# Fin 534 Midterm Part 2 (Solution 100%) - 90490

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This exam consist of 25 multiple choice questions and covers the material in Chapters 4 through 7.
1. At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.
Investment A pays \$250 at the beginning of every year for the next 10 years (a total of 10 payments).
Investment B pays \$125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
Investment C pays \$125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
Investment D pays \$2,500 at the end of 10 years (just one payment).
Investment E pays \$250 at the end of every year for the next 10 years (a total of 10 payments).
2. Which of the following statements is CORRECT?
An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
The present value of a 3-year, \$150 ordinary annuity will exceed the present value of a 3-year, \$150 annuity due.
If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.
If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
3. Which of the following statements is CORRECT?
If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
The cash flows for an annuity due must all occur at the ends of the periods.
The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
4. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?
Exactly 8% of the first monthly payment represents interest.
The monthly payments will decline over time.
A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.
5. A U.S. Treasury bond will pay a lump sum of \$1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?
The PV of the \$1,000 lump sum has a smaller present value than the PV of a 3-year, \$333.33 ordinary annuity.
The periodic interest rate is greater than 3%.
The periodic rate is less than 3%.
The present value would be greater if the lump sum were discounted back for more periods.
The present

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