Question

D) $17.450 6) For a given stated interest rate, an investor would receive a greater future value with daily compounding as opposed to monthly compounding TRUD OR FALSE *7) An investment is expected to yield $300 in three years, 5500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%? A) $735 B) $864 C) $885 D) $900 *8) What is the present value of $1,000 per year discounted at 5% annually in perpetuity? A) $3,333.33 B) $5,555,56 C) $20,000.00 D) $6,875.00 9) A rational investor would prefer to receive $1,200 today rather than $100 per month for 12 months. TRUE OR FALSE "10) At what rate must $287.50 be compounded annually for it to grow to $650,01 in 14 years? A) 6 percent B) 5 percent C) 7 percent D) 8 percent 11) The expected rate of retum from an investment is equal to the expected cash flows divided by the initial investment. TRUE OR FALSE 12) The required rate of return for an asset is equal to the risk-free rate plus a risk premium. TRUE OR FALSE "13) Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 retum; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return. What is the expected amount of return this investment will produce? A) $4,040 B) $7,640 C) $12140 D) $1,540 *14) Assume that an investment is forecasted to produce the following returns a 30% probability of a 12% return; a 50% probability of a 16% retum; and a 20% probability of a 19% return. What is the expected percentage return this investment will produce? A) 33.3% B) 16.1%

Answer 1

6]	TRUE
7]	PV = 300/1.05^3+500/1.05^5+300/1.05^7 =	$                 864
	Answer: [B]
8]	PV = 1000/5% =	$           20,000
	Answer: [C]
9]	TRUE
	The reason is that the PV of $1200 today is
	$1200, but, the PV of $100 every month will
	be lower.
10]	Rate = (650.01/287.50)^(1/14)-1 =	6.00%
	Answer: [A] 6%
11]	FALSE
12]	TRUE
13]	Expected amount = 1400*10%+6600*50%+1500*40% =	$             4,040
	Answer: [A] $4040