FIN 103

Preliminary Exam

GENERAL DIRECTIONS: NO ERASURES AND/OR ALTERATIONS ON YOUR ANSWER SHEET

Those who fail to follow the direction will automatically get a deduction of ten points.

Test I. Direction: Choose and encircle the letters of your final answers.

1. Papi wishes to save money to provide for his retirement. Beginning one year from now, he will begin
depositing the same fixed amount each year for the next 30 years into a retirement savings account.
Starting one year after making his final deposit, he will withdraw Php100,000 annually for each of the
following 25 years (i.e. he will make 25 withdrawals in all). Assume that the retirement fund earns
12% annually over both the period that he is depositing money and the period he makes withdrawals.
In order for Papi to have sufficient funds in his account to fund his retirement, how much should he
deposit annually (rounded to the nearest peso)?

a. Php97,368
b. Php2,902
c. Php3,250
d. Php3,640

2. EXB Inc. is considering the purchase of BTS Inc. The managers of BTS estimate that the assets of
BTS will generate Php14 million in cash flows next year and that these cash flows will grow at a
constant rate of 6 percent per year forever. The appropriate discount rate is 13 percent per year and
the purchase price is Php180 million. Compute the NPV of this investment.

a. Php10 million
b. Php20 million
c. Php30 million
d. Php40 million

3. Your neighbor offers you an investment opportunity which will pay a single lump sum of Php2,000
five years from today. The investment requires a single payment of Php1,500 today. What is the
annual rate of return on this investment?

a. 5.71%
b. 5.92%
c. 6.18%
d. 6.67%

4. Payments if it is made at end of each period such as an end of year is classified as

a. ordinary annuity
b. deferred annuity
c. annuity due
d. Both A and B

5. Process of calculating future value of money from present value is classified as

a. compounding
b. discounting
c. money value
d. stock value

6. Market in which prices are close to intrinsic value and seem to be in equilibrium
a. Money market
b. Stock market
c. Effective market
d. Efficient market

7. Stocks, bonds, notes, and mortgages belongs to

Prelim Exam in FIN 103- Financial Management 2 First Semester SY 2017 – 2018 Page 1 | 7
 a. Physical asset market
b. Financial asset market
c. Money markets
d. Capital markets

8. In calculation of time value of money, 'PMT' represents

a. present money tracking

b. payment
c. payment money tracking
d. future money payment

9. Lottery payoffs and payment for rental apartments are examples of

a. lump sum amount

b. deferred annuity
c. annuity due
d. payment fixed series

10. Finance company providing loans at 12% with 2 compounding periods per year, periodic rate is
classified as

a. 3% per quarter
b. 6% per quarter
c. 6% per year
d. 0.1667 % per year

11. Which of the following statements is true?

a. Capital market is where already existing and outstanding stocks are traded
b. Spot market is where participants enter into a contract to buy and sell assets at some future time
c. Private market is where standardize contracts are traded on an organized exchange
d. None of these

12. If security pays Php5,000 in 20 years with 7% annual interest rate, PV of security by using formula is

a. 1292.10 pesos per year

b. 1292.10 pesos
c. 0.00077 pesos per year
d. 16105.1 pesos per year

13. Prices of bonds will be decreased if an interest rates

a. rises
b. declines
c. equals
d. none of above

14. Securities future value is Php1,000,000 and present value of securities is Php500,000 with an interest
rate of 4.5%, 'n' will be

a. 16.7473 years
b. 0.0304 months
c. 15.7473 years
d. 0.7575 years

15. If payment of security is paid as Php100 at end of year for three years, it is an example of

a. fixed payment investment

b. lump sum amount
c. fixed interval investment
d. annuity

Prelim Exam in FIN 103- Financial Management 2 First Semester SY 2017 – 2018 Page 2 | 7
16. Payment of security if it is made at the beginning of each year is classified as

a. annuity due
b. payment fixed series
c. ordinary annuity
d. deferred annuity

17. Value of payment is Php25 and an interest rate is 2%, then present value will be

a. 12.5 pesos
b. 0.0008 pesos
c. 1,250 pesos
d. 0.8 pesos

18. Future value of ordinary annuity FVoa is, if deposited value is Php100 and earn 5% every year of
total three years will be

a. 315.25 pesos
b. 331.0125 pesos
c. 99.4875 pesos
d. 318.25 pesos

19. Future value of annuity due FVad is, if deposited value is Php100 and earn 5% every year of total
three years will be

a. 99.4875 pesos
b. 318.25 pesos
c. 315.25 pesos
d. 331.0125 pesos

20. They are also known as ‘underwriters’

a. Pension fund managers

b. Life insurance agents
c. Investment bankers
d. Hedge fund managers

21. Student loans, mortgages and car loans are examples of

a. lump sum amount

b. ordinary annuity
c. annuity due
d. payment fixed series

22. Procedure of finding present values in time value of money is classified as

a. compounding
b. discounting
c. money value
d. stock value
23. It is estimated that most individuals pay Php1,200 per year in interest costs. Assuming you
are 25 and instead of paying interest, you “decide to decide” to earn it. You do not go into
debt, but instead invest that Php1,200 per year that you would have paid in interest in an
equity mutual fund that earns an 8% return. How much money would you have in that fund at
age 50 (25 years) assuming payments are at the end of each year and it is in a Roth account in
which you pay no additional taxes?

a. 87,772
b. 87,727
c. 82,277
d. None of these

Prelim Exam in FIN 103- Financial Management 2 First Semester SY 2017 – 2018 Page 3 | 7
24. Continuation of number 23, at age 75 (50 years)?

a. 688,524
b. 652,880
c. 684,528
d. None of these

25. Bob and Bill are both currently 45 years old. Both are concerned for retirement; however,
Bob begins investing now with Php4,000 per year at the end of each year for 10 years, but
then doesn’t invest for 10 years. Bill, on the other hand, doesn’t invest for 10 years, but then
invests the same Php4,000 per year for 10 years. Assuming a 9% return, Bob will save?

a. 143,768
b. 143,667
c. 143,867
d. None of these

26. Continuation of number 25, how much more will Bob be able to save than Bill?

a. 143,667
b. 60,771
c. 83,096
d. None of these

27. Traditional department store of financial savings

a. Investment bank
b. Commercial bank
c. Financial services corporation
d. Hedge funds

28. The BatStateU bank pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate of
deposit. If you deposit Php20,000 you would expect to earn around __________ in interest.

a. 840
b. 858
c. 1,032
d. 1,120

{ [ 1 + (.056/360) ] ^ [270] - 1 } = .042891 or 4.2891%. Thus, $20,000 (.042891) = $857.82.

29. With continuous compounding at 8 percent for 20 years, what is the approximate future value of a
$20,000 initial investment?

a. 52,000
b. 93,219
c. 99,061
d. None of these

30. In 2 years you are to receive $10,000. If the interest rate were to suddenly decrease, the present value
of that future amount to you would __________.

a. rise
b. decline
c. still be the same
d. not be determinable

31. For $1,000 you can purchase a 5-year ordinary annuity which will pay you a yearly payment of
$263.80 for 5 years. What is the annual interest rate implicit in this investment to the nearest whole
percentage point?

Prelim Exam in FIN 103- Financial Management 2 First Semester SY 2017 – 2018 Page 4 | 7
 a. 8%
b. 9%
c. 10%
d. 11%

PV = PMT (PVIFA i%, n), so $1,000 = $263.80 (PVIFA i%, 5) or (PVIFA i%, 5) = 3.7908. By looking at
row n=5, then i=10% in a PVIFA table. Alternative methods of solving also exist.

32. You are going to place $12,500 into a certificate of deposit (CD) at a 6% annual rate (compounded
annually) with a maturity of 30 months. How much money will you receive when the CD matures?

a. 14,518
b. 14,460
c. 14,618
d. None of these

$12,500[ (1.06)^(2.5) ] = $14,460.

33. What is the present value of a $1,000 ordinary annuity that earns 8% annually for an infinite number
of periods?

a. 1,000
b. 8,000
c. 12,500
d. Unable to compute

The perpetual (ordinary) annuity formula is PMT/ i% = $1,000/.08 = $12,500.

34. Most active secondary market,

a. Commercial banks
b. Money market
c. Spot market
d. Stock market

You must calculate both the monthly deposit amount for an ordinary annuity ($286.13 = $1M/[FVIFA
1%,360]) and an annuity due ($283.29 = $1M/[(FVIFA 1%,360)(1.01)]). The difference is $286.13 -
$283.29 = $2.84 extra per month if payments are made at the end of each month rather than the
beginning.

35. You are planning for retirement 34 years from now. You plan to invest $4,200 per year for
the first 7 years, $6,900 per year for the next 11 years, and $14,500 per year for the following
16 years (assume all cash flows occur at the end of each year). If you believe you will earn an
effective annual rate of return of 9.7%, what will your retirement investment be worth 34
years from now? (4 pts)
a. 1,214,684.50
b. 1,542,217.26
c. 2,005,443.96
d. None of these

36. You are valuing an investment that will pay you $27,000 per year for the first ten years,
$35,000 per year for the next ten years, and $48,000 per year the following ten years (all
payments are at the end of each year). If the appropriate annual discount rate is 9.00%, what
is the value of the investment to you today? (3 pts)

a. 323,123.04
b. 396,227.23
c. 369,321.24
d. None of these

37. You are valuing an investment that will pay you $12,000 the first year, $14,000 the second
year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth year, and $29,000 the

Prelim Exam in FIN 103- Financial Management 2 First Semester SY 2017 – 2018 Page 5 | 7
 sixth year (all payments are at the end of each year). What it the value of the investment to
you now is the appropriate annual discount rate is 11.00%? (3 pts)

a. 76,273.63
b. 162,340.82
c. 77,462.82
d. None of these

38. You are told that if you invest $11,100 per year for 19 years (all payments made at the
beginning of each year) you will have accumulated $375,000 at the end of the period. What
annual rate of return is the investment offering? (2pts)

a. 4.65%
b. 6%
c. 5.48%
d. None of these

39. You are offered an annuity that will pay $17,000 per year for 7 years (the first payment will
be made today). If you feel that the appropriate discount rate is 11%, what is the annuity
worth to you today? (2pts)

a. 88,818.14
b. 88,919.14
c. 99,818.14
d. None of these

40. Which of the following has the largest future value if $1,000 is invested today? (2pts)

a. Five years with a simple annual interest rate of 10 percent

b. 10 years with a simple annual interest rate of 8 percent
c. Eight years with a compound annual interest rate of 8 percent
d. Eight years with a compound annual interest rate of 7 percent

41. Suppose an investor wants to have $10 million to retire 45 years from now. How much
would she have to invest today with an annual rate of return equal to 15 percent? (2pts)

a. $18,561
b. $17,844
c. $20,003
d. $21,345
42. Which of the following is false?

a. The longer the time period, the smaller the present value, given a $100 future
value and holding the interest rate constant.
b. The greater the interest rate, the greater the present value, given a $100 future
value and holding the time period constant.
c. A future dollar is always less valuable than a dollar today if interest rates are
positive.
d. The discount factor is the reciprocal of the compound factor.

43. To triple $1 million, Mika invested today at an annual rate of return of 9 percent. How long will it
take Mika to achieve his goal? (2 pts)

a. 15.5 years
b. 13.9 years
c. 12.7 years
d. 10 years

Prelim Exam in FIN 103- Financial Management 2 First Semester SY 2017 – 2018 Page 6 | 7
44. Which of the following concepts is incorrect?
a. An ordinary annuity has payments at the end of each year.
b. An annuity due has payments at the beginning of each year.
c. A perpetuity is considered a perpetual annuity.
d. An ordinary annuity has a greater PV than an annuity due, if they both have the same
periodic payments, discount rate and time period.

45. Your Tiyo Teng is 82 years old. Over the years, he has accumulated savings of Php80,000. He
estimates that he will live another 10 years at the most and wants to spend his savings by then. (If he
lives longer than that, he figures you will be happy to take care of him.) Tiyo Teng places his
Php80,000 into an account earning 10 percent annually and sets it up in such a way that he will be
making 10 equal annual withdrawals (the first one occurring 1 year from now) such that his account
balance will be zero at the end of 10 years. How much will he be able to withdraw each year? (4pts)

a. 13,180.71
b. 13,614.50
c. 12,989.22
d. 13,019.63.

Prelim Exam in FIN 103- Financial Management 2 First Semester SY 2017 – 2018 Page 7 | 7