Name: ________________________________________ Date: _____________________

Section: _______________________________________

FINANCIAL MANAGEMENT

Question 1.
The Short Holder bank pays 5.60%, compounded daily (based on 360 days), on a 9-month
certificate of deposit. If you deposit P20,000 you would expect to earn around __________ in
interest.
a. $840
b. $858
c. $1,032
d. $1,121

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

Question 2.
With continuous compounding at 8 percent for 20 years, what is the approximate future value
of a P20,000 initial investment?
a. $52,000
b. $93,219
c. $99,061
d. $915,240

$20,000[ e(.08 × 20) ] = $20,000(4.9530324) = $99,061.

Question 3.
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. fall
b. rise
c. remain unchanged
d. The correct answer cannot be determined without more information.

As the interest rate falls, this increases the value today. Thus, the PV of $10,000 when rates fall from
8% to 6% will increase from $8,573 to $8,900 for example.

Question 4.
To increase a given future value, the discount rate should be adjusted __________.
a. upward
b. downward
c. first upward and then downward
d. None of the above answers are correct; you should use PVIF.
Question 5.
Interest paid (earned) on only the original principal borrowed (lent) is often referred to as
a. present value
b. simple interest
c. future value
d. compound interest

Question 6.
Interest paid (earned) on both the original principal borrowed (lent) and previous interest
earned is often referred to as __________.
a. present value
b. simple interest
c. future value
d. compound interest

Question 7.
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. Necessary information is not available to solve the problem.
b. $14,460
c. $14,491
d. $14,518

Question 8.
What is the present value of a $1,000 ordinary annuity that earns 8% annually for an infinite
number of periods?
a. $80
b. $800
c. $1,000
d. $12,500

Question 9.
You expect to deposit the following cash flows at the end of years 1 through 5, $1,000; $4,000;
$9,000; $5,000; and $2,000 respectively. What is the future account value at the end of year 6 if
you can earn 10% compounded annually?
a. $15,633.62
b. $21,000.00
c. $25,178.10
d. $27,695.91
Question 10.
How much will be in an account at the end of five years the amount deposited today is
$10,000 and interest is 8% per year, compounded semi-annually? (delete)
a. 41,208.44
b. 14,208.44
c. 14,802.44
d. 41,802.44

FV = $10,000 (1+0.04)10 = $10,000 (1.4802) = $14,802.44

Question 11.
How much would I have to deposit in an account today that pays 12% interest, compounded
quarterly, so that I have a balance of $20,000 in the account at the end of 10 years? (delete)
a. 6,111.14
b. 6,331.14
c. 6,113.14
d. 6,131.14

FV = $20,000; i = 12%/4 = 3%; n = 10 x 4 = 40 quarters PV = $6,131.14

Question 12
If interest is paid at a rate of 5% per year, compounded quarterly, what is the annual
percentage rate (ANR) ? effective annual rate (EIR)?
a. 5%; 5%
b. 5%; 5.0945%
c. 5%; 5.9045%
d. 5.0945%; 5%

Question 13-15.
Consider an annuity consisting of three cash flows of $2,000 each. Assume a 4% interest rate.
What is the present value of the annuity if the first cash flow occurs:

a) Today? PV = ____________
b) 1 year from today? PV = ____________
c) 4 years from tomday? PV = ____________