1. Future value: You are interested in investing $10,000, a gift from your grand

Question

1. Future value: You are interested in investing $10,000, a gift from your grandparents, for the next four years in a mutual fund that will earn an annual return of 8 percent. What will your investment be worth at the end of four years? (Round to the nearest dollar.)

A. $10,800, B. $13,605, C. $13,200, D. None of the above

2. PV of multiple cash flows: Jack Stuart has loaned money to his brother at an interest rate of 5.75 percent. He expects to receive $625, $650, $700, and $800 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.)

A. $2,713, B. $2250, C. $2,404, D. $2545

3. Which one of the following statements is TRUE about the effective annual rate (EAR)?

A. The effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account.
B. The EAR conversion formula accounts for the number of compounding periods and, thus, effectively adjusts the annualized interest rate for the time value of money.

C. The EAR is the true cost of borrowing and lending.
D. None of the above

4. The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore?

A. 11.20% B. 19.20% C. 24.00% D. 32.00%

Explanation / Answer

1) B. $13,605,

2) C. $2,404

3) C. The EAR is the true cost of borrowing and lending

4) B. 19.20%.

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