A time line is not meaningful unless all cash flows occur annually.

FIN 540 – Basic Financial Tools: A Review

© 2013 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University. FIN 540 Homework Basic Financial Tools: A Review Page 1 of 2

Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points for this homework assignment.

1. Which of the following statements is CORRECT? a. Time lines cannot be constructed where some of the payments constitute an annuity but

others are unequal and thus are not part of the annuity. b. A time line is not meaningful unless all cash flows occur annually. c. Time lines are not useful for visualizing complex problems prior to doing actual

calculations. d. Time lines can be constructed to deal with situations where some of the cash flows occur

annually but others occur quarterly. e. Time lines can only be constructed for annuities where the payments occur at the end of

the periods, i.e., for ordinary annuities.

2. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

a. The discount rate decreases. b. The cash flows are in the form of a deferred annuity, and they total to $100,000. You

learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

c. The discount rate increases. d. The riskiness of the investment’s cash flows decreases. e. The total amount of cash flows remains the same, but more of the cash flows are

received in the earlier years and less are received in the later years.

3. Which of the following statements is CORRECT? a. 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. b. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the

periods. c. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the

series is by definition an annuity. d. The cash flows for an annuity due must all occur at the ends of the periods. e. 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. Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

a. The periodic rate of interest is 5% and the effective rate of interest is also 5%. b. The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. c. The periodic rate of interest is 5% and the effective rate of interest is greater than 5%. d. The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. e. The periodic rate of interest is 2.5% and the effective rate of interest is 5%.

FIN 540 – Basic Financial Tools: A Review

© 2013 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University. FIN 540 Homework Basic Financial Tools: A Review Page 2 of 2

5. A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?

a. The proportion of interest versus principal repayment would be the same for each of the 8 payments.

b. The annual payments would be larger if the interest rate were lower. c. If the loan were amortized over 10 years rather than 8 years, and if the interest rate were

the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan.

d. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.

e. The last payment would have a higher proportion of interest than the first payment.

edwin tarplah

Text Box

Go to Yahoo! Finance’s Website, located at http://finance.yahoo.com/. Select a publicly traded company in which you are interested, and figure out its symbol (e.g.: Apple-AAPL). Insert the company symbol into the search bar on the left-hand side where it reads “Quote Lookup” and click “Go”. Once on the stocks trading page, look for the vertical blue menu on the left of the page. Scroll down to “COMPANY,” click on the link titled “Key Statistics,” and review basic financial metrics for the chosen company. Discuss two (2) key financial metrics used by investors to evaluate the riskiness of a stock. Select the financial metric that you would be most likely to use and explain your reasoning. Support your selection with one (1) real-world example. Examine the concept of risk and return as it applies to financial instruments. Determine the relationship between the two (2) and whether or not the relationship between risk and return always holds true. Provide a rationale for your response.

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