The quiz is closed-book. You don't need a calculator; you can write the answer in terms of unevaluated formulas, such as (F/P,i,N).

1. Write down an expression, using unevaluated formulae, for the present value of a series of annual payments of $15,000. The payments start in the year 2005 and continue to the year 2015, and the annual interest rate is 8%.

   15000(P/A,0.08,11)(P/F,0.08,6)

2. What are sunk costs? What part do they play in comparing investment strategies?

   Costs incurred in the past; none.

3. What is a sinking fund?

   A fund set up with regular payments, such that the sum of payments and interest will be enough to cover some anticipated future expense.

4. What is capital recovery? How is it calculated?

   It is a series of periodic payments A, equivalent to a single initial payment P, where

   A = P (A/P,i,N).

5. Approximately how long will it take for an investment to double in value, if the interest rate is 1%?

   72 years.

6. If I take out a $100 loan at a nominal interest rate of 10% per annum, continuously compounded, what will I owe at the end of two years?

   100(1+j)², where j = e^0.1-1

   This can also be expressed as 100e^0.2

7. Someone promises to pay you $100 this time next year. If the interest rate is 10% and the inflation rate is zero, is the present worth of this payment greater than, equal to or less than $100?

   Less.

8. What is meant by the expression capitalized cost? How is it calculated?

   It is the present worth, P, of an infinite series of payments A.

   P = A/i

9. What is the discounted cash flow method of comparison?

   The method of comparing alternatives on the basis of their present worth.

10. A bank charges 1% interest per month, compounded monthly, on a loan.
    • What is the nominal annual interest rate?

      12%

    • What is the effective annual interest rate?

      (1.01)¹²-1