FIN 534 RANK Change The World /fin534rank.com FIN 534 RANK Change The World /fin534rank.com | Page 52

e. The proportion of interest versus principal repayment would be the
same for each of the 7 payments.
2. Which of the following statements is CORRECT?
a. If you have a series of cash flows, each of which is positive, you can
solve for I, where the solution value of I causes the PV of the cash flows
to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is negative but each of the
following CFs is positive, you can solve for I, but only if the sum of the
undiscounted cash flows exceeds the cost.
c. To solve for I, one must identify the value of I that causes the PV of
the positive CFs to equal the absolute value of the PV of the negative
CFs. This is, essentially, a trial-and-error procedure that is easy with a
computer or financial calculator but quite difficult otherwise.
d. If you solve for I and get a negative number, then you must have
made a mistake.
e. If CF0 is positive and all the other CFs are negative, then you cannot
solve for I.
3. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%,
compounded monthly. The loan (principal plus interest) must be repaid
at the end of the year. Midwest Bank also offers to lend you the $50,000,
but it will charge an annual rate of 7.0%, with no interest due until the
end of the year. How much higher or lower is the effective annual rate
charged by Midwest versus the rate charged by Riverside?
a. 0.52%