Personal Financial Management: practice questions

6 questions · 12 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   $10 000 is invested at 4% per annum compounded yearly. Find its future value after 2 years.

   A

   $10 800

   B

   $10 816

   C

   $10 400

   D

   $10 832

2. Question 2Multiple choice · 1 mark

   Paying only the minimum payment on a credit card statement each month will most likely lead to

   A

   high interest charges on the unpaid balance.

   B

   no interest being charged.

   C

   an automatic increase in the credit limit.

   D

   a better personal credit record.

3. Question 3Multiple choice · 1 mark

   The main purpose of diversification is to

   A

   guarantee a return.

   B

   increase liquidity.

   C

   reduce risk by spreading money over different investments.

   D

   avoid paying tax.

4. Question 4Multiple choice · 1 mark

   An investment plan offers a nominal rate of return of 8% per annum. In which case is the effective rate of return the same as the nominal rate?

   A

   Interest is compounded monthly.

   B

   Interest is compounded quarterly.

   C

   Interest is compounded half-yearly.

   D

   Interest is compounded once a year.

5. Question 54 marks

   Plan A offers a nominal rate of return of 6% per annum compounded monthly. Plan B offers 6.1% per annum compounded yearly. Calculate the effective rate of return of each plan, correct to 2 decimal places, and advise which plan to choose.

   Show worked solution

   Plan A: effective rate of return $= \left(1 + \dfrac{6\%}{12}\right)^{12} - 1 = 6.17\%$ (2)

   Plan B: compounded once a year, so the effective rate of return is 6.10%. (1)

   Choose Plan A, since its effective rate of return is higher. (1)

6. Question 64 marks

   Ming can invest $10 000 now in a project that will return $6000 at the end of Year 1 and $6000 at the end of Year 2. The discount rate is 8% per annum. Calculate the net present value, correct to 2 decimal places, and advise whether he should invest.

   Show worked solution

   Present value of inflows $= \dfrac{6000}{1.08} + \dfrac{6000}{1.08^2} = 5555.56 + 5144.03 = 10\,699.59$ (2)

   NPV = $10 699.59 − $10 000 = $699.59 (1)

   Since the NPV is positive, he should invest. (1)