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Finance Quiz

15 Questions 10 min
This Finance Quiz assesses time value of money calculations, rate conversions (APR vs EAR), and cash flow valuation using discounting and NPV logic. You will practice translating word problems into timelines, choosing correct periodic rates, and spotting sign and timing traps. It supports analysts, FP&A, lending teams, advisors, and operators pricing credit or evaluating projects.
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1You invest $500 today at 5% for one year. Without doing any detailed math, which statement must be true?
2Holding the future cash flow amount and timing constant, a higher discount rate produces a lower present value.

True / False

3On a loan statement, “principal” refers to which amount?
4With simple interest, interest is calculated on the original principal only, not on previously earned interest.

True / False

5If a savings account pays 12% APR compounded monthly, its effective annual rate (EAR) is exactly 12%.

True / False

6An interest rate moves from 3% to 5%. How big is the increase in percentage points?
7A loan is quoted at 9% APR compounded quarterly. What is the periodic interest rate per quarter?
8A lease requires the first payment immediately, then the same payment every month afterward. In TVM terms, this cash flow pattern is best treated as a(n):
9A savings account pays 12% APR compounded monthly. Approximately what is the effective annual rate (EAR)?
10You will receive $10,000 in 3 years. If your discount rate is 8% compounded annually, what is the present value (approximately)?
11You will receive $1,000 in 18 months. Your discount rate is 10% per year, compounded annually. Which setup gives the present value?
12Two payment streams have the same payment amount, number of payments, and interest rate. Stream A pays at the end of each month, Stream B pays at the beginning of each month. Which stream has the higher present value?
13With a fixed-rate amortizing loan, paying extra principal earlier reduces total interest paid, assuming there is no prepayment penalty.

True / False

14You have a $12,000 loan at 6% APR compounded monthly. What is the interest portion of the first month’s payment?
15You borrow $10,000 at 12% APR compounded monthly for 2 years, with fully amortizing equal monthly payments. Approximately what is the monthly payment?
16An investment is expected to return 8% nominal next year, and inflation is expected to be 3%. Approximately what is the real return?
17If inflation is 3% and your nominal return is 3%, your purchasing power still grows by 3%.

True / False

18Project A pays $10,000 at the end of each of the next 3 years. Project B pays $30,000 at the end of year 3 only. If the discount rate is positive and both require the same upfront cost, which project has the higher NPV?
19You are comparing two loans by effective annual cost. Loan A is 9.6% APR compounded monthly. Loan B is 9.85% APR compounded annually. Which loan has the lower effective annual rate (EAR)?

Finance Quiz Error Patterns: Rates, Timelines, Signs, and Real vs Nominal

1) Using APR as if it were an effective rate

An APR quoted with monthly compounding must be converted to a monthly periodic rate (APR/12) for payment and FV math. If the question asks for an annual result, convert back to EAR, not APR.

2) Period mismatch (months vs years)

If cash flows are monthly, then n is months and r must be a monthly rate. If cash flows are annual, use years and an annual rate. Write the timeline first, then pick units that match it.

3) Off-by-one timing in annuities

“First payment today” implies an annuity due, which equals the ordinary annuity value multiplied by (1 + r). “First payment in one period” is an ordinary annuity.

4) Cash-flow sign mistakes in NPV and IRR setups

Investment outflows should be negative and inflows positive. A flipped sign can turn a positive NPV project into a negative NPV result. Check that your final answer matches the story, like paying cash upfront should reduce value today.

5) Confusing percentage points with percent change

3% to 5% is a +2 percentage point move. It is a 66.7% relative increase. Follow the prompt’s wording exactly.

6) Comparing nominal dollars across time when inflation is included

If the question references purchasing power, use a real rate or deflate cash flows. If it references dollar totals in future nominal terms, stay nominal and keep inflation embedded in the discount rate.

Printable Finance Formulas Sheet: TVM, APR vs EAR, Annuities, and NPV

Print tip: Use your browser’s Print menu to print this page or save it as a PDF for offline practice.

Time Value of Money (single cash flow)

  • Future value: FV = PV(1 + r)n
  • Present value: PV = FV / (1 + r)n
  • Compounding m times per year: FV = PV(1 + APR/m)m·t
  • Simple interest: I = P·r·t, FV = P + I (only if the prompt explicitly says simple interest)

Rate conversions (APR vs EAR)

  • Periodic rate: rp = APR / m
  • Effective annual rate: EAR = (1 + APR/m)m − 1
  • Unit rule: r and n must describe the same period length.

Annuities and loans

  • Ordinary annuity PV: PV = PMT · [1 − (1 + r)−n] / r
  • Annuity due PV: PVdue = PVordinary · (1 + r)
  • Loan payment logic: Payment is set so PV(payments) equals the starting principal at the periodic rate.
  • Amortization check: Interest in a period = Balance × r. Principal paid = Payment − Interest.

Discounted cash flow (DCF) and decision rules

  • NPV: NPV = Σ CFt/(1 + r)t, with CF0 usually negative (the upfront cost).
  • Discount rate intuition: Higher r lowers PV, and it hits far-dated cash flows hardest.
  • Pay attention to timing: If cash flows occur monthly, discount with monthly r and monthly t.

Percent vs percentage points

  • Percentage points: 3% to 5% is +2 percentage points.
  • Percent change: (5% − 3%) / 3% = 66.7% increase.

Inflation (real vs nominal)

  • Real rate approximation: rreal ≈ rnominal − inflation (only for small rates).
  • Exact Fisher relation: (1 + rnominal) = (1 + rreal)(1 + inflation).

Worked Finance Example: APR to EAR, Loan Payment, and NPV Sign Discipline

Scenario

You are evaluating a $20,000 equipment purchase. It should generate $6,000 at the end of each year for 4 years. The lender offers APR 12% compounded monthly. You want (1) the EAR, (2) the monthly loan payment on a 4-year amortizing loan for $20,000, and (3) the NPV of the project using an annual discount rate consistent with the quoted loan rate.

Step 1: Convert APR to EAR for annual discounting

Monthly periodic rate rm = 0.12/12 = 0.01. EAR = (1 + 0.01)12 − 1 ≈ 0.1268, or 12.68%.

Step 2: Compute the monthly payment (unit match)

Use monthly units because payments are monthly. n = 4×12 = 48, r = 0.01, PV = 20,000.

PMT = PV·r / [1 − (1 + r)−n] = 20,000·0.01 / [1 − (1.01)−48] ≈ $527.07 per month.

Step 3: Compute project NPV with correct signs and timing

Cash flows: CF0 = −20,000. CF1..4 = +6,000 annually. Discount annually at EAR 12.68%.

NPV = −20,000 + 6,000/(1.1268)1 + 6,000/(1.1268)2 + 6,000/(1.1268)3 + 6,000/(1.1268)4 ≈ −$850.

Interpretation: at this discount rate, the cash inflows do not cover the upfront cost. If your NPV came out positive, recheck sign on CF0 and confirm you used an effective annual rate, not 12% flat.

Finance Quiz FAQ: Interpreting Wording, Timelines, and Banking Math

How do I tell if a question wants APR, EAR, or a periodic rate?

If the prompt mentions compounding frequency and asks for an “effective” annual result, compute EAR. If it asks for monthly payments or monthly FV, use the periodic rate APR/12. If it quotes APR without compounding details, assume annual compounding only if the wording supports it.

What wording signals an annuity due versus an ordinary annuity?

Annuity due signals include “first payment today,” “payments at the beginning of each period,” or “rent paid in advance.” Ordinary annuity signals include “first payment in one month” or “end of each period.” If you compute an ordinary annuity PV first, multiply by (1 + r) to convert to an annuity due PV.

Why do finance questions care so much about months vs years?

Because the exponent and the rate must share the same unit. Discounting 18 monthly cash flows using an annual rate with n = 18 will over-discount by a large factor. Convert to monthly periods with a monthly rate, or convert the timeline to years and keep an annual rate.

When inflation is mentioned, should I use real or nominal discounting?

Use real discounting if cash flows are stated in “today’s dollars” or the question asks about purchasing power. Use nominal discounting if cash flows are stated as future nominal dollars. Mixing nominal cash flows with a real discount rate, or the reverse, creates inconsistent answers.

I want more bank-focused practice. What related quiz fits this material?

For more on banking terms, credit mechanics, and common lender math, use the Challenging Banking Trivia for Money Pros quiz as a follow-up.

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