FIN module 2 mock exam

LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of the two investments?

9.38%; 10.25%

Other things held constant,:​ a.​the "liquidity preference theory" would generally lead to an upward sloping yield curve. b.​the "market segmentation theory" would generally lead to an upward sloping yield curve. c.​a downward sloping yield curve would suggest that investors expect interest rates to increase in the future. d.​the "expectations theory" would generally lead to an upward sloping yield curve. e.​the yield curve under "normal" conditions would be horizontal (i.e., flat).

A

A stock with a dual listing is _____.​ a.​registered to be traded in more than one capital market b.​registered to be traded in the debt market and the stock market c.registered to be traded in more than one money market​ d.​registered to be traded in the primary market as well as the secondary market e.​registered to be traded in the money market as well as the capital market

A. ​registered to be traded in more than one capital market

Your uncle would like to restrict his interest rate risk and his default risk, but he would still like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle's criteria?

AAA bond with 5 years to maturity

What is the correct expression for the amount of common stock or debt that a company needs to issue after taking into account the flotation costs?

Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 - Percentage flotation costs)

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.) a. The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. b. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. c. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. e. The outstanding balance declines at a slower rate in the later years of the loan's life.

B

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 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. b. The discount rate increases. c. The riskiness of the investment's cash flows decreases. d. 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. e. The discount rate decreases.

B

_____ is the tendency of prices to increase over time.

Inflation

Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. Using the equation method, what is the worth of the investment today?

​$44,325

If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is closest to:

​11.50%

Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. The number of months is will take her to have enough money to start college is closest to:

​25.10 months

Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance.​

​N = 5, I/Y = 6, PV = -2,700

The existence of an upward sloping yield curve proves that the _____ is correct, because an upward sloping curve necessarily implies that lenders will lend short-term funds at lower rates than they lend long-term funds.

​liquidity preference theory

A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of payment represents a(n) _____.

​ordinary annuity

The difference between the issuing price of a debt or equity issue and the net proceeds of the issue received by the issuing firm is known as the _____.

​underwriter's spread

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

$1,131

You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

$1,565.48 BEGIN Mode N 3 I/YR 5.5% PMT$550 FV$0.00 PV$1,565.48

Andrea's opportunity cost rate is 12 percent compounded annually. The amount he must deposit in an account today if he wants to receive $2,100 at the beginning of each of the next seven years is closest to:

$10,734

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

$11,262.88 BEGIN Mode N 5 I/YR 5.5% PMT$2,500 FV$0.00 PV$11,262.88

Shekhar invests $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made?

$13,351.39

Kim has just graduated from law school. She had taken an education loan of $45,000, which now needs to be repaid in equal monthly installments over the next 6 years. The amount of the monthly loan payment, if the loan carries a simple annual interest of 5% is closest to:

$724.72

Dwayne invests $4,700 in a savings account at the beginning of each of the next twelve years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth at the end of the 12th year?

$89,961.02

Last year Tempe Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

$936.33 N 8 I/YR 7.5% PV $525.00 PMT$0.00 FV$936.33

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?

0.30%

Which of the following is the yield of a bond that offers a risk-free rate of 4% and a risk premium of 2%?

6%

Andrew purchased a stock for $175 and sold it for $250. If he earned a dividend income of $30, the stock's yield is:

60%

Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in 8 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?

7.06%

Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on this investment?

7.50%

A leading bank is coming up with an investment that pays 8 percent interest compounded semiannually. The investment's effective annual rate (EAR) is closest to:

8.16%

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

8.24% (1 + 0.08/4)^4 -1 = 8.24%

What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?

8.95% Cost (PV) $950 PMT$85 I/YR 8.95%

Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is closest to:

$2,314

Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans. Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest compounded semiannually. The difference between the future values of the two investments if Mira's investment horizon is seven years is closest to:

$2,703.78

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

$20,352 N 10 I/YR 5.5% PMT$2,700 FV$0.00 PV$20,352

Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, the maximum amount he should be willing to pay for the investment today is closest to:

$23,089

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

$3,704.02

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

$3,754.27 N10 I/YR6.5% PV$2,000 PMT$0 FV$3,754.27

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

$31,294.42

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

$5,000 I/YR 5.0% PMT $250 PV $5,000

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. The amount that will be in the account after 8 months, assuming each month has 30 days, is closest to:

$5,178.09 Nominal I/YR = 5.25% = 0.0525 --> periodic rate = 0.0525 /360 Number of months = 8 Days in year = 360 Days in month = 30 // # compounding periods = 8 * 30 = 240 Amount deposited $5,000 Ending amount = $5,178.09 = $5,000(1 + 0.0525/360)^240 = $5,178.09

Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, the amount he must deposit in an account today is closest to:

$6,636

You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

$6,744.83 N 3 I/YR 5.5% PMT$2,500 FV$0.00 PV$6,744.83

Bill is considering investing $450 at the end of every month in a fixed income instrument. He will be receiving $27,000 at the end of 4 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment is closest to?

11.04%

If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is closest to:

11.50%

A corporate bond that yields 12% includes a risk-free rate of 7% and a default premium of 3%. The bond's maturity risk premium is _____.

2%

The form of informational market efficiency that states that current market prices of securities reflect all information contained in past price movements is known as the _____.

weak-form efficiency

Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

3.44% N 20 PV$15,000,000 PMT$1,050,000 FV$0.00 I/YR 3.44%

Interest rates on 1-year, 2-year, and 3-year Treasury bills are 5%, 6%, and 7% respectively. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?​ a.​The default risk premium is highest for Year 2. b.​Interest rates are expected to fall over the next two years. c.​The market expects one-year rates to be 7% one year from today. d.​The maturity risk premium is positive. e.​The liquidity risk premium is highest for Year 1.

C. The market expects one-year rates to be 7% one year from today.

Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance. a.N = 5, I/Y = 6, PV = 2,700 b.N = 5, I/Y = 6%, PV = 2,700 c.N = 6, I/Y = 5, PV = 2,700 d.N = 5, I/Y = 6, PV = -2,700 e.N = 5, I/Y = 6%, PV = -2,700

D

Which of the following financial intermediaries operates as a not-for-profit organization?​ a.​Whole-life insurance company b.​Thrift institution c.​Commercial bank d.​Credit union e.​Mutual fund

D. credit union

The payment of utility bills is an example of _____.​ a.​immediate annuity b.ordinary annuity c.annuity due d.lump-sum payments e.uneven cash flows

E

Which of the following is true about the process of setting the offering price of an issue? a.An investment bank finds it easier to set the offering price of an initial public offering as compared to that of a seasoned offering. b.The offering price of the initial public offering of the stock of a privately held company is determined by a financial intermediary, whereas the offering price of the seasoned offering of a public company is determined by an investment bank. c.An investment bank finds it easier to set the offering price of a seasoned offering of a private company as compared to a seasoned offering of a public company. d.An investment banker has an easier job of selling the issue if it carries a relatively high price. e.If the company is already publicly owned, the offering price will be based on the existing market price of the stock or the yield on the firm's existing bonds.

E

If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates?​

Prices will decline and interest rates will rise.

Zinc Corporation, a large, well-known public company that frequently issues securities, files a master registration statement with the Securities and Exchange Commission (SEC) and then updates it with a short-form statement just prior to each individual offering. The company is making use of which of the following procedures? a.Securities diversification b.Initial public offering registration c.Shelf registration d.Underwriting registration e.Best-effort registration

Shelf registration

Which of the following rates indicate the rate that will exist in an inflation-free world?​ a.​Real risk-free rate b.​Liquidity risk-free rate c.​Maturity risk-free rate d.​Default risk-free rate e.​Target risk-free rate

a. ​Real risk-free rate

The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.

annually

Pelican Corporation is planning to invest $12,000 for the next 8 years. It will have to pay the amount at the beginning of each year. This form of payment is known as a(n) _____.

annuity due

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)​ a.​Future value = Present value / (1 + r)^n b.​Future value = Present value × (1 + r)^n c.​Future value = Present value + (1 + r)^n d.​Future value = Present value / ((1 + r) × n) e.​Future value = Present value - (1 + r)^n

b. ​Future value = Present value × (1 + r)^n

Which of the following is true about the process of setting the offering price of an issue?​ a.​An investment banker has an easier job of selling the issue if it carries a relatively high price. b.​If the company is already publicly owned, the offering price will be based on the existing market price of the stock or the yield on the firm's existing bonds. c.​An investment bank finds it easier to set the offering price of a seasoned offering of a private company as compared to a seasoned offering of a public company. d.​An investment bank finds it easier to set the offering price of an initial public offering as compared to that of a seasoned offering. e.​The offering price of the initial public offering of the stock of a privately held company is determined by a financial intermediary, whereas the offering price of the seasoned offering of a public company is determined by an investment bank.

b.​If the company is already publicly owned, the offering price will be based on the existing market price of the stock or the yield on the firm's existing bonds.

If the Federal Reserve loosens money supply then:​ a.​sale of Treasury securities will increase. b.​interest rates will decrease. c.​inflation will decrease. d.​economic activity will decrease. e.​credit supply will decrease.

b.​interest rates will decrease.

The change in the market value of an asset over some time period is called the _____.

capital gain

_____ can be negative if the value of the investment decreases during the period it is held.

capital gains

Zync Corporation offers a block of its securities for sale to the investment banker that submits the highest price of all interested investment bankers. This procedure is known as a _____.

competitive bid

The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.

compounding

Production opportunity is one of the four fundamental factors that affect the __________

cost of money

A depository institution that is owned by its depositors, who are often members of a common organization or association, such as an occupation, a religious group, or a community is called a(an) _____.

credit union

William buys 20 shares of Zync Corporation at $18.5 per share. Zync pays dividend at the end of each year on the basis of profits made during the year. In its 25 years history, Zync has paid dividends every year without fail. William's initial investment and the receipt of dividend at the end of every year is referred to as _____ and _____, respectively.​ a.uneven cash flows; ordinary annuity b.lump-sum payment; annuity due c.lump-sum payment; ordinary annuity d.​lump-sum payment; uneven cash flows e.uneven cash flows; annuity due​

d. ​lump-sum payment; uneven cash flows

A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of payment represents a(n) _____.

uneven cash flow stream

Mutual funds _____.​ a.​are depository institutions that are owned by its depositors, who are often members of a common organization or association b.​cater to savers, especially individuals who have relatively small savings or need long-term loans to purchase houses c.​are organizations that distribute new issues of securities for corporations d.​are investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds in the financial markets e.​are groups of investment banking firms formed to spread the risk associated with the purchase and distribution of a new issue of securities

d.​are investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds in the financial markets

The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.

discounting

Which of the following is defined as the rate of return on the best available alternative investment of equal risk?​ a.​Amortization rate b.Expected rate of return​ c.​Risk adjusted rate d.​Required rate of return e.​Opportunity cost rate

e. Opportunity cost rate

Organizations that create various loans and investments from funds provided by depositors are known as _____.

financial intermediaries

Primary markets are markets _____

in which various organizations raise funds by issuing new securities

Ibiza Corporation has been investing $20,000 for the last four years in an investment scheme that is maturing at the end of the current year. It will be receiving $120,000 at the time of maturity. The $120,000 received at maturity is referred to as _____.

lump-sum amount

A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of payment represents a(n) _____.

ordinary annuity

An investor invested in a 10-year bond that makes a $50 coupon payment at the end of every six-month period until the bond matures. These coupon payments received by the investor can be referred to as a(an) _____.

ordinary annuity

If you wanted to purchase previously issued shares of stock from another investor, you would trade in the _____ market

secondary market

The future value of an uneven cash flow stream is also referred to as its _____.

terminal value