FIN221 Unit 1
Which of the following sources of investment income has the highest marginal tax rate for an individual?
Interest from a savings account
Which of the following explains how can a yield curve be flat or downward sloping if a maturity risk premium exists?
Investors expect inflation to be lower in the future.
What does a downward sloping yield curve mean according to the pure expectations hypothesis?
Investors expect interest rates to be lower in the future.
What is the appropriate interest rate and number of time periods to use to find the monthly payment for a 5-year car loan at 3.6% compounded monthly?
0.3% and 60
What is the appropriate interest rate and number of time periods to use to find the monthly payment for a 30-year mortgage at 6% compounded monthly?
0.5% and 360
Prof. Finance will have $1,500,000 saved up by retirement at age 65. The retired professor expects to live 25 more years after retiring. How large of an annual annuity withdrawal can Prof. Finance make at the beginning of each year under this scenario from an account paying 6% compounded annually? Round your answer to the nearest dollar
110,698
Micro Gates bought Microsoft stock for $68 a year ago and has received $1.56 in dividends. Microsoft's current price is $75 a share. What is Mic's rate of return if he sells Intel at the current price? (Express your answer as a percentage 0.1 = 10% or 10)
12.59%
Prof. Business will have $1,600,000 saved up by retirement at age 65. The retired professor expects to live 20 more years after retiring. How large of an annual annuity withdrawal can Prof. Finance make at the beginning of each year under this scenario from an account paying 6.5% compounded annually? Round your answer to the nearest dollar
136347
What is the present value of a perpetuity that makes annual payments of $10,000 at 4% compounded annually? (round your answer to the nearest dollar)
250000
A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?
27.78%
Titus Tribble wins the big Powerball lottery which pays $17 million at the beginning of each of the next 30 years. The reported prize is $510 million which is just the total of these 30 annuity payments. What is the present value of this prize today at a 5% annual rate? Express your answer in terms of millions of dollars and round the answer to the nearest tenth of a million, for example 17.0 for 17 million.
274.4
Bob, proprietor of Bob's Burgers, would like to retire in 20 years. He plans to deposit $6500 at the end of each year for the next 20 years into an account expected to earn 7.5% compounded annually. How much will Bob have in his retirement account in 20 years immediately after making his last deposit? Round your answer to the nearest dollar.
281480
Which of the following would be an example of a primary market transaction?
Buying shares of an open-ended mutual fund
How is a bond's value determined?
By finding the present value of the bond's expected coupon payments and par value at the bond's required rate of return
Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?
$1,232.15
You have been offered an investment that will pay you $10,000 in 10 years. You think a 7% annual rate compounded annually is an appropriate rate of return or interest rate for this investment. What is the most you would be willing to pay for this investment today based on this information? Round your answer to the nearest dollar.
5083
Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?
6.09%
Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?
7.39%
Lisa Simpson, age 8 genius, deposits $100 today and plans to continue making additional deposits of $100 at the end of each quarter for the next 13 years into a special off shore account that pays a tax-free 6% nominal annual rate coumpounded quarterly. At the end of 13 years after making 53 deposits, Lisa pays to use the money to go to Europe "to find herself". How much will Lisa have for her future trip to Europe? Round your answer to the nearest dollar.
8009
Which of the following bonds would have the most interest rate risk?
A 20-year zero coupon bond.
Which of the following would be an example of a defined contribution pension plan?
A 401K Plan
Which of the following would yield the highest future value for an amount invested for the same amount of time at the same annual interest rate?
Compound interest if invested more than a year
How can you calculate the future value at year n of a stream of uneven cash flows more rapidly on your financial calculator without finding the FV of each individual CF?
Enter cash flows into your cash flow worksheet and find the NPV at the interest rate, and then find the future value of the NPV for n years at the same interest rate.
Which of the following is true if interest is compounded once a year?
The APR and EAR will be the same
Which of the following is true for a bond whose required return is greater than its coupon rate?
The bond sells at a discount to par.
Quirk Drugs sold an issue of 30-year $1,000 par value bonds to the public that carry a 10.85% coupon rate, payable semi-annually. It is now 10 years later and the current market rate of interest is 9.00%. If interest rates remain at 9.00% until Quirk's bonds mature, what will happen to the value of the bonds over time?
The bonds will sell at a premium and decline in value until maturity
Which of the following has the highest time value of money at the same interest rate for the same number of payments?
The future value of an annuity-due
What is the relationship between the present value of an ordinary annuity and the present value of an annuity-due with the same number of payments and the same interest rate?
The present value of an annuity-due = the present value of an ordinary annuity times 1 plus the relevant interest rate.
Which of the following has the lowest time value of money at the same interest rate for the same number of payments?
The present value of an ordinary annuity
Which of the following bonds would have the highest required rate of return assuming each bond has the same time to maturity?
a BB rated callable bond
Which of the following illustrates an inflow of cash?
a decrease in inventory
Which of the following would increase the future value of a single cash flow?
an increase in interest rate
A series of or equal periodic cash flows is known as a(n) _______________.
annuity
Which of the following is an example of a capital market security?
common stock
What is a bond's annual coupon divided by its market price called?
current yield
For the same APR and number of years, which of the following would create the highest future value of a cash flow?
daily interest compounding
Which of the following is a non-cash expense on an income statement?
depreciation
What is a major advantage of mutual funds?
diversification
For which of the following sources of income does a corporation receive a tax break?
dividend income
Which of the following measures the cash available to the company's investors?
free cash flow
If a bond's required return falls, what will happen to its price?
it will rise
Which of the following are included in the nominal interest rate for a long-term US Treasury bond?
maturity risk premium
Current assets minus current liabilities is known as
net working capital
A money market is the market for _________________.
short-term debt securities
Which of the following would be an example of a defined benefit pension plan?
social security
Which of the following is an auction market that uses market makers or specialists to facilitate trading?
the New York Stock Exchange
A bond's annual coupon is ____________.
the coupon rate times the par value.
Which of the following is the actual rate of interest paid or earned over a year's time?
the effective annual rate
When interest is compounded more than once per year which interest rate should be used when finding the time value of money?
the periodic rate
You invest $1000 today at 6% compounded annually and want to know how much money you will have in 5 years. What does the $1000 represent?
the present value
What is a bond's expected total rate of return called?
yield to maturity