Exam 2
You are planning to make annual deposits of $5,700 into a retirement account that pays 10 percent interest compounded monthly. How large will your account balance be in 30 years?
$1,025,403.78
What is EAR?
Effective Annual Interest. The interest rate that is adjusted for compounding over a given period. Simply put, the effective annual interest rate is the rate of interest that an investor can earn (or pay) in a year after taking into consideration compounding
What is a T-note?
Coupon debt with original maturity between one and ten years
What is a T-bond?
Coupon debt with original maturity greater than ten years
RAK, Inc., currently has an EPS of $2.45 and an earnings growth rate of 8 percent. If the benchmark PE ratio is 23, what is the target share price five years from now?
$82.80
Weismann Co. issued 15-year bonds a year ago at a coupon rate of 4.9 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 4.5 percent, what is the current bond price?
$1,041.22
Suppose you are looking at the following possible cash flows: Year 1 CF = $100 Years 2 and 3 CFs = $200 Years 4 and 5 CFs = $300 The required discount rate is 7% What is the value of the cash flows at year 3?
$1,070.90
What is the price of a $1,000 par value bond with a 6% coupon rate paid semiannually, if the bond is priced to yield 5% and it has 9 years to maturity
$1,071.77
Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years. How much would you have using simple interest?
$1,100.00
Suppose you are looking at the following possible cash flows: Year 1 CF = $100 Years 2 and 3 CFs = $200 Years 4 and 5 CFs = $300 The required discount rate is 7% What is the value of the cash flows at year 5?
$1,226.07
Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years. How much would you have using compound interest?
$1,586.08
If an ordinary bond has a coupon rate of 14%, then the owner will get a total of $140 per year, but this $140 will come in two payments of $70 each. The yield to maturity is quoted at 16%. The bond matures in 7 years. What is the semiannual coupon payment?
$1000 par value and $70 a semi annual coupon payment
Suppose you need $15,000 in 3 years. If you can earn 6% annually, how much do you need to invest today?
$12,594.29
Imprudential, Inc., has an unfunded pension liability of $415 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 5.2 percent, what is the present value of this liability?
$150,568,214.50
You want to have $1 million to use for retirement in 35 years. If you can earn 1% per month, how much do you need to deposit if the first payment is made today?
$153.96
You want to have $1 million to use for retirement in 35 years. If you can earn 1% per month, how much do you need to deposit on a monthly basis if the first payment is made in one month?
$155.50
First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a deposit of $7,500 in each bank, how much more money would you earn from your Second City Bank account at the end of eight years?
$2,044.22
Suppose a company had earnings $1,500,000 and $750,000 outstanding shares of common stock. The industry average return is 10%. What is the stock price?
$20
You want to receive $5,000 per month for the next 5 years. How much would you need to deposit today if you can earn 0.75% per month?
$240,867
Your company will generate $47,000 in annual revenue each year for the next seven years from a new information database. If the appropriate interest rate is 7.1 percent, what is the present value of the savings?
$252,415.91
You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more years at 6.8 percent per year. How much will you have in eight years?
$29,679.56
You want to have $60,000 in your savings account 12 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.4 percent interest, what amount must you deposit each year?
$3,474.39
If you put up $41,000 today in exchange for a 5.1 percent, 15-year annuity, what will the annual cash flow be?
$3,976.78
Mannix Corporation stock currently sells for $57 per share. The market requires a return of 11 percent on the firm's stock. If the company maintains a constant 3.75 percent growth rate in dividends, what was the most recent dividend per share paid on the stock?
$3.98
Suppose you have $200,000 to deposit and can earn 0.75% per month. How much could you receive every month for 5 years?
$4,151.67
Fuente, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $1,075 2 1,210 3 1,340 4 1,420 If the discount rate is 8 percent, what is the future value of the cash flows in Year 4?
$5,632.73
Fuente, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $1,075 2 1,210 3 1,340 4 1,420 If the discount rate is 11 percent, what is the future value of the cash flows in Year 4?
$5,868.44
You are considering preferred stock that pays a quarterly dividend of $1.50. If your desired return is 3% per quarter, how much would you be willing to pay?
$50
Hudson Corporation will pay a dividend of $3.28 per share next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company's stock today?
$52.48
Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 10.75 percent, what is the current share price?
$58.70
You want to receive 5,000 per month in retirement. If you can earn 0.75% per month and you expect to need the income for 25 years, how much do you need to have in your account at retirement?
$595,808
Fuente, Inc., has identified an investment project with the following cash flows. Year Cash Flow 1 $1,075 2 1,210 3 1,340 4 1,420 If the discount rate is 24 percent, what is the future value of the cash flows in Year 4?
$6,991.72
The appropriate discount rate for the following cash flows is 7.17 percent per year. Year Cash Flow 1 $2,480 2 0 3 3,920 4. 2,170 What is the present value of the cash flows?
$7,143.77
Suppose you are looking at the following possible cash flows: Year 1 CF = $100 Years 2 and 3 CFs = $200 Years 4 and 5 CFs = $300 The required discount rate is 7% What is the value of the cash flows today?
$874.17
If an ordinary bond has a coupon rate of 14%, then the owner will get a total of $140 per year, but this $140 will come in two payments of $70 each. The yield to maturity is quoted at 16%. The bond matures in 7 years. What is the bond price?
$917.56
What is the price of a $1,000 par value bond with a 6% coupon rate paid semiannually, if the bond is priced to yield 7% and it has 9 years to maturity
$934.05
You have an 8% coupon bond, with semiannual coupons, face value of 1,000, 15 years to maturity, $950.25 price. The Yield to Maturity is 8.5964% and the Current Yield is 8.42%. What is the projected value of the bond in 1 year assuming no change in the YTM?
$951.98
You have an 8% coupon bond, with semiannual coupons, face value of 1,000, 15 years to maturity, $950.25 price. The Yield to Maturity is 8.5964% and the Current Yield is 8.42%. What is the capital gains yield? Calculation → (price in 1 year - current price) / current price
-0.18
Big Dom's Pawn Shop charges an interest rate of 27 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. If the APR is 324%, what is the effective annual rate?
1,660.54%
What monthly rate would you need to earn if you only have $200,000 to deposit?
1.439%
he next dividend payment by Savitz, Inc., will be $2.34 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $37 per share, what is the required return?
10.82%
Excey Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature?
11.06 years
At 6.1 percent interest, how long does it take to double your money?
11.8 years
What is the value of a stock that is expected to pay a constant dividend of $2 per year if the required return is 15%?
13.33
You observe a stock price of $18.75. You expect a dividend growth rate of 5%, and the most recent dividend was $1.50. What is the required return?
13.4%
If an ordinary bond has a coupon rate of 14%, then the owner will get a total of $140 per year, but this $140 will come in two payments of $70 each. The yield to maturity is quoted at 16%. The bond matures in 7 years. How many coupon payments are there?
14
The value of a stock is 13.33 that pays a constant dividend of $2 per year with a required return of 15%. What if the company starts increasing dividends by 3% per year, beginning with the next dividend? The required return stays at 15%
17.17
A Japanese company has a bond outstanding that sells for 105.43 percent of its ¥100,000 par value. The bond has a coupon rate of 3.4 percent paid annually and matures in 16 years. What is the yield to maturity of this bond?
2.97%
At 6.1 percent interest, how long does it take to quadruple it?
23.41 years
A taxable bond has a yield of 8%, and a municipal bond has a yield of 6%. At what tax rate would you be indifferent between the two bonds?
25%
Suppose you want to buy some new furniture for your family room. You currently have $500, and the furniture you want costs $600. If you can earn 6%, how long will you have to wait if you don't add any additional money?
3.13 years
According to the Census Bureau, in October 2016, the average house price in the United States was $354,900. In October 2000, the average price was $215,100. What was the annual increase in the price of the average house sold?
3.18%
Big Dom's Pawn Shop charges an interest rate of 27 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report?
324%
Gabriele Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $948. At this price, the bonds yield 5.1 percent. What must the coupon rate be on the bonds?
4.29%
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. Suppose a sales associate told you the policy costs $800,000. At what interest rate would this be a fair deal?
4.38%
West Corp. issued 25-year bonds two years ago at a coupon rate of 5.3 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
4.93%
Suppose you have $200,000 to deposit and can earn 0.75% per month. How many months could you receive the $5,000 payment?
47.73 months
The price of a $1,000 par value bond with a 6% coupon rate paid semiannually, if the bond is priced to yield 7% and it has 9 years to maturity is $934.05. What is the current yield on the bond if the YTM is 7%?
6.42%
If an ordinary bond has a coupon rate of 14%, then the owner will get a total of $140 per year, but this $140 will come in two payments of $70 each. The yield to maturity is quoted at 16%. The bond matures in 7 years. What is the semiannual yield?
8%
Suppose a bond with a 10% coupon rate and semiannual coupons, has a face value of $1,000, 20 years to maturity and is selling for $1,197.93. What is the YTM?
8%
You have an 8% coupon bond, with semiannual coupons, face value of 1,000, 15 years to maturity, $950.25 price. What is the current yield?
8.42%
You have an 8% coupon bond, with semiannual coupons, face value of 1,000, 15 years to maturity, $950.25 price. What is the yield to maturity?
8.5964%
What is the required return?
A minimum level of rate of return that investors would agree to accept for a particular invest
What is the annuity date?
A repeating payment that is made at the beginning of each period. It has the following characteristics
What is an ordinary annuity?
A series of equal payments made at the end of consecutive periods over a fixed length of time. While the payments in an annuity can be made as frequently as every week. In practice, ordinary annuity payments are made monthly, quarterly, semi-annually, or annually
What is a discount loan?
A situation where all the interest on a loan is paid at once. That is, the interest is deducted from the amount the borrower receives at the beginning of the loan
Which is not a major characteristic of preferred stock? A. Preferred stock generally carries voting rights B. Stated dividend that must be paid before dividends can be paid to common stockholders C. Preferred dividends can be deferred indefinitely D. Most preferred dividends are cumulative - any missed preferred dividends have to be paid before common dividends can be paid
A. Preferred stock generally carries voting rights
What is the difference between simple and compound interest if the Present Value and Trm are equal?
All things being equal, compound interest will generate a higher future value
What is an annuity due?
An annuity for which the cash flows occur at the beginning of the period
What is APR?
Annual Percentage Rate. The interest rate on a given account
What is the coupon rate?
Annual coupon divided by face value
What is not a major characteristic of common stock? A. Voting rights B. Proxy voting C. Stated dividend that must be paid before dividends can be paid to preferred stockholders D. Share proportionally in declared dividends
C. Stated dividend that must be paid before dividends can be paid to preferred stockholders
How would the decision be different if you were looking at borrowing $500 today and either repaying 4% or repaying $600?
Choose to repay $600 because you would be repaying a lower rate
Which rate should you use to compare alternative investments or loans?
EAR
What is the mathematical relationship between present value and future value?
FV = PV(1+r)t
What is an annuity?
Finite series of equal payments that occur at regular intervals
Which of the following statements is false? If the current value of a bond is greater than its par value, then the yield to maturity is less than the coupon rate. If the current value of a bond is greater than its par value, then the yield to maturity is more than the coupon rate.
If the current value of a bond is greater than its par value, then the yield to maturity is more than the coupon rate.
What is perpetuity?
Infinite series of equal payments
You can invest $500 today and receive $600 in 5 years. The investment is considered low risk or you can invest the $500 in a bank account paying 4%. What is the implied interest rate your first choice and which investment should you choose?
Implied rate = 3.714%
What is compound interest?
Interest paid on interest previously earned
What happens with interest on a municipal bond?
Interest received is tax-exempt at the federal level
Suppose a bond with a 10% coupon rate and semiannual coupons, has a face value of $1,000, 20 years to maturity and is selling for $1,197.93 Is the YTM more or less than 10%? What is the semiannual coupon payment? How many periods are there?
Less than 10%, $50 coupon payment, 40 periods
A taxable bond has a yield of 8%, and a municipal bond has a yield of 6% If you are in a 30% tax bracket, which bond do you prefer?
Municipal since 8%(1 - .3) = 5.6%
What is the definition of an APR?
Period rate x # of compounding periods per year
Which rate do you need to use in the time value of money calculations?
Period rate, and have to use the APR to get it
You know the payment amount for a loan, and you want to know how much was borrowed. Do you compute a present value or a future value?
Present value
What is par value?
Principal amount, repaid at maturity
What is a T-bill?
Pure discount bonds with original maturity of one year or less
What is the yield to maturity?
Rate of return required in the market for the bond
What is a discount rate?
Rate used to discount future cash flow
What is the coupon?
Stated interest payment
What is an interest rate?
The "exchange rate" between earlier money and later money
What is the cost of capital?
The cost of funds used for financing a business
What is present value?
The current value of a future sum of money or stream of cash flows given a specified rate of return
What is the opportunity cost of capital?
The incremental return on investment that a business foregoes when it elects to use funds for an internal project, rather than investing cash in a marketable security
What is effective interest rate?
The interest rate that is actually earned or paid on an investment, loan or other financial product
What is simple interest?
The money your investment earns is based solely on the principle (your initial investment amount)
What is the effective annual rate?
The rate we earn (or pay) after we account for compounding
What is future value?
The value of a current asset at a specified date in the future based on an assumed rate of growth
What is the maturity date?
When a bond's principal is repaid
