FIN 325 Test 2
Grand Adventure Properties offers a 9.5% coupon bond with annual payments. The yield to maturity is 11.2% and the maturity date 11 years from today. What is the market price of this bond if the face value is $1,000?
$895.43
Nadine is retiring today at age 66 and expects to live to age 82. She has $136,000 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death?
$1,103.56 N=12*(82-66); I/Y=6/12; PV=$-136,000; FV=0; CPT PMT=$1,103.5555
You invested $6,500 in an account that pays 6% simple interest. How much more could you have earned over a 10-year period if the interest had compounded annually?
$1,240.51 (P+(interest*Principal*Time)= $6,500+(.06*6500*10)=10,400 N=10; I/Y=6; PV= -6500; CPT FV= 11640.51
Alex investeed $10,500 in an account that pay 6% compound interest. How much money will he have at the end of four years?
$13,256 (N= 4; I/Y=6; PV= 10,500; CPT FV= 13,256)
What is the present value of $42,000 to be received 22 years from today if the discount rate is 14%?
$2,351.49 (N=22; I/Y=14; FV= 42000)
Travis invested $8,250 in an account that pays 4% compound interest for 7 years. How much more could he have earned over the period if the interst were 7% compounded annually?
$2391.26 (N=7; I/Y=4; PV=8250; CPT=10856.4372) (Change= I/Y=7)
Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,400 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 6.75 percent?
$27,677.34 (N=20; I/Y=6.75; PMT=$2,400; CPT PV=$-27,677.3410)
Troy will receive $7,500 at the end of year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of year 5 if the interest rate is 8 percent?
$33,445
You estimate that you will owe $39,950 in student loans by the time you graduate. The interest rate is 3.75 percent. If you want to have this debt paid in full within 10 years, how much must you pay each month?
$399.74 (N=12*10; I/Y=3.75/12; PV=-$39,950; FV=0; CPT PMT $399.7447)
Racing Engines wants to save $750,000 to buy some new equipment four years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. The firm can earn 4.75 percent on its savings. How much does the firm have to save each quarter to achieve its goal?
$42,337.00 (N=4*4; I/Y=4.75/4; FV=$750,000; CPT PMT=$-42,336.9975)
A preferred stock pays an annual dividend of $4.10. What is one share of this stock worth today if the rate of return is 9.68 percent?
$42.36 4.10/0968
An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent, what is the most you are willing to pay as a lump sum today to buy this annuity?
$44,591.11 (N=4*20; I/Y=6.5/4; PMT=$1,000; CPT PV=$44.591.1058)
What is the future value of $6,200 invested for 23 years at 9.25% compounded annually?
$47,433.47 (N=23; I/Y=9.25; PV= -6,200; CPT FV= $47,433.47)
Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $187,000, $220,000, and $245,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 13.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?
$503,098
Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease?
$6,232.80 (N=36; I/Y=6.5/12; PMT=-$190; CPY PV=$6,232.8020)
Twindle Johns, your long-lost and very much removed cousin, offers to help with your college expenses. Because of his own financial predicament, he offers to give you $2,000 at the end of three years, $4,000 at the end of year five, $6,000 at the end of year seven. You rejoice! However, you would like to have the money now. At a nearby park, you meet Lefty U. Broke, your friendly sidewalk loan officer. He says he will loan you the money, but his required return is 10 percent. You agree to his terms. How much money is he going to hand to you? Oh, by the way, if you don't hand over the payments from your cousin on time, Bruno will visit you. It won't be pretty.
$7,065.26
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $40,000 per year forever. If the required return on this investment is 5.1%, how much will you pay for the policy?
$784,313.73 (PV=coupon payment/required return= $40,000/.051)
Gerald invested $5,600 in an account that pays 5% simple interest. How much money will he have at the end of ten years?
$8,400 (I= 5,600*.05*10= 2,800; 5,600+2,800=8,400)
Al invested $7,200 in an account that pays 4% simple interest. How much money will he leave at the end of five years?
$8,640
Dinero Bank offes you a five-year loan for $50,000 at an annual interest rate of 7.5%. What will your annual loan payment be?
12,358.24 (N=5; I/Y=7.5; PV= -50,000; CPT PMT= $12,358.24)
You are paying an effective annual rate of 15.33 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?
14.35
Tai Credit Corp. Wants to earn an effective annual return on its consume laons of 16.5% per year. The bank uses daily compounding on its loans. What interst rate is the bank required by law to report to potential borrowers?
15.28
You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price?
182.80 N=20*2; I/Y=8.68/2; PMT=0; FV=$1,000 CPT PV=$-182.7960
Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $742. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?
5.73 years I/Y=13.2; PV=$-742; PMT=$65; FV=$1,000; CPT N=5.7255 years
At 6% interest, how long would it take to quadruple your money?
23.79 years
Your credit card company quotes you an interest rate of 21.9 percent based on annual compounding (APR). Interest is billed monthly. What is the actual rate of interest (EFF) you are paying?
24.24
According to the Census Bureau, in Jan 2013, the average house price in the US was 306,900. In January 2000, the average price was 200,300. What was the annual percentage increase in selling price?
3.34 (N=13; PV=200,300, FV=306,900; CPT I/Y 3.34)
MBM estimates its expansion cost at $18.63 million and wants it fully funded upfront. Management has decided to save $1.1 million a quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on its savings. How long does the firm have to wait before expanding its operations?
3.79 years I/Y=6.25/4; PV=0; PMT=-$1,100,000; FV=$18,630,000; CPT N=15.1430 quarters or 15.1430/4=3.7858
You just paid $750,000 for an annuity that will pay you and your heirs $36,000 a year forever. What rate of return are you earning on this policy
36,000/750,000=.0480
What is the future value of 11,600 invested for 17 years at 7.25% compounded annually?
38,125.1976 (N=17; I/Y=7.25; PV=11,600)
If you put up $38,000 today in exchange for a 5.8% 15 year-annuity, what will the annual cash flow be?
3861.62 (N=15; I/Y=5; PV= 38,000; CPT PMT= 3,861.62)
Redesigned Computers has 6.5% coupon bonds outstandingg with a current market price of $832. The yield to maturity is 16.28% and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?
4.19 years
The value of an ordinary annuity is $5,000. The discount rate for the annuity is 5%. The value of this annuity would be ____ if it were an annuity due.
5,250 (5,000 * 1.05)
The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,032. What is the yield to maturity?
6.48% N=16; PV=$-1032; PMT=$35; FV=$1,000; CPT I/Y=3.2405 semi; but need annual; 3.2405*2=6.4811
One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?
6.92% (N=1; PV=1800; FV= 1924.62; CPT I/Y= 6.9233)
Today, you borrowed $6,200 on your credit card to purchase some furniture. The interest rate is 14.9 percent, compounded monthly. How long will it take you to pay off this debt if you do not charge anything else and make regular monthly payments of $120?
6.93. years I/Y=14.9/12; PV=$6,200; PMT=$-120; FV=0; CPT N=83.1350 months or 83.1350/12=6.9279 years
Travis invested $9,250 in an account that pays 6% simple interest. How much more could he have earned over a 7-yaer period if the interst had compounded annually?
773.58 (9,250*.06*7+9,250=13,135) (Simple) (N=7; I/Y= 6; PV= -9250; CPT FV= 13,908.50) (Compounded annually)
Using the Rule of 72j, if the rate of return on an investment is 7.3%, how long will it take for the investment to double in value?
9.86 years (72/7.3)
Oil Wells offers 6.5 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000?
975.93 N=14; I/Y= 6.94/2; PMT=$65/2; FV=$1,000 CPT PV=$-975.9264
All else constant, a bond will sell at ___ when the coupon rate is ___ the yield to maturity.
A discount; less than
On your ninth birthday, you received $300 which you invested at 4.5% interest compounded annually. Your investment is now worth $756. How old are you you today?
Age 30
A perpetuity is
An annuity that has no end, or a stream of cash payments that cotinue forever
The interest rate that is most commonly quoted by a lender is referred as which one of the following?
Annual percentage rate
The interest rte that is most commonly quoted by a lender is referred to as which one of the following?
Annual percentage rate
What is the interest rate charged per period muiltiplied by the number of periods per year called?
Annual percentage rate
You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75% interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concernings these two annuities?
Annuity B has a smaller present value than annuity A.
A bond that is payable to whomever has physical possession of the bond is said to be in:
Bearer form
Which one of the following is the price a dealer will pay to purchase a bond?
Bid price
A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following?
Call premium
Steve just computed the present vvalue of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?
Compound rate
Tracy invested $1,00 five years ago and earns 4% interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?
Compounding
Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:
Discounting
According to the Rule of 72, you can do which one of the following?
Double your money in 5 years at 14.4% interest
A sinking funds is managed by a trustee for which one of the following purposes?
Early bond redemption
An interest rate on a loan is compounded monthly but expressed as an annual rate would be an example of which one of the following rates?
Effective annual rate
When you are comparing two investments with different compounding period, the most appropriate rate to use for the comparison is:
Effective annual rate
An ordinary annuity is best defined by which one of the following?
Equal payments paid at regular intervals over a stated time period
An ordinary annuity is best defined by which one of the following?
Equal payments paid at the end of regular intervals over a stated time period
Bert owns a bond taht will pay $75 each year in interst plus a $1,000 principal payment at maturity. What is the $1,000 called?
Face/Par value
You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?
Future Value
You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?
Future value
Which of the following increease the price sensitivity of a boond to changes in interest rates? I. increase in time to maturity II. Decrease in time to maturity III. Increase in coupon rate IV. Decrease in coupon rate
I & IV only (Longer the bond terms, the more sensitive; Lower the coupon payment, the more sensitive)
Which of the followng are negative covenants that might be found in a bond indenture? I. The company shall maintain a current ratio of 1.10 or better II. No debt senior to this issue can be issued III. The company cannot lease any major assets without approval by the lender. IV. The company must maintain the loan collateral in good work order.
II and III only
Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7% discount rate to these amounts?
In today's dollars, Luis' money is worth more than Soo Lee's
Which one of the following premiums is compensation for expected future inflation?
Inflation
Steve invested $100 two years ago at 10% interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 hhe earned in intersted the second year is referred to as:
Interest on Interest
Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?
Interest-only loan
Which one of the following terms is used to describe a loan that calls periodic interest payments and a lump sum principal payment?
Interest-only loan
The current yield or yield to maturity is defined as the annual interst on a bond divided by which one of the following?
Market Price (Current yield= Coupon payment/market price)
Interest rates that include an inflation premium are referred to as
Nominal rate (Real interest rate + expected rate of inflation)
Which one of the following accurately defines a perpetuity?
Unending equal payments paid at equal time intervals
Which one of the following statements related to loan interst rate is correct?
When comparing loans you should compare the effective annual rates
Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following?
Present Value
In a present value calculation, if the discount rate rises, the:
Presnt value will fall
A loan where the borrower receives money today and reapys a single lump sum on a future date is called a ____ loan.
Pure discount
A loan where the borrower receives money today and repays a single lump sum on a future date is called a ___ loan.
Pure discount
Renee invested $2,000 six years ago 4.5% interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?
Simple interest
Sara invested $500 six years ago at 5% interest. She spends her earnings as soon as she earns any interest sso she only recieves interest on her initial $500 investment. Which type of interest is Sara earning?
Simple interest
Sue & Neal are twins. Sue invests $5,000 at 7% when she is 25 years old. Neal invested $5,000 at 7% when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?
Sue will have more money than Neal as long as they retire at the same time.
The pure time vvalue of money is know as the:
Term structure of interest rates
The effective annual rate (EAR) is:
The annual rate of interst that accounts for the effect of compounding
What is the relationship between present value and future value interest factors?
The factors are reciprocals of each other
Which one of the following variables is the exponent in the present value formula?
Time