Finance 3000 Test 2 midterm material

Determine the interest payment for the following three bonds: 3 ½ percent coupon corporate bond (paid semi-annually), 4.25 percent coupon Treasury note, LG1 and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

17.50, 21.25, 0

You have secured a loan from your bank for 2 years to build your home. The terms of the loan are that you will borrow $100,000 now and an additional $50,000 in one year. Interest of 9 percent APR will be charged on the balance monthly. Since no payments will be made during the two-year loan, the balance will grow. At the end of the two years, the balance will be converted to a traditional 30-year mortgage at a 7 percent interest rate. What will you pay as monthly mortgage payments (Principal and Interest only)?

174331.69

A mortgage broker is offering a $279,000 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4.5 percent APR interest rate. After the second year, the mortgage interest rate charged increases to 7.5 percent APR. What are the monthly payments in the first two years? What are the monthly payments after the second year?

1923.25

What's the present value of a $500 annuity payment over 5 years if interest rates are 9 percent?

1944.83

Consider a 3.5% TIPS with an issue CPI reference of 185.6. At the beginning of this year, the CPI was 196.2 and was at 201.3 at the end of the year. What was the capital gain of the TIPS in dollars and in percentage terms?

2.6%

Compute the present value of a $1,000 deposit in year 1 and another $1,500 deposit at the end of year 3 if interest rates are 10 percent.

2036.06

Determine the interest payment for the following three bonds: 4 ½ percent coupon corporate bond (paid semi-annually), 5.15 percent coupon Treasury note, and a corporate 4.56 coupon bond maturing in 15 years. (Assume a $1,000 par value.)

22.50, 25.75, 45.6

What's the present value of a $700 annuity payment over 4 years if interest rates are 10 percent?

2218.91

If you start making $50 monthly contributions today and continue them for 5 years, what's their future value if the compounding rate is 10 percent APR? What is the present value of this annuity?

2372.88

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 6.5 percent.

278.23

If you start making $75 monthly contributions today and continue them for 4 years, what is their future value if the compounding rate is 12 percent APR? What is the present value of this annuity?

2876.53

What is the future value of a $500 annuity payment over 5 years if interest rates are 9 percent?

2992.36

Consider a 2.25% TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 197.1 and was at 203.8 at the end of the year. What was the capital gain of the TIPS in dollars and in percentage terms?

3.4%

What is the future value of a $700 annuity payment over 4 years if interest rates are 10 percent?

3248.70

You wish to buy a $10,000 dining room set. The furniture store offers you a 3-year loan with a 11 percent APR. What are the monthly payments? How would the payment differ if you paid interest only?

327.39

Calculate the price of a zero coupon bond that matures in 15 years if the market interest rate is 7.25 percent

343.61

A 6.5 percent coupon bond with 14 years left to maturity is priced to offer a 7.2 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.8 percent. What is the change in price the bond will experience in dollars?

35.49

Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $575 in two weeks. What is the compounded annual rate implied by this 15 percent rate charged for only two weeks

3685.7%

Compute the present value of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using an 8% interest rate.

3689.43

A 5.75 percent coupon bond with 10 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.0 percent. What is the change in price the bond will experience in dollars?

37.33

Prices A corporate bond with a 6.5 percent coupon has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 8.5 percent. What will be the change in the bond's price in dollars and percentage terms? (Assume interest payments are paid semi-annually.)

-11.13%

What's the taxable equivalent yield on a municipal bond with a yield to maturity of 2.9 percent for an investor in the 33 percent marginal tax bracket?

4.33%

A 5.25 percent coupon bond with 14 years left to maturity can be called in 4 years. The call premium is one year of coupon payments. It is offered for sale at $1,075.50. What yield to call of the bond? (Assume that interest payments are paid semi-annually.)

4.39%

What's the taxable equivalent yield on a municipal bond with a yield to maturity of 3.5 percent for an investor in the 28 percent marginal tax bracket?

4.86%

Phoebe realizes that she has charged too much on her credit card and has racked up $6,000 in debt. If she can pay $200 each month and the card charges 18 percent APR (compounded monthly), how long will it take her to pay off the debt?

40.15

A perpetuity pays $100 per year and interest rates are 7.5 percent. How much would its value change if interest rates increased to 8.5 percent? Did the value increase or decrease?

-156.86

Calculate the price of a 6.2 percent coupon bond with 18 years left to maturity and a market interest rate of 5.9 percent. (Assume interest payments are semi-annual.) Is this a discount or premium bond?

1032.99 premium since it is over 1000

A 6.5 percent corporate coupon bond is callable in ten years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

1065

A 7 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

1070

Consider that you are 35 years old and have just changed to a new job. You have $80,000 in the retirement plan from your former employer. You can roll that money into the retirement plan of the new employer. You will also contribute $5,000 each year into your new employer's plan. If the rolled-over money and the new contributions both earn a 7 percent return, how much should you expect to have when you retire in 30 years?

1081284.33

A loan is offered with monthly payments and an 11 percent APR. What's the loan's effective annual rate (EAR)?

11.57%

Calculate the price of a 5.7 percent coupon bond with 25 years left to maturity and a market interest rate of 4.8 percent. (Assume interest payments are semi-annual.) Is this a discount or premium bond?

1130.22 premium since it is over 1000

Payday loans are very short-term loans that charge very high interest rates. You can borrow $250 today and repay $300 in two weeks. What is the compounded annual rate implied by this 20 percent rate charged for only two weeks?

11347.5%

A 2 ¾ percent TIPS has an original reference CPI of 185.4. If the current CPI is 210.7, what is the current interest payment and par value of the TIPS?

1136.45, 15.63

A 3 1/8 percent TIPS has an original reference CPI of 180.5. If the current CPI is 206.8, what is the current interest payment and par value of the TIPS?

1145.71, 17.90

Ross has decided that he wants to build enough retirement LG9 wealth that, if invested at 7 percent per year, will provide him with $4,000 of monthly income for 30 years. To date, he has saved nothing, but he still has 20 years until he retires. How much money does he need to contribute per month to reach his goal?

1154.16

A loan is offered with monthly payments and a 12 percent APR. What's the loan's effective annual rate (EAR)?

12.68%

A mortgage broker is offering a $183,900 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4 percent APR interest rate. After the second year, the mortgage interest rate charged increases to 7 percent APR. What are the monthly payments in the first two years? What are the monthly payments after the second year?

1204.89

Hank purchased a $20,000 car two years ago using an 9 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What's the minimum price Hank would need to receive for his car?

13055.77

A 6.75 percent coupon bond with 26 years left to maturity can be called in 6 years. The call premium is one year of coupon payments. It is offered for sale at $1,135.25. What yield to call of the bond? (Assume that interest payments are paid semi-annually.)

5.08%

What's the current yield of a 5.5 percent coupon corporate bond quoted at a price of 102.08

5.39%

A 5.25 percent coupon bond with 14 years left to maturity is offered for sale at $955.75. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually.)

5.71%

What's the current yield of a 7.2 percent coupon corporate bond quoted at a price of 96.78?

7.44%

What's the interest rate of a 5-year, annual $5,000 annuity with present value of $20,000?

7.93%

If the present value of an ordinary, 7-year annuity is $6,500 and interest rates are 8.5 percent, what's the future value of the same annuity due?

7052.5

Assume that you contribute $150 per month to a retirement plan for 15 years. Then you are able to increase the contribution to $350 per month for the next 25 years. Given an 8 percent interest rate, what is the value of your retirement plan after the 40 years?

713856.45

A corporate bond with a 6.75 percent coupon has 10 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.2 percent. The firm has recently become more financial stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 7.1 percent. What will be the change in the bond's price in dollars and percentage terms? (Assume interest payments are paid semi-annually.)

8.08%

Rachel purchased a $15,000 car two years ago using an 8 percent, 4-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What is the minimum price Rachel would need to receive for his car?

8096.66

A bond issued by Ford on May 15, 1997 is scheduled to mature on May 15, 2097. If today is November 16, 2008, what is this bond's time to maturity

88 years and 6 months

What's the present value, when interest rates are 8.5 percent, of a $75 payment made every year forever?

882.35

A bond issued by IBM on December 1, 1996 is scheduled to mature on December 1, 2096. If today is December 2, 2007, what is this bond's time to maturity?

89 years

What's the interest rate of a 7-year, annual $4,000 annuity with present value of $20,000?

9.20%

If the future value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what's the future value of the same annuity due?

9307.5

If the present value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what's the present value of the same annuity due?

9307.50

A 4.25 percent coupon bond with 8 years left to maturity is offered for sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000) A. 4.50% B. 4.25% C. 2.25% D. 2.36%

A

A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes? A. The municipal bond B. There is not enough information given to determine answer C. The corporate bond D. Both give the client equal profits after taxes

A

Compute the future value in year 10 of a $1,000 deposit in year 1 and another $1,500 deposit at the end of year 4 using an 8 percent interest rate. A. $3,120.73 B. $4,379.31 C. $4,500.00 D. $5,397.31

B

Compute the future value in year 4 of a $500 deposit in year 1 and another $1,000 deposit at the end of year 3 using a 5 percent interest rate. A. $1,625.00 B. $1,628.81 C. $1,800.00 D. $1,823.26

B

If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends and the required return on the preferred stock is 7%, what's the value of the stock? A. $0.43 B. $42.86 C. $21.00 D. $0.21

B

International Business Machines (IBM) has earnings per share of $6.85 and a P/E ratio of 15.19. What is the stock price? A. $45.09 B. $104.05 C. $2.22 D. $0.45

B

What is the present value of a $200 payment made in 3 years when the discount rate is 8 percent? A. $150.00 B. $158.77 C. $251.94 D. $515.42

B

What is the present value of a $500 payment made in 4 years when the discount rate is 8 percent? A. $365.35 B. $367.51 C. $460.00 D. $680.24

B

A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that offers a 6.45 percent yield. Which bond will give the client more profit after taxes? (Calculate ETY and compare

Corporate bond

Financial analysts forecast Target Corp. (TGT) growth for the future to be 11 percent. Their recent dividend was $0.52. What is the value of their stock when the required rate of return is 11.89 percent? A. $5.25 B. $6.48 C. $58.43 D. $64.85

D

Future Value of an Annuity What is the future value of an $800 annuity payment over 15 years if the interest rates are 6 percent? A. $1,917.25 B. $7,002.99 C. $12,720.00 D. $18,620.78

D

What's the current yield of a 6 percent coupon corporate bond quoted at price of 101.70? A. 6.0% B. 6.1% C. 10.2% D. 5.9%

D

Given a 7 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400

4199.29

Given a 6 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500

4207.08

Compute the future value in year 8 of a $1,000 deposit in year 1 and LG1 another $1,500 deposit at the end of year 3 using a 10% interest rate.

4364.48

Joey realizes that he has charged too much on his credit card and has racked up $5,000 in debt. If he can pay $150 each month and the card charges 17 percent APR (compounded monthly), how long will it take him to pay off the debt?

45.4

Given a 9 percent interest rate, compute the year 6 future value if deposits of $1,500 and $2,500 are made in years 2, and 3, respectively, and a withdrawal of $700 is made in year 5.

4591.94

A 3.75 percent coupon municipal bond has 14 years left to maturity and has a price quote of 98.45. The bond can be called in 4 years. The call premium is one year of coupon payments. Compute and discuss the bond's current yield, yield to maturity, taxable equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call. (Assume interest payments are paid semi-annually and a par value of $5,000.)

current yield: 3.81% Yield to Maturity: 3.89% ETY: 5.98% Yield to Call: 5.04%

A car company is offering a choice of deals. You LG9 can receive $1,000 cash back on the purchase, or a 2 percent APR, 5-year loan. The price of the car is $20,000 and you could obtain a 5-year loan from your credit union, at 7 percent APR. Which deal is cheaper?

first

A car company is offering a choice of deals. You LG9 can receive $500 cash back on the purchase, or a 3 percent APR, 4-year loan. The price of the car is $15,000 and you could obtain a 4-year loan from your credit union, at 7 percent APR. Which deal is cheaper?

first deal

Consider the following three bond quotes; a Treasury note quoted at 97:27, and a corporate bond quoted at 103.25, and a municipal bond quoted at 101.90. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

treasury: 978.44 corporate: 1032.40 municipal:5095.00

Compute the price of a 4.5 percent coupon bond with 15 years left to maturity and a market interest rate of 6.8 percent. (Assume interest payments are semi-annual.) Is this a discount or premium bond?

- 785.81 discount since it less than 1000

A 6.25 percent coupon bond with 22 years left to maturity is priced to offer a 5.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.0 percent. If this occurs, what would be the total return of the bond in dollars and percent?

-0.26%

Compute the price of a 5.6 percent coupon bond with 10 years left to maturity and a market interest rate of 7.0 percent. (Assume interest payments are semi-annual.) Is this a discount or premium bond

-900.51 discount since it is less than 1000

A 7.5 percent coupon bond with 13 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. If this occurs, what would be the total return of the bond in dollars and percentage terms?

0.45%

What annual interest rate would you need to earn if you wanted a $500 per month contribution to grow to $45,000 in 6 years?

0.608%

What annual interest rate would you need to earn if you wanted a $1,000 per month contribution to grow to $75,000 in 5 years?

0.732%

A small business owner visits his bank to ask for a loan. The owner states that she can repay a loan at $1,500 per month for the next three years and then $500 per month for two years after that. If the bank is charging customers 8.5 percent APR, how much would it be willing to lend the business owner?

56048.70

Given a 6 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500.

5967.82

A 6.85 percent coupon bond with 26 years left to maturity is offered for sale at $1,035.25. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually.

6.57%

Assume that you contribute $200 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $400 per month for another 20 years. Given a 7 percent interest rate, what is the value of your retirement plan after the 40 years?

629148.01

Given a 7 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400.

6302

Compute the future value in year 7 of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using a 8% interest rate.

6323.03

You wish to buy a $25,000 car. The dealer offers you a 4-year loan with a 10 percent APR. What are the monthly payments? How would the payment differ if you paid interest only?

634.06

What's the present value, when interest rates are 7.5 percent, of a $50 payment made every year forever?

666.67

A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $1,000 per month for the next three years and then $2,000 per month for two years after that. If the bank is charging customers 7.5 percent APR, how much would it be willing to lend the business owner

67662.70

A perpetuity pays $50 per year and interest rates are 9 percent. How much would its value change if interest rates decreased to 8 percent? Did the value increase or decrease?

69.45

What is the present value of a $250 deposit in year 1 and another $50 deposit at the end of year 6 if interest rates are 10 percent? A. $120.00 B. $169.34 C. $255.50 D . $278.22

C

What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent? A. $204.17 B. $440.80 C. $1,197.81 D. $1,938.96

C

What is the present value of a $500 deposit in year 1 and another $100 deposit at the end of year 4 if interest rates are 5 percent? A. $480.00 B. $493.62 C. $558.46 D. $582.27

C

What is the present value, when interest rates are 10 percent, of a $75 payment made every year forever? A. $6.75 B. $675.00 C. $750.00 D. $1,000.00

C

A 4.25 percent coupon municipal bond has 18 years left to maturity and has a price quote of 97.65. The bond can be called in 8 years. The call premium is one year of coupon payments. Compute and discuss the bond's current yield, yield to maturity, taxable equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call. (Assume interest payments are paid semi-annually and a par value of $5,000.)

Current Yield: 4.35% YTM: 4.44% ETY: 6.83 YTC: 5.04%

1. Yield to Call A 7.25 percent coupon bond with 25 years left to maturity can be called in 5 years. The call premium is one year of coupon payments. It is offered for sale at $1066.24. What is the yield to call of the bond? (Assume that interest payments are paid semi-annually and par value is $1,000.) A. 3.51% B. 3.41% C. 3.45% D . 6.90%

D

American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The dividend is expected to grow at a 15.5 percent rate. At the current stock price of $24.07, what is the return shareholders are expecting? A. 15.50 percent B. 15.52 percent C. 17.08 percent D. 17.32 percent

D

A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that offers a 6.45 percent yield. Which bond will give the client more profit after taxes? (calculate ETY and compare)

municipal bond

Would you rather pay $10,000 for a five year $2,500 annuity or a ten-year $1,250 annuity? Why?

pay 10000 for five year 2500 annuity because it earns a higher effective annual rate of interest

Consider the following three bond quotes; a Treasury bond quoted at 106:14, and a corporate bond quoted at 96.55, and a municipal bond quoted at 100.95. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

treasury: 1064.375 corporate: 965.50 municipal: 5047.00