Finance exam 2
This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following? A)Bearer-form bond B)Note C)Debenture D)Callable bond E)Registered-form bond
A) Bearer-form bond
ou want to purchase a new condominium that costs $287,500. Your plan is to pay 25 percent down in cash and finance the balance over 15 years at 3.75 percent. What will be your monthly mortgage payment including principal and interest? A)$1,568.07 B)$1,406.11 C)$1,333.33 D)$1,221.43 E)$1,708.16
A)$1,568.07
ou would like to establish a trust fund that would provide annual scholarships of $100,000 forever. How much would you have to deposit today in one lump sum to achieve this goal if you can earn a guaranteed 4.5 percent rate of return? A)$2,222,222 B)$2,413,435 C)$1,800,000 D)$1,620,975 E)$1,678,342
A)$2,222,222
Eric is considering an investment that will pay $8,200 a year for five years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 11.2 percent? A)$30,154.50 B)$18,153.55 C)$17,899.08 D)$20,186.75 E)$27,117.36
A)$30,154.50
You will receive annual payments of $800 at the end of each year for 12 years. The first payment will be received in Year 3. What is the present value of these payments if the discount rate is 7 percent? A)$5,549.96 B)$6,018.52 C)$6,856.60 D)$6,299.80 E)$5,465.20
A)$5,549.96
Postal Express is considering the purchase of a new sorting machine. The sales quote consists of quarterly payments of $37,200 for five years at 7.6 percent interest. What is the purchase price? A)$614,184.40 B)$687,418.22 C)$836,267.35 D)$774,311.28 E)$621,380.92
A)$614,184.40
Charlene can afford car payments of $185 a month for 48 months. If the interest rate is 5.65 percent, how much money can she afford to borrow? A)$7,931.44 B)$8,422.09 C)$8,022.15 D)$7,899.60 E)$7,734.95
A)$7,931.44
Jeffries, Inc.,has semiannual, 6 percent coupon bonds on the market that currently have 11 years left to maturity. If the market rate of return for this bond is 7.13 percent three years from now, what will be the bond's clean price at that time? A)$932.00 B)$925.88 C)$903.14 D)$921.42 E)$933.33
A)$932.00
Cromwell is acquiring some land for $1,200,000 in exchange for semiannual payments of $75,000 at an interest rate of 6.35 percent. How many years will it take Cromwell to pay for this purchase? A)11.35 years B)11.80 years C)11 years D)10.47 years E)12 years
A)11.35 years
Which one of the following statements is true? A)A discount bond has a coupon rate that is less than the bond's yield to maturity. B)A premium bond has a current yield that exceeds the bond's coupon rate. C)The current yield on a premium bond is equal to the bond's coupon rate. D)The current yield on a par value bond will exceed the bond's yield to maturity. E)The yield to maturity on a premium bond exceeds the bond's coupon rate.
A)A discount bond has a coupon rate that is less than the bond's yield to maturity.
Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms? A)Annuity B)Lump sum C)Consol D)Present value E)Perpetuity
A)Annuity
ou are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information? A)Annuity B has both a higher present value and a higher future value than Annuity A. B)The present value of Annuity A is equal to the present value of Annuity B. C)The future value of Annuity A is greater than the future value of Annuity B. D)Annuity A has a higher future value but a lower present value than Annuity B. E)Annuity B will pay one more payment than Annuity A will.
A)Annuity B has both a higher present value and a higher future value than Annuity A.
Which one of these is a perpetuity? A)Trust income of $1,200 a year forever B)Lottery winnings of $1,000 a month for life C)Rental payment of $800 a month for one year D)Retirement pay of $2,200 a month for 20 years E)Car payment of $260 a month for 60 months
A)Trust income of $1,200 a year forever
If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be: A)humped B)flat. C)double-humped. D)upward sloping. E)downward sloping.
A)humped
The price at which an investor can purchase in the bond market is called the _____ price. A)call B)asked C)bid D)face E)coupon
B) Asked
ST Trucking just signed a $3.8 million contract. The contract calls for a payment of $1.1 million today, $1.3 million one year from today, and $1.4 million two years from today. What is this contract worth today at a discount rate of 8.7 percent? A)$3,202,840.91 B)$3,480,817.37 C)$2,108,001.32 D)$3,202,223.89 E)$3,783,648.48
B)$3,480,817.37
How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $42,000 a year for 25 years? She expects to earn an average rate of return of 9.75 percent. A)$401,533.33 B)$388,683.83 C)$407,419.81 D)$426,580.50 E)$385,160.98
B)$388,683.83
The 4.5 percent bond of JL Motors has a face value of $1,000, a maturity of 7 years, semiannual interest payments, and a yield to maturity of 6.23 percent. What is the current market price of the bond? A)$947.21 B)$903.05 C)$945.08 D)$912.40 E)$959.60
B)$903.05
City Motors will sell a $15,000 car for $345 a month for 52 months. What is the interest rate? A)8.53% B)9.28% C)8.67% D)8.38% E)9.10%
B)9.28%
Which statement is true? A)All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity. B)All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. C)All else equal, an ordinary annuity is more valuable than an annuity due. D)All else equal, a decrease in the number of payments increases the future value of an annuity due. E)An annuity with payments at the beginning of each period is called an ordinary annuity.
B)All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
You purchase a bond with an invoice price of $1,108.48. The bond has a coupon rate of 5.5 percent, semiannual coupons, and there are two months to the next coupon date. What is the clean price of the bond? A)$1,057.50 B)$1,050.20 C)$1,090.15 D)$998.50 E)$1,086.35
C)$1,090.15
Your grandfather started his own business 52 years ago. He opened an investment account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 5.73 percent annually. Today, his account is valued at $289,209.11. How much did your grandfather save every three months assuming he saved the same amount each time? A)$331.09 B)$284.02 C)$226.78 D)$328.67 E)$262.25
C)$226.78
Today, you are purchasing a 20-year, 6 percent annuity at a cost of $48,350. The annuity will pay annual payments starting one year from today. What is the amount of each payment? A)$4,511.08 B)$4,013.20 C)$4,215.37 D)$5,208.19 E)$2,754.40
C)$4,215.37
Capstone Investments is considering a project that will produce cash inflows of $11,000 at the end of Year 1, $24,000 in Year 2, and $36,000 in Year 3. What is the present value of these cash inflows at a discount rate of 12 percent? A)$54,868.15 B)$63,494.54 C)$54,578.17 D)$41,997.60 E)$46,564.28
C)$54,578.17
Industrial Tools owes you $38,600. This amount is seriously delinquent so you have offered to accept weekly payments for one year at an interest rate of 3 percent to settle this debt in full. What is the amount of each payment? A)$599.04 B)$609.18 C)$753.71 D)$818.11 E)$829.90
C)$753.71
S&S Furniture is offering a bedroom suite for $3,200. The credit terms are 60 months at $55 per month. What is the interest rate on this offer? A)1.15 percent B)1.65 percent C)1.22 percent D)1.50 percent E)1.30 percent
C)1.22 percent
You have just won the lottery! You can either receive $6,500 a year for 20 years or $100,000 as a lump sum payment today. What is the interest rate on the annuity option? A)2.20% B)2.45% C)2.64% D)1.68% E)1.95%
C)2.64%
Good Guys will pay you $2,500 a year for 10 years in exchange for $31,300 today. What interest rate will you earn on this annuity? A)1.67% B)2.55% C)3.89% D)2.38% E)5.50%
C)3.89%
New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 14.5 years, and have a 4.5 percent coupon. The current price is quoted at 97.6. What is the yield to maturity? A)5.27 percent B)5.13 percent C)4.73 percent D)5.32 percent E)4.92 percent
C)4.73 percent
So you can retire early, you have decided to start saving $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn 5 percent on your savings, how many years will it be before you can retire? A)42.87 years B)33.87 years C)44.76 years D)44.71 years E)33.39 years
C)44.76 years
What is the effective annual rate of 8.25 percent compounded quarterly? A)8.49% B)8.38% C)8.51% D)8.25% E)8.56%
C)8.51%
If your nominal rate of return is 14.38 percent and your real rate of return is 4.97 percent, what is the inflation rate? A)8.47 percent B)9.44 percent C)8.96 percent D)19.92 percent E)19.35 percent
C)8.96 percent
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are: A)an annuity due B)an ordinary annuity C)a perpetuity D)a perpetuity due E)amortized payments
C)a perpetuity
All else held constant, the present value of an annuity will decrease if you: A)increase the payment amount. B)increase the annuity's future value. C)decrease the annuity payment. D)increase the time period. E)decrease the discount rate.
C)decrease the annuity payment.
An upward-sloping term structure of interest rates indicates: A)the real rate of return is lower for short-term bonds than for long-term bonds. B)there is an indirect relationship between real interest rates and time to maturity C)the nominal rate is increasing even though the real rate is constant as the time to maturity increases. D)there is an indirect relationship between nominal interest rates and time to maturity. E)the nominal rate is declining as the real rate rises as the time to maturity increases.
C)the nominal rate is increasing even though the real rate is constant as the time to maturity increases.
If Treasury bills are currently paying 2.84 percent and the inflation rate is 1.63 percent, what is the approximate real rate of interest? The exact real rate? A)1.19 percent; 1.21 percent B)1.21 percent; 1.20 percent C)1.19 percent; 1.20 percent D)1.21 percent; 1.19 percent E)1.20 percent; 1.21 percent
D)1.21 percent; 1.19 percent
E-Z Loans is offering a special on one-year loans. The company will loan you $1,500 today with no waiting and no credit check, in exchange for one payment of $2,000 one year from now. What is the APR on this loan? A)30.63% B)21.20% C)17.93% D)33.33% E)25.63%
D)33.33%
A bond's annual interest divided by its face value is referred to as the: A)call rate B)market rate C)current yield D)coupon rate E)yield-to-maturity
D) Coupon Rate
When a bond's yield to maturity is less than the bond's coupon rate, the bond: A)has reached its maturity date. B)had to be recently issued. C)is priced at par. D)is selling at a premium. E)is selling at a discount.
D) is selling at a premium
McClary Tires plans to save $20,000, $25,000, $27,500, and $30,000 at the end of each year for Years 1 to 4, respectively. If it earns 3.3 percent on its savings, how much will the firm have saved at the end of Year 4? A)$111,860.57 B)$108,392.69 C)$107,525.40 D)$107,130.78 E)$110,426.41
D)$107,130.78
At the end of this month, Les will start saving $200 a month for retirement through his company's retirement plan. His employer will contribute an additional $.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 8.25 percent on his retirement savings, how much will he have in his retirement account 30 years from now? A)$540,311.67 B)$503,289.01 C)$589,406.19 D)$470,465.70 E)$401,005.25
D)$470,465.70
JK Industries just signed a sales contract with a new customer. JK will receive annual payments in the amount of $62,000, $108,000, $135,000, and $150,000 at the end of Years 1 to 4, respectively. What is this contract worth at the end of Year 4 if the firm earns 4.3 percent on its savings? A)$466,118.00 B)$402,311.19 C)$497,425.35 D)$478,639.54 E)$485,271.13
D)$478,639.54
Best's Fried Chicken just took out an interest-only loan of $50,000 for three years with an interest rate of 8.15 percent. Payments are to be made at the end of each year. What is the amount of the payment that will be due at the end of Year 3? A)$19,454.21 B)$20,166.67 C)$52,824.60 D)$54,075.00 E)$50,000.00
D)$54,075.00
A bond has a $1,000 face value, a market price of $1,045, and pays interest payments of $74.50 every year. What is the coupon rate? A)7.00 percent B)8.14 percent C)6.76 percent D)7.45 percent E)7.12 percent
D)7.45 percent
TAC Co. has 4.8 percent, semiannual coupon bonds on the market with four years left to maturity. If the bond currently sells for $908.60, what is its YTM? A)8.02 percent B)7.90 percent C)6.78 percent D)7.49 percent E)8.10 percent
D)7.49 percent
A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate? A)4.50 percent B)4.60 percent C)9.20 percent D)9.00 percent E)6.00 percent
D)9.00 percent
What is the effective annual rate of 9.6 percent compounded semiannually? A)9.71% B)9.92% C)9.68% D)9.83% E)9.79%
D)9.83%
Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why? A)Project 1, because the annual cash flows are greater by $4,000 than those of Project 2 B)Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33 C)Project 2, because the total cash inflows are $72,000 greater than those of Project 1 D)Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62 E)It does not matter as both projects have almost identical present values.
D)Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: A)upward sloping. B)double-humped. C)flat. D)downward sloping. E)humped.
D)downward sloping.
Suenette plans to save $600 at the end of Year 1, $800 at the end of Year 2, and $1,000 at the end of Year 3. If she earns 3.4 percent on her savings, how much money will she have saved at the end of Year 3? A)$2,309.16 B)$2,402.19 C)$2,200.00 D)$2,238.47 E)$2,468.69
E)$2,468.69
Alexis plans to invest $2,500 a year for 30 years starting at the end of this year. How much will this investment be worth at the end of the 30 years if she earns an average annual rate of return of 9.6 percent? A)$403,018.90 B)$387,411.26 C)$311,416.67 D)$417,932.11 E)$381,324.92
E)$381,324.92
Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment? A)$7,600.00 B)$7,773.10 C)$7,800.00 D)$7,856.25 E)$7,546.70
E)$7,546.70
Overnight Trucking recently purchased a new truck costing $219,800. The firm financed this purchase at 6.6 percent interest with monthly payments of $2,435. How many years will it take the firm to pay off this debt? A)10.23 years B)9.22 years C)11.60 years D)11.04 years E)10.42 years
E)10.42 years
You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 9.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan? A)5.84 years B)6.80 years C)6.33 years D)7.59 years E)5.29 years
E)5.29 years
National Distributors has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest semiannually, mature in 11 years, and have a yield to maturity of 6.87 percent. What is the current yield? A)6.77 percent B)7.39 percent C)7.61 percent D)6.48 percent E)6.95 percent
E)6.95 percent
Which one of the following qualifies as an annuity payment? A)Medical bills B)Weekly grocery bill C)Clothing purchases D)Car repairs E)Auto loan payment
E)Auto loan payment
The term structure of interest rates is primarily based on which three of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium V. Liquidity premium A)II, IV, and V B)I, III, and V C)II, III, and IV D)I, II, and V E)I, II, and IV
E)I, II, and IV
Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds? A)Inflation premium B)Real rate C)Interest rate risk premium D)Taxability premium E)Liquidity premium
E)Liquidity premium
All else held constant, the future value of an annuity will increase if you: A)decrease the payment amount. B)decrease the interest rate. C)decrease both the interest rate and the time period. D)decrease the present value. E)increase the time period.
E)increase the time period.