Finance exam 2

If you borrow $10,000 by taking out an 5-year interest-only loan, for which you will not pay back any of the principal until five years later. At 10% APR, the yearly interest payment is $____________Answer (do not include thousand separator (,) in the number)

1000

Consider a 5-year amortized loan of $100,000 that requires monthly loan payment. The APR of this loan is 4.8%. After making the loan payment for the first month, the loan balance is $____________(Answer. (rounding with two decimals, do not include (, ) in the number)

98522.03

A company is expected to generate $50 million cash flow next year and the cash flow is predicted to grow at 5% each year. Assume the required return for the company is 11%. What is the estimated intrinsic value of the company? Select one: a. $833.33 million b. $875 million c. $775 million d. $900 million

A

Moerdyk Corporation's bonds have a 15-year maturity, a 7.5% annual coupon rate payable semiannually, and a par value of $1,000. The current market interest rate is 5.30%. Based on semiannual compounding, what is the bond's price? Select one: a. $1,225.7 b. $1,164.05 c. $948.04

A

The APR on a 30 year mortgage loan offered by a local bank is 4%. You can afford up to $1800 loan payment each month. If the mortgage loan can finance 80% of your house purchase, what is the maximum home price can you afford? Select one: a. $471,287.79 b. $486,901.25 c. $500,245.57 d. $496,740.33

A

Which of the following statements about different types of loan are NOT correct? I. If the loan is amortized, the proportion of principal paid in the loan payment will increase over time. II. If the loan is amortized, the loan payment amount each period will declines over time. III. If the loan is interest-only, the loan principal will not be paid until maturity. IV. T-bill and zero coupon bond are example of pure discount loan V. The total interest over the life of loan is smaller for an interest-only than that of an otherwise equivalent amortized loan Select one: a. II and V b. I, II, IV c. II, III d. I, III, V e. III, V

A

Which of the following statements about the relationship between the interest rate on a loan and the loan amount is correct? Select one: a. All else equal, the lower the APR on mortgage loan, the larger amount of money you can borrow while making the same loan payment each month. b. All else equal, the higher the APR on mortgage loan, the larger amount of money you can borrow while making the same loan payment each month. c. All else equal, the lower the APR on mortgage loan, the lower amount of money you can borrow while making the same loan payment each month. d. All else equal, the lower the APR on mortgage loan, the longer it takes to pay off the loan while making the same loan payment each month.

A

Which of the following statements are correct? I. APR is annualized interest rate and therefore incorporates the compounding. II. EAR is annualized interest rate incorporating the compounding. III. When the interest rate is yearly compounding, APR= EAR IV. When the interest rate is daily compounding, EAR= daily interest rate*365 Select one: a. II and III b. I, II and III c. III and IV d. I, II, III, IV

A

Which of the following statements is NOT correct? Select one: a. The worse the bond issuer's credit rating, the lower is the bond's yield b. Investors' recent flight to cash has caused bond market to fall and bond yields to rise. c. Treasury bills are considered to have minimum liquidity risk. d. Bonds issued by the same company at different points of time may have different coupon rates e. It is common that a company has one class of common stock and dozens of bond issues

A

Maria borrowed $1,000 from a Payday loan company. The quoted interest rate is 0.8% per week. If she paid off the loan after 2 weeks, the EAR on the loan is ______________ %. Select one: a. 48.75% b. 51.34% c. 41.6% d. 1.6%

B

If you make monthly contribution to your retirement saving account and earn effective annual yield (EAR) of 12%, what is the monthly rate of return did you earn? Select one: a. 0.87% b. 0.95% c. 1.12% d. 1.00%

B

Mary has been working hard to save for her retirement. At the beginning of 2020 she had $300,000 in her 401 retirement saving account. However, the Covid19 crisis hit the market hard and caused her portfolio balance to decline to $200,000. If she wants to reach a goal of $1,500,000 in 20 years, how much must she contribute to the investment account at the end of each year? Assume the average annual rate of return on her investment is 5%? Select one: a. $26,700.32 b. $29,315.36 c. $31,823.06 d. $28,538.90

B

You purchased a 6-month CD of $10,000. You received $20 interest each month, totaling $120 from the bank. Which of the following are correct? I. The monthly interest rate is 0.2% II. The effective annual rate of interest (EAR) is 1.2%. III. The annual percentage yield (APY) on the CD is 2.4% IV. You earned compound interest of $120 on the CD. Select one: a. I, II, III, IV b. I, III c. I, III, IV d. II, III, IV

B

Consider a 3-year amortized loan of $100,000 that requires monthly loan payment. The APR of this loan is 6%. What is the interest being paid for the first month? Select one: a. $568.33 b. $479.25 c. $500 d. $588.12

C

Assume that you are considering the purchase of a 20-year bond with an annual coupon rate of 9.5%, payable semiannually. The bond has a face value of $1,000. If the required annual market yield is 9.5% on this bond, what is the maximum price you should be willing to pay for the bond? Select one: a. $1,140.00 b. $1,010.00 c. $1,000.00 d. $1,220.00 e. $980.00

C

Mr. Smith has accumulated $1 million and considers retirement. He can earn 4% compounding annually on his saving. If he spends $60,000 each year, by withdrawing the money at the beginning of each year, for how many years can the money can last? Select one: a. 24.3 b. 20 c. 26.12 d. 25 e. 23.14

C

Ms. Henry accumulates $800,000 and retires. She can earn 3.5% interest rate on her account. If she withdraw a constant amount the beginning of each year, how much can she spend each year so her saving can support 25 years of living? Select one: a. $51,448.75 b. $46,230.52 c. $46,897.81 d. $48,250.37

C

Which of the following statements are incorrect? Select one: a. A bond's yield to maturity constantly changes with the overall economic conditions. b. Bond issuers choose their coupon rates so as to issue their bonds at par. c. A bond's coupon rate will decrease when the demand for the bond increases and thus the bond price increases. d. Coupon rate is the cost of money the bond issuer promises to pay to the bondholders during the life of the bond.

C

Which of the following statements is CORRECT? Select one: a. A zero coupon bond's coupon rate is equal to its yield to maturity. b. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. c. All else equal, if a bond's yield increases, its price will fall. d. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. e. All else equal, if a bond's price increases, its expected return offered to new investors who purchase at that price will rise.

C

Your grandmother sent you a check of $1,000, telling you to start investing early. So you invest the $1,000 in a market index fund with an expected return of 7.5% annually. You also place $5 in a drawer each day and plan to invest the accumulated savings ($1,825) from the drawer into the same market index fund at the end of the year. If you keep saving in this manner, how much will you have accumulated after 45 years? Select one: a. $594,502.67 b. $590,118.75 c. $631,922.58 d. $582,500.62

C

Adams Enterprises' bonds currently sell for $1,480. They have a 20-year maturity, an annual coupon of $80, and a par value of $1,000. What is their yield to maturity? Select one: a. 3.31% b. 4.14% c. 3.52% d. 4.36% e. 4.64%

D

An investment project requires $200 million spending today. It is estimated to generate $60 million, $80 million, $80 million and $30 million, respectively, at the end of each following year. What is annualized expected rate of return on the project? Select one: a. 10.75% b. 11.65% c. 12% d. 10.31%

D

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal annual yield to maturity is 9.17% and they pay coupon semiannually. The bonds currently sell at a price of $1000. What is the bond's annual coupon rate? Select one: a. 8.86% b. 9.25% c. 10.03% d. 9.17%

D

Which of the following statements about bond's yield to maturity is NOT correct? Select one: a. A bond's yield to maturity is calculated by finding the discount rate that makes PV of bond's cash flows equal to the bond's market price. b. Bond's yield to maturity is investor's annualized expected rate of return at that bond price assuming the investor will hold the bond until maturity. c. A bond's yield to maturity is lower when its market price rises. d. Bond's yield to maturity is a fixed annual rate of return that bond issuers promise to provide.

D

You may use Excel function to calculate the answer. Consider an investment project that is expected to generate $200 million, $300 million, $300 million and a negative $50 million because of disposal cost involved, at the end of year 1, year 2, year 3 and year 4, respectively. Assume the annual required return is 7.5%. What is the present value of this investment project? Select one: a. $620.75 mil b. $600.25 mil c. $651.33 mil d. $649.69 mil

D

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 5.0%, at what price should the bonds sell? Select one: a. $924.70 b. $652.25 c. $1,015.52 d. $891.68 e. 1072.66

E

Which of the following statements is correct? Select one: a. The bond trading is mainly conducted on the exchange floor. b. In terms of capitalization, global stock market is larger than global bond market c. The primary bondholders are small individual investors. d. Banks can issue bonds as a way to lend money to the public e. Municipal bonds are bonds issued by local governments

E

You want to buy a house that costs $350,000 and you can afford to repay a loan no more than $1,500 per month. The APR on a 30 year mortgage loan is 4.8%. If you want to calculate the maximum loan you can take, which Excel function will you use? Select one: a. FV b. RATE c. PMT d. NPER e. PV

E