Homework #2 Managerial Finance

You have $500 that you would like to invest. You have 2 choices: Savings Account A which earns 8% compounded annually or Savings Account B which earns 7.75% compounded semiannually. Which would you choose and why? a. Account A because it has a higher effective annual rate b. Account A because the future value in one year is lower c. Account B because it has a higher effective annual rate d. Account B because the future value in one year is lower e. Account B because it has the higher quoted rate

a. Account A because it has a higher effective annual rate

Which of the following statements is most correct? a. All else equal, if a bond's yield to maturity increases, its price will fall. b. All else equal, if a bond's yield to maturity increases, its current yield will fall. c. If a bond's yield to maturity exceeds the coupon rate, the bond will sell at a premium over par. d. None of the statements above is correct.

a. All else equal, if a bond's yield to maturity increases, its price will fall.

Which of the following statements is correct? a. The New York Stock Exchange is a physical location auction market. b. Money markets include markets for consumer automobile loans. c. If an investor sells shares of stock through a broker, then it would be a primary market transaction. d. Capital market transactions involve only the purchase and sale of equity securities. e. None of the statements above is correct.

a. The New York Stock Exchange is a physical location auction market.

If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond? a. The yield on the 10-year bond is less than the yield on a 1-year bond. b. The yield on a 10-year bond will be higher than the yield on a 1-year bond because of maturity premiums. c. It is impossible to tell without knowing the interest rates of the bonds. d. The yields on the two bonds are equal. e. It is impossible to tell without knowing the relative risks of the two bonds.

a. The yield on the 10-year bond is less than the yield on a 1-year bond.

In order to support your education, your uncle has agreed to deposit $3,000 in your account at the end of each of the next five years. You estimate that you can earn 9 percent a year on this account. How much will you have in your account in 5 years? a. $13,719.39 b. $17,954.13 c. $19,570.00 d. $21,430.45 e. $22,436.12

b. $17,954.13

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year? a. $2,404.91 b. $2,531.49 c. $2,658.06 d. $2,790.96 e. $2,930.51

b. $2,531.49

Consider a $1,000 par value bond with a 7 percent annual coupon. The bond pays interest annually. There are 9 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10 percent? a. 10.00% b. 8.46% c. 7.00% d. 8.52% e. 8.37%

b. 8.46%

Which of the following statements regarding an amortized 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.) a. The remaining balance after three years will still be $125,000. b. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. c. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. d. The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. e. The outstanding balance declines at a slower rate in the later years of the loan's life.

b. Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

Which of the following is likely to increase the level of interest rates in the economy? a. Households start saving a larger percentage of their income. b. Corporations step up their plans for expansion and increase their demand for capital. c. The level of inflation is expected to decline. d. None of the statements above is correct.

b. Corporations step up their plans for expansion and increase their demand for capital.

What is the future value at the end of year 4 of the following set of cash flows? Assume an interest rate of 8%. Year 1 2 3 4 Cash Flow $1,000 -$1,000 $1,000 -$1,000 a. $0.00 b. $127.38 c. $173.31 d. $379.41 e. $3,312.13

c. $173.31

You need to borrow $18,000 to buy a truck. The current loan rate is 9.9% compounded monthly and you want to pay the loan off in equal monthly payments over 5 years. What is your monthly payment? a. $363.39 b. $374.04 c. $381.56 d. $394.69 e. $455.66

c. $381.56

You have just won the lottery. You and your heirs will receive $25,000 per year forever, beginning one year from now. If the present value of the lottery is $416,667, what is the discount rate used to value this perpetuity? a. 4.0% b. 5.0% c. 6.0% d. 7.0% e. 8.0%

c. 6.0%

Which of the following statements is correct? a. All else equal, short-term bonds have more interest rate risk than long term bonds. b. All else equal, higher coupon bonds have less reinvestment risk than low coupon bonds. c. All else equal, short-term bonds have more reinvestment risk than do long-term bonds. d. All else equal, higher coupon bonds have more interest rate risk than low coupon bonds. e. None of the statements above is correct.

c. All else equal, short-term bonds have more reinvestment risk than do long-term bonds.

Which of the following statements is correct? a. If the maturity risk premium (MRP) is greater than zero, the yield curve must be upward sloping. b. If the maturity risk premium (MRP) equals zero, the yield curve must be flat. c. If inflation rates are expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the yield curve will be upward sloping. d. The yield curve will never be downward sloping. e. None of the statements above are correct.

c. If inflation rates are expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the yield curve will be upward sloping.

Which of the following statements is correct? a. If an investor sells 100 shares of Microsoft to his brother-in-law, this would be a primary market transaction. b.If a previously private company sells common stocks to the general public for the first time, this would be a secondary market transaction. c.Money markets are where short-term debt are traded, whereas capital markets represent the markets for long-term debt and common stock. d.None of the statements above are correct.

c.Money markets are where short-term debt are traded, whereas capital markets represent the markets for long-term debt and common stock.

Given the following cash flows, what is the total present value if the discount rate is 8%? Year 1 2 3 4 5 6 Cash Flow $50 $200 $0 $0 $0 $800 a. $482.72 b. $661.68 c. $697.25 d. $721.90 e. $852.83

d. $721.90

Your monthly mortgage payment on your house is $593.90. It is a 30 year mortgage at 7.8% compounded monthly. How much did you borrow? a. $75,000 b. $77,500 c. $80,000 d. $82,500 e. $85,000

d. $82,500

Your uncle would like to limit his interest rate risk (i.e., maturity risk) and his default risk, but he would still like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle's criteria? a. AAA bond with 10 years to maturity. b. BBB perpetual bond. c. BBB bond with 10 years to maturity. d. AAA bond with 5 years to maturity. e. BBB bond with 5 years to maturity.

d. AAA bond with 5 years to maturity.

You intend to purchase a 10-year, $1,000 face value bond that has 12% coupon rate, paid semiannually. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond? a. $ 826.31 b. $1,086.15 c. $ 957.50 d. $1,431.49 e. $1,124.62

e. $1,124.62

You just put $1,000 in a bank account that pays 6 percent nominal annual interest, compounded monthly. How much will you have in your account after 3 years? a. $1,006.00 b. $1,056.45 c. $1,180.32 d. $1,191.00 e. $1,196.68

e. $1,196.68

A bond with a face value of $1,000 has annual coupon payments of $80 and was issued 15 years ago. The bond currently sells for $1,000 and has 10 years left to maturity. This bond's _______________ must be 8%. I. yield to maturity II. current yield III. coupon rate a. I only b. I and II only c. III only d. II and III only e. I, II and III

e. I, II and III

A corporate bond matures in 14 years. The bond has an 8 percent semiannual coupon and a par value of $1,000. The bond is callable in five years at a call price of $1,050. The price of the bond today is $1,075. What are the bond's yield to maturity and yield to call? a. YTM = 14.29%; YTC = 14.09% b. YTM = 3.57%; YTC = 3.52% c. YTM = 7.14%; YTC = 7.34% d. YTM = 6.64%; YTC = 4.78% e. YTM = 7.14%; YTC = 7.05%

e. YTM = 7.14%; YTC = 7.05