FIN Exam 2

Suppose you borrowed $27,000 at a rate of 10.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

$2,835.00 I/YR10.5% Years5 Amount borrowed$27,000 Interest in Year 1$2,835.00Simply multiply the rate times the amount borrowed.

How much would $10,000 due in 50 years be worth today if the discount rate were 7.5%?

$268.89

After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandfather just gave you a $37,500 graduation gift which you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

$312,955

How much would $1, growing at 12.0% per year, be worth after 75 years?

$4,913.06

At a rate of 5.0%, what is the future value of the following cash flow stream? Years: 0 1 2 3 4 CFs: $0 $75 $225 $0 $300

$635

What's the present value of a perpetuity that pays $3,900 per year if the appropriate interest rate is 5%?

$78,000.00 I/YR 5.0% PMT $3,900 PV $78,000.00

Suppose you deposited $8,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?

$8,284.94

Bob has $2,500 invested in a bank that pays 6.6% annually. How long will it take for his funds to double?

10.85 years

5-year Treasury bonds yield 6.1%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?

3.80%

Charter Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay?

4.59%

Your Aunt Ruth has $610,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero?

43 years BEGIN ModeI/YR 6.5% PV $610,000 PMT $40,000 FV $0.00 N 43 years

Which of the following bank accounts has the highest effective annual return?

An account that pays 8% nominal interest with daily (365-day) compounding.

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

FALSE

High current and quick ratios always indicate that the firm is managing its liquidity position well.

FALSE

In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.

FALSE

Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see interest rates decline.

FALSE

Because the maturity risk premium is normally positive, the yield curve must have an upward slope. If you measure the yield curve and find a downward slope, you must have done something wrong.

FALSE If the rate of inflation is expected to decline sharply in the future, this could offset the positive MRP and result in a downward-sloping yield curve.

Which of the following statements is CORRECT?

If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.

A firm's new president wants to strengthen the company's financial position. Which of the following actions would make the company financially stronger?

Increase EBIT while holding sales and assets constant.

You observe that a firm's ROE is above the industry average, but both its profit margin and equity multiplier are below the industry average. Which of the following statements is CORRECT?

Its total assets turnover must be above the industry average.

An upward-sloping yield curve is often call a "normal" yield curve, while a downward-sloping yield curve is called "abnormal."

TRUE

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.

In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1(t 1)%, where t is the number of years until the bond matures. Given this information, which of the following statements is CORRECT?

The yield curve must be upward sloping.

Suppose 1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 4.40%. Assuming the pure expectations theory is correct, and thus the maturity risk premium for T-bonds is zero, what is the yield on a 1-year T-bond expected to be one year from now? Round the intermediate calculations to 4 decimal places and final answer to 2 decimal places.

X = (1.044)2 / (1.040) - 1.0 = r1-year in 1 yr 4.80%