Finance Exam 2
15.Suppose you invest $3,500 today, compounded semiannually, with an annual interest rate of 8.50%. What amount of interest will you have earnedin one year? A) $303.82 B) $307.12 C) $309.13 D) $313.82
A
18.When quoting rates on loans, the "Truth in Lending Law" requires the bank to state the rate as an APR, effectively understating the true cost of the loan when interest is computed more often than once a year. A) TRUE B) FALSE
A
19. What is the EAR if the APR is 5% and compounding is quarterly? A) Slightly above 5.09% B) Slightly below 5.09% C) Under 5.00% D) Over 5.25
A
20.You put down 20% on a home with a purchase price of $150,000, or $30,000. The remaining balance will be $120,000. The bank will loan you this remaining balance at 4.375% APR. You will make monthly payments with a 20-year payment schedule. What is the monthly annuity payment under this schedule? A) $751.11 B) $830.53 C) $910.12 D) $5,250.18
A
25.Delagold Corporation is issuing a zero-coupon bond that will have a maturity of fifty years. The bond's par value is $1,000, and the current annual yield on similar bonds is 7.5%. What is the expected price of this bond, using the semiannual convention? A) $25.19 B) $250.19 C) $750.00 D) $1,000.00
A
7.The "Truth in Savings Law" requires banks to advertise their rates on investments such as CDs and savings accounts as annual percentage yields (APY). A)TRUE B) FALSE
A
A/An ________ is a series of equal end-of-the-period cash flows. A) ordinary annuity B) annuity due C) perpetuity due D) None of these
A
Assume a five-year equal payment amortization schedule with an annual interest rate of 7% and annual payments. If the beginning principal is $8,000, then the first interest payment will be how large? A) $560.00 B) $960.00 C) $1,219.28 D) There is not enough information to answer this question.
A
Becky is seeking to expand her stamp collection. Each year, stamps increase in price at a seven percent rate. She believes that if she invests her money for one year, she should be able to buy 24 stamps for what 23 stamps would cost today. What is her real interest rate or reward for waiting? A) 4.35% B) 1.00% C) 2.25% D) 3.35%
A
Five years ago, CleanEnergy Corporation issued an 10% coupon per year (paid semi-annually), 15-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 8%. What is the current price per bond? $1135.9 $1058.3 $1291.5 $977.8
A
John borrows $500,000 at an annual rate of 7.62% for a 10 year term. At the end of each year interest payments of $38,100 are paid. At the maturity of the loan the principal amount is repaid, in addition to an interest payment. What type of loan is this? a. interest-only b. amortized c. discount d. simple e. compound
A
Most U.S. corporate and government bonds choose to make ________ coupon payments. A) semiannual B) quarterly C) annual D) monthly
A
Susan's goal is to retire with $500,000 in her retirement account. The local bank advertises with an interest rate of 1% per month and monthly compounding on retirement fund accounts. If she retires in 30 years how much should Susan save each month to reach her goal? a.$143.06 b.$1,500.25 c.$454.76 d.$222.24
A
What is the future value at the end of year four of an ordinary annuity cash flow of $6,000 per year at an interest rate of 12.00% per year? A) $28,675.97 B) $32,117.08 C) $93,761.02 D) $90,154.83
A
What is the total payment each year? a.$4021.15 b.$5042.25 c.$1298.74 d.$3319.82
A
You are saving up for retirement and decide to deposit $3,000 each year for the next 20 years, starting today (annuity due), into an account which pays a rate of interest of 8% per year. What is the total value of your investments in the account 20 years from today? a.$148,268.76 b.$151,418.05 c.$126,916.73 d.$137,285.89
A
You have accumulated $1,200,000 for your retirement. How much money can you withdraw in equal annual beginning-of-the-year cash flows if you invest the money at a rate of 5% for thirty years? A) $74,344.50 B) $58,469.12 C) $60,251.52 D) $39,061.96
A
You have an annuity of equal annual end-of-the-year cash flows of $500 that begin three years from today and last for a total of ten cash flows. Using a discount rate of 4%, what are those cash flows worth in today's dollars? A) $3,749.49 B) $4,055.45 C) $3,957.61 D) $3,899.47
A
23.Five years ago, Thompson Tarps Inc. issued twenty-five-year 10% annual coupon bonds with a$1,000 face value each. Since then, interest rates in general have risen and the annual yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond? A) $843.14 B) $850.61 C) $1,181.54 D) $1,170.27
B
24.The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current annual yield to maturity is 12%, what is the firm's current price per bond? A) $850.61 B) $849.54 C) $1,170.27 D) $1,171.59
B
A finite series of equal payments that occur at regular intervals is called a(n). a. discount bond. b. annuity. c. consol. d. perpetuity.
B
Among the three principal repayments, the principal repayment at the end of year 3 is the lowest. a.True b.False
B
Assume that Ray is 38 years old and has 27 years for saving until he retires. He expects an APR of 7.5% on his investments. How much does he need to save if he puts money away monthly in equal end-of-the-month amounts to achieve a future value of $1,200,000 dollars in 27 years' time? A) $3392.22 B) $1,148.81 C) $588.92 D) $2,264.42
B
Five years ago, Simpson Warehouses Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond? A) $1,170.27 B) $850.61 C) $843.14 D) $1,181.54
B
Four years ago, CleanEnergy Corporation issued an 10% coupon per year (paid semi-annually), 15-year, AA-rated bond at its par value of $1000. Currently, the annual yield to maturity (APR) on these bonds is 12%. What is the current price per bond? $759.17 $879.58 $911.56 $991.84
B
Ten years ago Pancake House Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Bacon bonds is now 9%. Given this information, what is the price today for such a bond? A) $901.77 B) $919.39 C) $1,000 D) $1.085.59
B
The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. A) coupon rate B) yield to maturity C) prime rate D) current yield
B
Theresa borrows $800 today in exchange for one payment of $1,000 five years from now. This is an example of a(n): a.interest-only loan. b.pure discount loan. c.quoted rate loan. d.compounded loan. e.amortized loan.
B
Twenty years ago Bison Enterprises Inc. issued thirty-year 9% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the firm's bonds is now 11%. Given this information, what is the price today for a bond from this issue? A) $1,116.54 B) $882.22 C) $914.41 D) $1,000
B
What is the EAR if the APR is 5% and compounding is quarterly? A) Under 5.00% B) Slightly above 5.09% C) Over 5.25% D) Slightly below 5.09%
B
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value. A) coupon rate; premium over B) coupon rate; discount to C) time to maturity; same price as D) time to maturity; discount to
B
You dream of endowing a chair in finance at the local university that will provide a salary of $250,000 per year forever, with the first cash flow to be one year from today. If the university promises to invest the money at a rate of 4% per year, how much money must you give the university today to make your dream a reality? A) $3,000,000 B) $6,250,000 C) $8,857,143 D) This question cannot be answered.
B
You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30-year payment schedule. What is the annual annuity payment under this schedule? A) $18,100.23 B) $11,439.96 C) $6,666.67 D) $11,009.49
B
A basis point is ________. A) one-thousandth of a percentage point B) one-tenth of a percentage point C) one-hundredth of a percentage point D) one percentage point
C
A company selling a bond is ________ money. A) reinvesting B) taking C) borrowing D) lending
C
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________. A) the credit rating increases, the default risk increases, and the required rate of return decreases B) the credit rating increases, the default risk decreases, and the required rate of return increases C) the credit rating increases, the default risk decreases, and the required rate of return decreases D) the credit rating decreases, the default risk decreases, and the required rate of return decreases
C
How much is the loan balance the end of year 1? a.$7957.70 b.$5081.24 c.$6978.85 d.$4681.31
C
Lily invested $10,000 seven years ago with an insurance company that has paid her 4 percent (APR), compounded semi-annually (twice per year). How much interest did Lily earn over the 7 years? $4,592.61 $1,674.43 $3,194.79 $2,335.94
C
The present value of a $100 three-year annuity due (first cash flow occurs today) discounted at a rate of 10% is equal to ________. A) $135.17 B) $300.00 C) $273.55 D) $248.69
C
The real rate is 1.25% and inflation is 5.25%. What is the approximate nominal rate? A) 3.25% B) 1.25% C) 6.50% D) 5.25%
C
What if Jennifer were to invest $2,750 today, compounded semiannually, with an annual interest rate of 5.25%. What amount of interest will Jennifer earn in one year? A) $84.27 B) $2,896.27 C) $146.27 D) $525.27
C
our parents have an investment portfolio of $450,000, and they wish to take out cash flows of $60,000 per year as an ordinary annuity. How long will their portfolio last if the portfolio is invested at an annual rate of 4.50%? A) 10.14 years B) 9.10 years C) 9.35 years D) 8.00 years
C
22.A bond may be issued by ________. A) companies B) state governments C) the federal government D) All of the above
D
6.You are running short of cash and really need to pay your rent. A friend suggests that you check out the local title pawn shop. At the shop they offer to loan you $5,000 if you pay them back $6,000 in one week. It seems like a good idea to you because you don't want to sell your car and you are sure you will be able to pay the money back in a week. What is the APR on this loan? A) 10% B) 120% C) 420% D) 1040%
D
Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________. A) you will be able to consume fewer goods B) you will be able to buy the same amount of goods or services C) you will be able to buy fewer goods or services D) you will be able to buy more goods or services
D
Assume you just bought a new boat and now have a boat loan to repay. The amount of the principal is $68,000, the loan is at 6.75% APR, and the monthly payments are spread out over 7 years. What is the monthly loan payment? A) $809.52 B) $1,225.36 C) $1,206.58 D) $1,018.01
D
How much is the interest payment at the end of year 1? a.$500 b.$2000 c.$3000 d.$1000
D
Present value calculations do which of the following? A) Compound all future cash flows into the future B) Compound all future cash flows back to the present C) Discount all future cash flows into the future D) Discount all future cash flows back to the present
D
The Canadian Government has once again decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay $60 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian governmentbonds is 4%. What should this consol bond sell for in the market? a.$6000 b.$600 c.$8,000 d.$1,500 e.$3,000
D
Tony is offering Phil two repayment plans for a long overdue loan. Offer 1 is a visit from an enforcer and the debt is due in full at once. Offer 2 is to pay back $5,000 at the end of each year at 20% interest rate until the loan principal is paid off. Phil owes Tony $20,000. How long will it take for Phil to pay off the loan if he takes Offer 2? a.4.00years b.6.23 years c.7.27 years d. 8.83 years e.It will never be paid off.
D
Which of the following is NOT true regarding the total payment in an equal payment amortization table? A) The total payment for any period is equal to the principal plus interest payments for that same period. B) The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment. C) The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate. D) All of these are true.
D
You want to buy a new Tesla car for $100,000. The contract is in the form of a 60-month annuity dueat a monthly interest rate of 1%. What will your monthly payment be? a.$1000 b.$1557.87 c.$2224.45 d.$2202.42
D
21.If your nominal rate of return is 6.59 percent and the inflation rate is 2.0 percent, what is the real rate of return? A) 8.72% B) 4.59% C) 7.59% D) 5.15% E) 4.50%
E
Which one of the following has the highest effective annual rate? a.APR of 6 percent compounded annually b.APR of 6 percent compounded semi-annually c.APR of 6 percent compounded quarterly d.APR of 6 percent compounded monthly e.APR of 6 percent compounded daily
E
You are comparing two separate investments. Each one is for a period of 10 years and pays $2,500 a year. You require a 10 percent return on these investments. Investment A pays at the beginning of each year and investment B pays at the end of each year. Given this situation, which one of the following statements is accurate? a.Both investments are equally valuable today. b.Investment B is worth more today because of the timing of its cash flows. c.Investment A is worth more today because you will receive ten payments whereas investment B only pays nine payments. d.Investment A has a higher present value and a lower future value than investment B. e.Investment A has both a higher present value and a higher future value than investment B.
E
