Problem sets for Test 2 Review

You want to buy a house and will need to borrow $215,000. The interest rate on your loan is 5.41 percent compounded monthly and the loan is for 30 years. What are your monthly mortgage payments? $1,208.63 $1,269.07 $1,168.35 $1,203.21 $1,220.54

$1,208.63

You have just won the lottery and will receive a lump sum payment of $22.65 million after taxes. Instead of immediately spending your money, you plan to deposit all of the money into an account that will earn 4.9 percent. If you make equal annual withdrawals for the next 40 years, how much can you withdraw each year starting exactly one year from now? $566,250.00 $1,367,073.33 $1,241,157.87 $1,345,373.76 $1,301,974.60

$1,301,974.60

Gugenheim, Inc., has a bond outstanding with a coupon rate of 7.4 percent and annual payments. The yield to maturity is 8.6 percent and the bond matures in 20 years. What is the market price if the bond has a par value of $2,000? $1,779.59 $1,774.52 $1,777.25 $1,772.73 $1,810.01

$1,774.52

Thomas invests $114 in an account that pays 4 percent simple interest. How much money will Thomas have at the end of 6 years? $136.80 $144.25 $138.70 $145.92 $141.36

$141.36

You need to have $25,000 for a down payment on a house in 7 years. If you can earn an annual interest rate of 4.3 percent, how much will you have to deposit today? $17,649.04 $17,851.12 $14,462.52 $18,005.74 $18,618.72

$18,618.72

Todd can afford to pay $425 per month for the next 5 years in order to purchase a new car. The interest rate is 7.5 percent compounded monthly. What is the most he can afford to pay for a new car today? $20,149.27 $20,917.32 $30,824.02 $21,209.76 $21,916.75

$21,209.76

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,800, $10,800, and $17,000 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.? $23,965.53 $33,600.00 $27,368.56 $36,456.00 $25,888.53

$25,888.53

One year ago, the Jenkins Family Fun Center deposited $4,800 into an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $6,600 to this account. They plan on making a final deposit of $8,800 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a rate of return of 9 percent? $25,415.70 $27,185.42 $26,077.59 $26,935.83 $28,098.09

$28,098.09

You have just started a new job and plan to save $4,650 per year for 43 years until you retire. You will make your first deposit in one year. How much will you have when you retire if you earn an annual interest rate of 10.31 percent? $2,878,036.49 $2,734,735.86 $2,889,974.64 $2,917,153.08 $3,021,337.12

$3,021,337.12

Bob has saved $425 each month for the last 6 years to make a down payment on a house. The account earned an interest rate of .46 percent per month. How much money is in Bob's account? $35,146.75 $34,931.15 $30,600.00 $34,605.70 $36,178.69

$36,178.69

You are going to deposit $3,300 in an account that pays .59 percent interest per quarter. How much will you have in 9 years? $4,082.91 $4,054.45 $4,070.86 $4,102.44 $4,078.37

$4,078.37

Harpeth Valley Water District has a bond outstanding with a coupon rate of 3.31 percent and semiannual payments. The bond matures in 19 years, with a yield to maturity of 3.93 percent, and a par value of $5,000. What is the market price of the bond? $4,679.50 $4,587.75 $4,594.81 $4,590.42 $4,600.86

$4,587.75

You just won the $84 million Ultimate Lotto jackpot. Your winnings will be paid as $4,200,000 per year for the next 20 years. If the appropriate interest rate is 7.5 percent, what is the value of your windfall? $41,828,128.49 $40,676,020.52 $46,028,128.49 $42,816,863.71 $44,244,092.50

$42,816,863.71

Mo will receive a perpetuity of $15,000 per year forever, while Curly will receive the same annual payment for the next 30 years. If the interest rate is 5.9 percent, how much more are Mo's payments worth? $42,690.55 $47,813.41 $44,113.57 $40,556.02 $45,536.58

$45,536.58

Five years from today, you plan to invest $3,550 for 6 additional years at 7.1 percent compounded annually. How much will you have in your account 11 years from today? $5,337.28 $5,454.51 $4,950.83 $6,532.11 $5,357.54

$5,357.54

George Jefferson established a trust fund that will provide $236,500 per year in scholarships. The trust fund earns an annual return of 4.3 percent. How much money did Mr. Jefferson contribute to the fund assuming that only income is distributed? $4,583,333.33 $6,285,714.29 $5,500,000.00 $5,076,923.08 $4,812,500.00

$5,500,000.00

Today, your dream car costs $50,100. You feel that the price of the car will increase at an annual rate 2.1 percent. If you plan to wait 5 years to buy the car, how much will it cost at that time? $55,586.13 $56,753.44 $56,960.60 $56,089.81 $54,442.83

$55,586.13

Whipple Corp. just issued 340,000 bonds with a coupon rate of 6.38 percent paid semiannually that mature in 25 years. The bonds have a YTM of 6.82 percent and have a par value of $2,000. How much money was raised from the sale of the bonds? (Round your intermediate calculations to two decimal places and final answer to the nearest whole dollar amount.) $644.33 million $1,237.12 million $680.00 million $618.56 million $601.38 million

$644.33 million

You want to have $15,500 in 7 years for a dream vacation. If you can earn an interest rate of .7 percent per month, how much will you have to deposit today? $8,818.64 $14,761.33 $8,741.95 $8,813.06 $8,626.93

$8,626.93

Whatever, Inc., has a bond outstanding with a coupon rate of 5.58 percent and semiannual payments. The yield to maturity is 6.8 percent and the bond matures in 12 years. What is the market price if the bond has a par value of $1,000? $902.06 $919.03 $903.58 $902.39 $901.01

$901.01

You purchase a bond with an invoice price of $985. The bond has a coupon rate of 5.21 percent, it makes semiannual payments, and there are 4 months to the next coupon payment. The par value is $1,000. What is the clean price of the bond? $993.68 $976.32 $958.95 $967.63 $1,011.05

$976.32

You purchased a bond at a price of $3,600. In 25 years when the bond matures, the bond will be worth $25,000. It is exactly 21 years after you purchased the bond and you can sell the bond today for $16,825. If you hold the bond until it matures, what annual rate of return will you earn from today? 9.4 percent 8.1 percent 10.4 percent 7.6 percent 11.6 percent

10.4 percent

Bob has been investing $4,500 in stock at the end of every year for the past 13 years. If the account is currently worth $115,000, what was his annual return on this investment? 9.80% 11.80% 10.09% 10.62% 12.14%

10.62%

Assume the real rate was 9.5% and the inflation rate was 4%. Using the Fisher Effect, what was the nominal rate? 11.50% 9.50% 12.12% 13.88% 12.88%

13.88%

Your credit card company charges you 1.37 percent per month. What is the EAR on your credit card? 15.62% 17.09% 17.74% 18.62% 16.44%

17.74%

Bad Company, Inc., has a major outlay of $1.15 million that is needed to renovate the company's manufacturing facility. Because the company's management is conservative, it won't undertake the renovation until it has the cash necessary to fund the renovation. The company plans to deposit $101,000 each quarter into an account that will earn 1.3 percent per quarter. How many years will it be until the company has the money saved for the renovation? 2.81 years 2.67 years 2.47 years 2.29 years 2.85 years

2.67 years

One year ago, you invested $3,400. Today, it is worth $4,150. What rate of interest did you earn? 1.84 percent 5.53 percent 11.03 percent 22.06 percent 4.53 percent

22.06 percent

You just paid $370,000 for a policy that will pay you and your heirs $13,400 per year forever with the first payment in one year. What rate of return are you earning on this policy? 3.62% 3.80% 3.74% 3.86% 3.49%

3.62%

You have just purchased a car and, to fund the purchase, you borrowed $22,000. If your monthly payments are $493.27 for the next 4 years, what is the APR of the loan? 3.00% 3.65% 3.37% 4.17% 3.79%

3.65%

Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value? 2 percent interest, compounded annually 3 percent interest, compounded annually 3 percent simple interest 4 percent interest, compounded annually 4 percent simple interest

4 percent interest, compounded annually

Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 6.2 percent. The bond sells for $978.42 and matures in 24 years. The par value is $1,000. What is the YTM of the bond? 3.19% 6.38% 6.06% 5.74% 4.78%

6.38%

Footsteps Co. has a bond outstanding with a coupon rate of 5.9 percent and annual payments. The bond currently sells for $935.93, matures in 15 years, and has a par value of $1,000. What is the YTM of the bond? 5.49% 5.93% 5.90% 6.59% 6.30%

6.59%

Crossfade Corp. has a bond with a par value of $2,000 that sells for $1,963.46. The bond has a coupon rate of 6.81 percent and matures in 23 years. If the bond makes semiannual coupon payments, what is the YTM of the bond? 6.97% 6.27% 6.62% 3.49% 5.23%

6.97%

Maxxie purchased a tract of land for $27,000. Today, the same land is worth $43,200. How many years have passed if the price of the land has increased at an annual rate of 6.7 percent? 6.21 years 6.52 years 6.44 years 5.44 years 7.25 years

7.25 years

Assume the nominal rate was 11.50% and the inflation rate was 3%. Using the Fisher Effect, what was the real rate? 9.10% 11.50% 9.90% 8.1% 8.25%

8.25%

One of your customers has just made a purchase in the amount of $22,400. You have agreed to payments of $425 per month and will charge a monthly interest rate of 1.23 percent. How many months will it take for the account to be paid off? 92.05 months 85.47 months 52.71 months 40.88 months 79.78 months

85.47 months

Which one of the following will increase the present value of a lump-sum future amount to be received in 15 years? A decrease in the future value An increase in the time period An increase in the interest rate Changing to compound interest from simple interest A decrease in the interest rate

A decrease in the interest rate

Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have? Interest-only Amortized Pure discount Blended discount Complex

Amortized

Which statement is true? A bondholder has the right to determine when his or her bond is called. Bonds are generally called at par value. An indenture is a contract between a bond's issuer and its holders. Collateralized bonds are called debentures. A current list of all bondholders is maintained whenever a firm issues bearer bonds.

An indenture is a contract between a bond's issuer and its holders

The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is: A. B. Ba. BB. BBB.

BBB.

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? Callable bond Registered-form bond Note Debenture Bearer-form bond

Bearer-form bond

When short-term rates are higher than long-term rates, we say it is __________________. Declining Upward sloping Downward sloping. Humped Short-sighted

Downward sloping

The Fisher Effect has all of the following components, except: Compensation for Inflation on Investment Earned Real Rate on the Investment, r Expected Rate of Return, E Compensation for Inflation of Original Investment, h

Expected Rate of Return, E

What is the principal amount of a bond that is repaid at the end of the loan term called? Market price Face value Accrued price Coupon Dirty price

Face value

For each of the following, compute the future value: (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Present Value Years Interest Rate $2,200 10 16% 10,353 23 7% 108,305 17 9% 246,382 33 4%

Future Value $9,705.16 49,078.71 468,704.34 898,895.43

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount? Paying simple interest rather than compound interest Shortening the investment time period Paying interest only on the principal amount Increasing the interest rate Paying interest only at the end of the investment period rather than throughout the investment period

Increasing the interest rate

Solve for the unknown interest rate in each of the following: (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Present Value Years Interest Rate Future Value $760 7 1471 950 8 1,808 19,500 19 146,332 74,800 22 321,815

Interest Rate 9.89 8.38 11.19 6.86

Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have? Pure discount Interest-only Amortized Complex Compound

Interest-only

Which one of the following might be included in a bond's list of negative covenants? Maintain a times interest earned ratio of 2 or more Maintain a current ratio of 1.2 or more Provide audited financial statements in a timely manner Maintain a minimum cash balance of $1.2 million Limit cash dividends to $1 per share or less

Limit cash dividends to $1 per share or less

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the time to maturity, the _________ the interest rate risk. Longer, greater Shorter, greater Longer, lower Shorter, lower

Longer, greater

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the coupon rate, the _________ the interest rate risk. Higher, greater Lower, lower Lower, greater

Lower, greater

The term structure of interest rates tells us what _________ interest rate are on default-free, pure discount bonds of all maturities. Nominal Future Expected Discount Average

Nominal

Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318? Present value Compound value Factor value Future value Complex value

Present Value

For each of the following, compute the present value: (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Present Value Years Interest Rate Future Value 10 6% $18,728 2 11 42,917 14 14 804,382 19 13 661,816

Present Value $10,457.62 34, 832.40 128,467.84 64,900.32

Cindy is taking out a loan today. The cash amount that she is receiving is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this? Interest-only Principal-only Compound Pure discount Amortized

Pure Discount

On which one of the following dates is the principal amount of a semiannual coupon bond repaid? Half of the principal is repaid evenly over each coupon period with the remainder paid on the issue date. A portion of the principal is repaid on each coupon date. The entire bond is repaid on the issue date. Half of the principal is repaid evenly over each coupon period with the remainder paid on the maturity date. The entire bond is repaid on the maturity date.

The entire bond is repaid on the maturity date.

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? The future value of the loan is equal to 36 × $450. The $500 is the present value of the purchase. The car loan is an annuity due. To compute the initial loan amount, you must use a monthly interest rate. The present value of the car is equal to $500 + (36 × $450).

To compute the initial loan amount, you must use a monthly interest rate.

When comparing a 10-year bond versus a 1-year bond, the 10-year bond has a much greater interest rate risk.

True

Which one of these is a perpetuity? Car payment of $260 a month for 60 months Trust income of $1,200 a year forever Lottery winnings of $1,000 a month for life Rental payment of $800 a month for one year Retirement pay of $2,200 a month for 20 years

Trust income of $1,200 a year forever

The term structure of interest rates includes all of the following basic components, except: Real Rate of Interest Weighted Average Cost of Capital Rate of Inflation Interest Rate Risk

Weighted Average Cost of Capital

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders? Income Callable Zero coupon Convertible Tax-free

Zero coupon

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the: perpetual rate. effective annual rate. annual percentage rate. simple rate. compounded rate.

annual percentage rate.

A bond dealer sells at the _____ price and buys at the _____ price. bid; asked dirty; clean clean; dirty asked; bid asked; asked

asked; bid

Which one of the following qualifies as an annuity payment? Clothing purchases Medical bills Weekly grocery bill Auto loan payment Car repairs

auto loan payment

Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as: simple interest. interest on interest. compound interest. complex interest. discounted interest.

compound interest.

Tomas earned $89 in interest on his savings account last year and has decided to leave the $89 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called: compounding. indexing. multiplying. duplicating. discounting.

compounding.

A bond's annual interest divided by its face value is referred to as the: current yield. yield-to-maturity. coupon rate. call rate. market rate.

coupon rate

Bond ratings classify bonds based on: interest rate, inflation rate, and default risk. default risk only liquidity, market, and default risk. liquidity, interest rate, and default risk. default and liquidity risks.

default risk only

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a: bearer form bond. registered form bond. call protected bond. debenture. note.

debenture.

Russell's has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance. This provision is referred to as the _____ provision. sinking fund market safeguard deferred call liquidity

deferred call

Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called: aggregating. extrapolating. discounting. simplifying. compounding.

discounting.

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the: present value. true value. future value. complex value. discounted value.

future value.

Assume all else is equal. When comparing savings accounts, you should select the account that has the: lowest effective annual rate. highest effective annual rate. lowest annual percentage rate. highest stated rate. highest annual percent rate.

highest effective annual rate.

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called: accrued interest. interest on interest. complex interest. simple interest. discounted interest.

interest on interest.

When a bond's yield to maturity is less than the bond's coupon rate, the bond: is priced at par. is selling at a premium. had to be recently issued. has reached its maturity date. is selling at a discount.

is selling at a premium.

A call provision grants the bond issuer the: option of repurchasing the bonds prior to maturity at a prespecified price. right to repurchase the bonds on the open market prior to maturity. right to automatically extend the bond's maturity date. right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds. option to exchange the bonds for equity securities.

option of repurchasing the bonds prior to maturity at a prespecified price.

The purpose of a bond sinking fund is to: accumulate funds needed to pay the tax liability on the bond proceeds. repay bondholders from a trust fund if the issuer defaults. repay bonds early either through purchases or calls. hold the bond proceeds until the funds need disbursed. accumulate funds to pay the regular interest payments.

repay bonds early either through purchases or calls.

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: is 12.9 percent. can either be greater than or equal to 12.9 percent. can either be less than or equal to 12.9 percent. will be less than 12.9 percent. will be greater than 12.9 percent.

will be greater than 12.9 percent

Solve for the unknown number of years in each of the following: (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Present Value Years Interest Rate Future Value $300 10% $1,155 1,991 8 3,750 32,905 13 387,620 32,600 20 199,724

years 14.14 8.23 20.18 9.94

All else held constant, the present value of a bond increases when the: time to maturity of a zero coupon bond increases. coupon rate decreases. current yield increases. yield to maturity decreases. time to maturity of a premium bond decreases.

yield to maturity decreases

The market-required rate of return on a bond that is held for its entire life is called the: dirty yield. call premium. coupon rate. yield to maturity. current yield.

yield to maturity.