Corp. Finance Exam #2 Quizzes

You just received $225,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 25 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent?

$1,189,576 Future value= $225,000 x (1 + .105)^25 = $2,730,483 Future value= $225,000 x (1 + .08)^25 = $1,540,907 Difference= $2,730,483 - $1,540,907 = $1,189,576

Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,408.79. How much did your father originally invest?

$17,444.86 Present value= $51,480.79 x [1/(1 + .0425)^26] = $17,444.86

Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years?

$2,333,572

Four years from now you will receive the first of seven annual $6,000 payments. The current interest rate is 8%, but by the beginning of year 4, the rate will rise to 10%. What is the present value of this cash flow stream?

$23,617.66

What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume annual compounding.

$310,868

You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at 8.6 percent interest. What is the amount of each payment?

$366.05

Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. At a 5.5 percent discount rate, what are these payments worth to you on the day you enter college?

$4,299.88

Today you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent?

$55,032.54 Future value= $36,000 x (1 + .036)^12 = $55,032.54

You have just received notification that you have won the $1.4 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday, 70 years from now. The appropriate discount rate is 8 percent. What is the present value of your winnings?

$6,404.20 PV = $1,400,000 x [1/(1.08)^70] = $6,404.20

Travis invested $9,250 in an account that pays 6 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually?

$773.58 Simple interest= $9,250 + ($9,250 x .06 x 7) = $13,135 Compound interest= $9,250 x (1 + .06) ^7 = $13,908.58 Difference= $13,908.58 - $13,135 = $773.58

Phi ca afford $180 a month for 5 years for a car loan. If the interest rate is 8.6 percent, how much can he afford to borrow to purchase a car?

$8,752.84

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000?

$991.47

You are preparing to make monthly payments of $65, beginning at the end of this month , into an account that pays 6 percent interest compounded monthly. How many payments will you have made when your account balance reaches $9,278?

108 t= ln 1.7137/ln 1.005; t = 108 payments

Suppose the real rate is 9.5 percent and the inflation rate is 1.8 percent. What rate would you expect to see on a Treasury bill?

11.47 percent (1+R) = (1+0.095) x (1+0.018); R = 11.47 percent

Forty years ago, your mother invested $5,000. Today, that investment is worth $430,064.11. What is the average annual rate of return she earned on this investment?

11.78 percent $430,065.11 = $5,000 x (1 + r)^40 ; r = 11.78 percent

Global Communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of 6.72 percent. How many years is it until this bond matures?

12.53 years

You expect to receive $9,000 at graduation in 2 years. You plan on investing this money at 10 percent until you have $60,000. How many years will it be until this occurs?

21.90 years $60,000 = $9,000 x (1 + .10)^t ; t = 19.90 years Total time = 2 + 19.90 = 21.90 years

Assume the average vehicle selling price in the United States last year was $41,996. The average price 9 years earlier was $29,000. What was the annual increase in the selling price over this time period?

4.20 percent $41,996 = $29,000 x (1 + r) ^9 ; r = 4.20 percent

The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $989. What is the yield to maturity?

6.14 percent

The Wine Press is considering a project which has an initial cash requirement of $187,400. The project will yield cash flows of $2,832 monthly for 84 months. What is the rate of return on this project?

7.04 percent

A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following?

Callable

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

Compound Interest

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?

Coupon

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

Discounting

An ordinary annuity is best defined by which one of the following?

Equal payments paid at regular intervals over a stated time period

A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate

II and IV only

Which of the following statements related to interest rates are correct?

II and IV only

You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which of the following statements is correct given these two investment options?

Option B has a higher present value at time zero than does option A

Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following?

Present value

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

Sue will have more money than Neal as long as they retire at the same time

An indenture is:

The legal agreement between the bond issuer and the bondholders

Protective covenants:

are primarily designed to protect bondholders

Which of the following statements correctly states a relationship?

Time and present value are inversely related, all else held constant

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

Yield to maturity

Bonds issued by the U.S. government:

are considered to be free of default risk