FI361 Financial Mgmt Test 2 Study

Arts and Crafts Warehouse wants to issue 15-year, zero-coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding.

$331.40 PV = $1,000 / [1 + (.075 / 2)]30 PV = $331.40

If Treasury bills are currently paying 2.84 percent and the inflation rate is 1.63 percent, what is the approximate real rate of interest? The exact real rate?

1.21%; 1.19% Solution: Approximation (Fisher Effect) real rate = nominal (quoted) rate - inflation rate r = 2.84% - 1.63% = 1.21% Actual real rate = (Nominal rate - Inflation rate) / (1 + Inflation rate) = (2.84% - 1.63%) / (1 + 1.63%) = 1.19%

Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?

4 percent interest, compounded annually

Western Bank pays 5 percent simple interest on its savings account balances, whereas Eastern Bank pays 5 percent compounded annually. If you deposited $6,000in each bank, how much more money would you earn from the Eastern Bank account at the end of 3 years?

45.75 in interest. Note it says Compound Interest at Eastern Bank.

Suppose that in 2015, a $10 silver certificate from 1898 sold for $11,700. For this to have been true, what would the annual increase in the value of the certificate have been?

6.22% You can use the Rate function in excel to help find this.

Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny? a. 6.75 percent interest, compounded annually b. 6.80 percent interest, compounded annually c. 6.6 percent simple interest d. 6.5 percent simple interest e. 6.5 percent interest, compounded annually

6.5 percent simple interest

You're trying to save to buy a new car valued at $48,690. You have $38,000 today that can be invested at your bank. The bank pays 3.7 percent annual interest on its accounts. How long will it be before you have enough to buy the car for cash? Assume the price of the car remains constant.

6.82 years

Standards Life Insurance offers a perpetuity that pays annual payments of $12,000. This contract sells for $250,000 today. What is the interest rate?

= 12000/250000 = 0.048 * 100 = 4.8%

Compass Bank is offering an APR of.8 percent, compounded daily, on its savings accounts. If you deposit $2,500 today, how much will you have in the account in 15 years?

=2500*e^(0.8%*15) =$2818.74

Which one of the following statements concerning annuities is correct?

An annuity due has payments that occur at the beginning of each time period

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Annuity

Appalachian Bank offers you a $30,000, 2-year term loan at an APR of 5.5 percent, compounded monthly. What will be your monthly loan payment?

Calculation of Monthly Loan Payment. Principal (P) = $30,000 APR = 5.5% or 0.055 or 0.055/12 Monthly Terms (n) = 2 Years or 24 months Monthly Payment = P (r(1+r)^n)/((1+r)^n-1) = $30,000(0.055/12(1+(0.055/12))^24/(1+(0.055/12))^24-1) = $1,322.87 Therefore, Monthly loan payment will be $1,322.87

Which one of the following is the quoted price of a bond?

Clean Price

A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments. The bond quote is 100.8. What is the amount of each coupon payment?

Coupon Yield - Current Yield x Bond Quote = 6.25% x 100.8 = 6.3% Coupon Payment = 1000x 0.063/2 = 31.5

The 8 percent, $1,000 face value bonds of Sweet Sue Foods are currently selling at $1,057. These bonds have 16 years left until maturity. What is the current yield?

Current yield = Interest /current price = ( 1000 *.08) /1057 = 80 / 1057 = 0.0757 or 7.57%

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:

Future Value

Your parents spent $7,800 to buy 200 shares of stock in a new company 12 years ago. The stock has appreciated 14.6 percent per year on average. What is the current value of those 200 shares?

Future value = $7,800 ×(1 + 0.146)^12 = $40,023.03

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?

Interest rate risk premium

Smiley Industrial Goods has $1,000 face value bonds on the market with semiannual interest payments, 13.5 years to maturity, and a market price of $1,023. At this price, the bonds yield 6.4 percent. What must be the coupon rate on these bonds?

PV = $1,023 = C ×{(1 - {1 / [1 + (.064 / 2)]27}) / (.064 / 2)} + $1,000 / [1 + ( .064 / 2)]27 C = $33.28 Coupon rate = ($33.28×2) / $1,000 Coupon rate = .0666, or 6.66 percent

Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the guaranteed rate of return on this investment is 3.6 percent, how much will you pay for the policy?

PV = $10,000/.036 = $277,777.78

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are:

Perpetuity

You and your sister are planning a large anniversary party 3 years from today for your parents' 50th wedding anniversary. You have estimated that you will need $6,500 for this party. You can earn 2.6 percent compounded annually on your savings. How much would you and your sister have to deposit today in one lump sum to pay for the entire party?

Present value=6500/(1.026)^3=$6,018.3

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

The bond must be priced at par.

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?

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

Russells 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.

deferred call

Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:

effective annual rate.

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

A call provision grants the bond issuer the:

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

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

remain constant, regardless of the investment time period.