FIN 3104
EAR
(1 + (quoted annual rate / compounding periods per year)^m) - 1
To pay for your education, you've taken out $26,000 in student loans. If you make monthly payments over 12 years at 6 percent compounded monthly, how much are your monthly student loan payments? The monthly payment of your student loan is $nothing. (Round to the nearest cent.)
(C/R) (1 - 1/ ((1+R)^N)) 26000 = (C/.005) (1 - 1 / 1.005^144)
An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%?
865
What would you expect the nominal rate of interest to be if the real rate is 4.3 percent and the expected inflation rate is 6.7 percent? The nominal rate of interest would be 11.2911.29%. (Round to two decimal places.)
1.043*1.067 = 1.11288 - 1 = .11288 move the decimal over two times = 11.29
You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?
11
How much money must you pay into an account at the beginning of each of 20 years in order to have $10,000 at the end of the 20th year? Assume that the account pays 12% per annum, and round to the nearest $1.
124
What is the present value of an annuity of $27 received at the beginning of each year for the next six years? The first payment will be received today, and the discount rate is 10% (round to nearest $10).
130
Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Gina's plan is to invest her money by depositing into an IRA at the end of every year. What is the amount that she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will earn an annual rate of 11.5%. Round off to the nearest $1.
1497
Your company has received a $50,000 loan from an industrial finance company. The annual payments are $6,202.70. If the company is paying 9% interest per year, how many loan payments must the company make?
15
Lisa Simpson wants to have $1,900,000 in 55 years by making equal annual end-of-the-year deposits into a tax-deferred account paying 12.00 percent annually. What must Lisa's annual deposit be? The amount of Lisa's annual deposit must be $nothing. (Round to the nearest cent.)
1900000= P ((1+.12)^55) - 1) / .12 448.5
A friend of yours plans to begin saving for retirement by depositing $2,000 at the end of each year for the next 25 years. If she can earn 10% annually on her investment, how much will she have accumulated at the end of 25 years?
196692
What is the present value of $250 received at the beginning of each year for 21 years? Assume that the first payment is received today. Use a discount rate of 12%, and round your answer to the nearest $10. What is the present value of $150 received at the beginning of each year for 16 years? The first payment is received today. Use a discount rate of 9%, and round your answer to the nearest $10.
2117 1360
You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts? Year End of Year Deposit 1 $350 2 $500 3 $725 4 $400 What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end−of−period payments. Round to the nearest whole dollar. Year Cash Flow 1 $3,000 2 $4,000 3 $5,000
2207 10588
You are thinking of buying a miniature golf course. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight. If the appropriate discount rate is 10%, what is the present value of these cash flows?
235048
Recently you borrowed money for a new car. The loan amount is $15,000 to be paid back in equal annual payments which begin today, and will continue to be payable at the beginning of each year for a total of five years. Interest on the loan is 8%. What is the amount of the loan payment?
3478.31
You wish to borrow $2,000 to be repaid in 12 monthly installments of $170.30. The annual interest rate is
4%
Edward Johnson decided to open up a Roth IRA. He will invest $1,800 per year for the next 35 years. Deposits to the Roth IRA will be made via a $150 payroll deduction at the end of each month. Assume that Edward will earn 8.75% annual interest compounded monthly over the life of the IRA. How much will he have at the end of 35 years?
414405
Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $398,930 due in 28 years. In other words, they will need $398,930 in 28 years. Toni Flanders, the company's CEO, is scrambling to discount the liability to the present to assist in valuing the firm's stock. If the appropriate discount rate is 7 percent, what is the present value of the liability?
60000 total val * (1 / (1 + interest rate) ^ years)
SellUCars, Inc. offers you a car loan at an annual interest rate of 8% compounded monthly. What is the annual percentage yield of the loan?
8.3
At a discount rate of 7.00%, find the present value of a perpetual payment of $8,000 per year. If the discount rate were lowered to 3.50%, half the initial rate, what would be the value of the perpetuity? a. If the discount rate were 7.00%, the present value of the perpetuity is $nothing. (Round to the nearest cent.)
8000/.07
Ingrid Birdman can earn a nominal annual rate of return of 12%, compounded semiannually. If Ingrid made 40 consecutive semiannual deposits of $500 each, with the first deposit being made today, how much will she accumulate at the end of Year 20? Round off to the nearest $1.
82024
Harry just bought a new four−wheel−drive Jeep Cherokee for his lumber business. The price of the vehicle was $35,000, of which he made a $5,000 down payment and took out an amortized loan for the rest. His local bank made the loan at 12% interest for five years. He is to pay back the principal and interest in five equal annual installments beginning one year from now. Determine the amount of Harry's annual payment.
8322
Calvin Johnson has a $4,000 debt balance on his Visa card that charges 10.2 percent APR compounded monthly. In 2009, Calvin's minimum monthly payment is 4 percent of his debt balance, which is $160. How many months (round up) will it take Calvin Johnson to pay off his credit card if he pays the current minimum payment of $160 at the end of each month? In 2010, as the result of a federal mandate, the minimum monthly payment on credit cards rose to 5 percent. If Calvin made monthly payments of $200 at the end of each month, how long would it take to pay off his credit card?
=NPER(.0085,-160,4000,0)
(Annuity payments) A firm borrows $30,000 from the bank at 6 percent compounded annually to purchase some new machinery. This loan is to be repaid in equal annual installments at the end of each year over the next 6 years. How much will each annual payment be? The amount of each annual payment will be (Round to the nearest cent.)
=PMT (RATE, NPER, PV, FV) = PMT(.06, 6, 30000, 0) 6100.9
Ford Motor Company's current incentives include 3.9 percent APR financing for 96 months or $1,300 cash back on a Mustang. Let's assume Suzie Student wants to buy the premium Mustang convertible, which costs $20,000, and she has no down payment other than the cash back from Ford. If she chooses the $1,300 cash back, Suzie can borrow from the VTech Credit Union at 5.9 percent APR for 96 months (Suzie's credit isn't as good as Prof. Finance). What will Suzie Student's monthly payment be under each option? Which option should she choose? a. If Suzie chooses 3.9 percent APR financing for 96 months to buy the premium Mustang convertible, which costs $20,000=PMT(82.353251), what will her monthly payment be? (Round to the nearest cent.) b. If Suzie chooses $1,300 cash back to buy the premium Mustang convertible and borrows $18,700 from the VTech Credit Union at 5.9 percent APR for 96 months, how much will her monthly payment be? $244.8244.8 (Round to the nearest cent.) c. Which option should Suzie Student choose? (Select the best choice below.) A. Choose cash back financing because the monthly payment under this option is lower. B. Choose low interest rate financing because the monthly payment under this option is lower.
=PMT(RATE, NPER, PV, FV) = PMT (.00325,96,20000, 0) part c is b
(Present value of annuities and complex cash flows) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows: Investment Alternatives End of Year A B C 1 $ 20,000 $ 20,000 2 20,000 3 20,000 4 20,000 5 20,000 $ 20,000 6 20,000 100,000 7 20,000 8 20,000 9 20,000 10 20,000 20,000 Assuming an annual discount rate of 16 percent, find the present value of each investment. a. What is the present value of investment A at an annual discount rate of 16 percent?
=PV(.16,5,20000,0) Y=PV(.16,6,20000,0) =PV(.16,4,0,Y)
Determine the present value of an annuity due of $8,000 per year for 25 years discounted back to the present at an annual rate of 11 percent. What would be the present value of this annuity due if it were discounted at an annual rate of 16 percent? a. If the annual discount rate is 11 percent, the present value of the annuity due is $nothing. (Round to the nearest cent.)
=PV(rate,nper,pmt,fv,type) =PV(.11, 25, 8000, 0, 1) a = 74785.09
You've been offered a loan of $10,000, which you will have to repay in 11 equal annual payments of $2,000, with the first payment due one year from now. What interest rate would you pay on that loan? The interest rate you would pay on the loan is nothing%. (Round to two decimal places.)
=RATE(11, 2000, -10000, 0) 16.15
(Future value of an annuity) Let's say you deposited $160,000 in a 529 plan (a tax advantaged college savings plan) hoping to have $420,000 available 12 years later when your first child starts college. However, you didn't invest very well, and 2 years later the account balance dropped to $140,000. Let's look at what you need to do to get the college savings plan back on track. a. What was the original annual rate of return needed to reach your goal when you started the fund 2 years ago? b. With only $140,000 in the fund and 10 years remaining until your first child starts college, what annual rate of return would the fund have to make to reach your $420,000 goal if you add nothing to the account? c. Shocked by your experience of the past 2 years, you feel the college fund has invested too much in stocks, and you want a low-risk fund in order to ensure you have the necessary $420,000 in 10 years. You are willing to make end-of-the-month deposits to the fund as well. You find you can get a fund that promises to pay a guaranteed annual return of 6 percent which is compounded monthly. You decide to transfer the $140,000 to this new fund and make the necessary monthly deposits. How large of a monthly deposit must you make into this new fund? d. After seeing how large the monthly deposit would be (in part c of this problem), you decide to invest the $140,000 today and $500 at the end of each month for the next 10 years into a fund consisting of 50 percent stock and 50 percent bonds and hope for the best. What APR would the fund have to earn in order to reach your $420,000 goal?
=RATE(15,0,-150000,450000) =RATE(13,0,-130000,450000) =PMT((.06/12),120,-130000,450000) =RATE(120, -450., -130000,450000)
Advantages to borrowing in the private market include A. reduced initial costs. B. lower interest costs. C. less restrictive covenants. D. avoiding future SEC registration.
A
All of the following operate as financial intermediaries EXCEPT A. the U. S. Treasury B. mutual funds. C. insurance companies. D. commercial banks.
A
An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future. A. put option B. futures contract to take delivery of an asset at a future date C. call option D. convertible bond
A
a. If you put your inheritance in an account that earns 7 percent interest compounded annually, how many years will it be before your inheritance grows to $30,000? b. If you let your money grow for 10.25 years at 7 percent, how much will you have? c. How long will it take your money to grow to $30,000 if you move it into an account that pays 3 percent compounded annually? How long will it take your money to grow to $30,000 if you move it into an account that pays 11 percent? d. What does all this tell you about the relationship among interest rates, time, and future sums?
A = 6 B = 40,014.16 initial invested (1 + interest rate)^years c = 13.8 d = 3.9 POSITIVE
The area of finance that deals with long−term investment decisions is known as A. capital budgeting. B. capital structure. C. financial strategy. D. working capital management.
A
The interest on corporate bonds is typically paid A. semiannually. B. annually. C. monthly. D. quarterly.
A
The principal savers in the financial markets are A. individuals. B. banks. C. governments. D. businesses.
A
The term stockholder is equivalent to A. shareholder. B. stakeholder. C. general partner. D. creditor.
A
The yield on a corporate bond with a 20 year maturity would include A. the risk−free rate plus a default risk premium, a liquidity risk premium and a maturity risk premium. B. the real rate of interest, the expected inflation rate and a default risk premium. C. only the real rate of interest and expected inflation. D. the risk−free rate multiplied by 1+ default rate.
A
Which of the following financial instruments is not traded in the capital markets? A. debt with a maturity of less than one year B. bonds C. common stock D. preferred stock
A
There are three basic questions that are addressed by the study of finance. They are: (Select all that apply.) A. How can the firm best manage its cash flows as they arise in its day-to-day operations (working capital management decisions)? Your answer is correct. B. Which parts of the company should receive less capital (capital rationing)? C. How should the firm raise money to fund new investments (capital structure decisions)? Your answer is correct. D. What long-term investments should the firm undertake (capital budgeting decisions)?
ACD
Which of the following statements regarding a sole proprietorship are correct? (Select all that apply.) A. Sole proprietorships are easy to set up with no paperwork required before the business can be opened. B. The sole proprietor is personally responsible for all debt of the sole proprietorship. C. Sources of funds for a sole proprietorship typically include personal savings, as well as raising funds from a bank or personal loans from friends and family. D. One advantage of the sole proprietorship is that the survival of the firm does not depend upon just one person.
ABC
Which of the following financial instruments entails the most risk and potentially the highest returns for investors? A. debt with a maturity of less than one year B. preferred stock C. bonds D. common stock
D
Preferred stock is an equity security that has seniority rights. (Select all that apply.) A. During the liquidation of a company, holders of preferred stock would have a claim on assets before any claims by common stock shareholders. Your answer is correct. B. Preferred stock has voting rights, which supercede the voting rights of common stockholders. C. Preferred stock is sometimes referred to as a hybrid security. Your answer is correct. D. Owners of preferred stock receive their dividends before dividends are distributed to common stock shareholders. Your answer is correct. E. Preferred stock dividends, which are unpaid due to a lack of profits may accrue to be paid later when the corporation returns to profitability.
ACDE
Assuming two investments have equal lives, a high discount rate tends to favor A. the investment with even cash flow. B. the investment with large cash flow early. C. the investment with large cash flow late. D. neither investment since they have equal lives.
B
Jillian has purchased AAA rated corporate bonds that will mature in 20 years . She plans to sell the bonds in 10 years as she approaches retirement age. The most significant risk she faces is A. default risk. B. maturity risk. C. liquidity risk. D. None of the above, the bonds are essentially risk−free.
B
The par value of a bond A. is determined by the investor. B. generally is $1,000. C. never equals its market value. D. is never returned to the bondholder.
B
The par value of a bond is _________. (Select the best choice below.) A. the amount paid for a bond on the secondary market B. the face value of the bond, which is received by the bondholder when the bond matures at its normal maturity date C. the value of a bond sold to build a golf course D. the amount of annual interest paid by a corporate bond
B
The price at which the stock or asset may be purchased from (or sold to) the option writer is referred to as A. open interest. B. exercise or strike price. C. intrinsic value of the option. D. option premium.
B
What does the agency problem refer to? A. The problem associated with financial managers and Internal Revenue agents. B. The problem that results from potential conflicts of interest between the manager of a business and the stockholders. C. The conflict that exists between the board of directors and the employees of the firm. D. The conflict that exists between stockbrokers and investors.
B
When managers have little or no ownership in the firm, they are less likely to work energetically for the company's shareholders. We call this type of conflict a(n) __________. (Select the best choice below.) A. ownership problem B. agency problem C. management problem D. moral problem
B
Which of the following is true about bonds? A. Their interest rate always varies with the Consumer Price Index B. They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year. C. At maturity of the bond, the investor receives the market price of the bond. D. They are obligations from the investor to the corporation.
B
Which of the following statements best represents what finance is about? A. Maximizing profits B. The study of how people and businesses make investment decisions and how to finance those decisions. C. How political, social, and economic forces affect corporations D. Reducing risk
B
A(n) ________ gives the holder the right to buy a stated number of shares at a specified price for a limited time. A. stock index futures contract B. call option C. interest rate futures contract D. put option
B
The typical business organization for large companies is the corporation. Advantages of the corporate form of business organization include: (Select all that apply.) A. The corporation is owned by the board of directors who share in the profits and the liabilities of the company. B. Corporations have a greater ease in raising large sums of money than other forms of business organization. C. The owners' liability is limited to the amount of their investment in the company. D. The life of the business is not tied to the status of the corporate owners.
BCD
Which of the following are legal forms of business organization? (Select all that apply.) A. The triumvirate. B. The corporation. C. The partnership. D. The sole proprietorship.
BCD
Investment companies are specialized financial intermediaries that provide financial services to businesses. These investment companies include: (Select all that apply.) A. savings and loans. B. private equity firms. Your answer is correct. C. mutual funds. Your answer is correct. D. public equity firms. E. hedge funds.
BCE
Banks collect the savings of individuals and businesses and then lend these pooled savings to other individuals and businesses. In this role, banks are: (Select all that apply.) A. making money by paying a rate of interest to savers that exceeds the rate they charge to borrowers. B. making money by charging a rate of interest to borrowers that exceeds the rate they pay to savers. C. acting as a borrower. D. acting as a financial intermediary.
BD
A call option on a stock is a financial instrument defined by which of the following statements? A. It obligates the investor holding it to buy the stock at the specified price at the stated date in the future. B. It gives the investor holding it the right, but not the obligation, to sell the stock at the specified price at the stated date in the future. C. It gives the investor holding it the right, but not the obligation, to buy the stock at the specified price at the stated date in the future. D. It obligates the investor holding it to sell the stock at the specified price at the stated date in the future.
C
Both venture capital (VC) firms and leveraged buyout (LBO) firms are types of ___________. (Select the best choice below.) A. hedge funds B. money market funds C. mutual funds D. exchange-traded funds E. private equity firms
E
Foregoing the earning potential of a dollar today is referred to as the A. creation of wealth. B. time value of money. C. opportunity cost concept. D. risk/return tradeoff.
C
Secondary markets A. are an important vehicle for established firms to raise additional money for expansion. B. are a means by which funds are cycled from savers to borrowers. C. are concerned with the trading of previously issued securities between investors. D. function as a place for smaller, less well−known firms to issue securities.
C
The strike price is the A. premium minus the exercise price. B. price paid for the option. C. price at which the stock or asset may be purchased from the writer. D. minimum value of the option.
C
Unlike the owner of a(n) ________ contract, the owner of a(n) ________ contract does not have to exercise it A. put, call B. long, short C. futures, option D. option, futures
C
When managers have little or no ownership in the firm, they are less likely to work energetically for the company's shareholders. We call this type of conflict a(n) __________. (Select the best choice below.) A. management problem B. ownership problem C. agency problem D. moral problem
C
The Fisher effect can be expressed mathematically as A. the real rate of interest= the nominal rate − the inflation rate). B. ( nominal rate)= (the real rate of interest) ( the inflation rate). C. the nominal rate)= the real rate of interest + the inflation rate). D. (1+ the nominal rate)= (1+the real rate of interest) (1 + the inflation rate).
D
The detailed legal agreement between a bond's issuer and and its trustees is known as the A. covenant. B. collateral agreement. C. call provision. D. indenture.
D
Advantages of privately placing debt include all of the following except A. flexibility. B. speed. C. reduced placement costs. D. restrictive covenants.
D
Corporate debt can be privately placed with A. union pension funds. B. state pension funds C. life insurance companies D. all of the above
D
Each of the following is true of Mutual Funds EXCEPT A. Mutual Fund shares must be bought from or sold to the Fund by investors. B. Funds can be classified as load or no−load funds. C. The NAV is the total value of stock held by the fund divided by the number of outstanding shares in the mutual fund. D. An index fund is the fund with the highest expenses payable by investors.
D
Uses of future contracts include A. speculating on future price movements of commodities which the speculator neither uses nor produces. B. reducing uncertainty about the future cost of key inputs. C. reducing uncertainty about the prices that will be received when a commodity is ready for market. D. all of the above.
D
When comparing annuity due to ordinary annuities, annuity due annuities will have higher A. future values. B. annuity payments. C. present values. D. both A and C. E. all of the above.
D
Government bonds have lower yield to maturity than do corporate bonds of the same maturity because the ________ premium is lower for government bonds. A. maturity B. interest rate risk C. inflation D. default
D
If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)? A. $828 B. $1,176 C. $827 D. $833
D
There are several measures that can be taken to help limit the agency problem. (Select the best choice below.) A. Compensation plans can be put in place to reward managers when they maximize shareholder wealth. B. The board of directors can actively monitor the actions of managers to keep pressure on them to act in the best interest of shareholders. C. Financial markets play a key role in monitoring management. D. Firms that fail to maximize shareholder wealth may be taken over and their management team replaced. E. All of the above are correct.
E
Your folks just called and would like some advice from you. An insurance agent just called them and offered them the opportunity to purchase an annuity for $37,632.97 that will pay them $3,500 per year for 20 years. They don't have the slightest idea what return they would be making on their investment of $37,632.97. What rate of return would they be earning? The annual rate of return your folks would be earning on their investment is nothing%. (Round to two decimal places.)
Enter into excel =RATE(nper,pmt,pv,fv) =RATE(20,3500,-37632.97,0) change it to percentage and make sure it has decimals 6.81
Financial intermediaries include: (Select the best choice below.) A. Insurance companies B. Investment companies C. Commercial banks D. Investment banks E. Finance companies F. All of the above
F
Options can only be purchased for individual stocks, not for funds or indexes. True False
FALSE
Options contracts all expire on the last trading day of the month. True False
FALSE
The current yield is the average rate of interest a bond will from the time of purchase until it matures. True False
FALSE
The present value of a $100 perpetuity discounted at 5% is $1200.
FALSE
(Future value of an ordinary annuity) You are graduating from college at the end of this semester and after reading the The Business of Life box in this chapter, you have decided to invest $4,900 at the end of each year into a Roth IRA for the next 43 years. If you earn 6 percent compounded annually on your investment, how much will you have when you retire in 43 years? How much will you have if you wait 10 years before beginning to save and only make 33 payments into your retirement account? How much will you have when you retire in 43 years?
FV(annuity) = A[(1+r)^n-1 /r] 4900(((1+0.06)^43-1) / 0.06)
(Determining the outstanding balance of a loan) Ten years ago you took out a $200,000, 25-year mortgage with an annual interest rate of 10 percent and monthly payments of $1,817.40. What is the outstanding balance on your current loan if you just make the 120th payment? If you just make the 120th payment, the outstanding balance on your current loan is $nothing. (Round to the nearest cent.)
Formula: FV = PV x (1+R%)^N - PMT x ((1+R%)^N-1)/R% FV = 250000*(1+8%/12)^120 - 1929.54055*((1+8%/12)^120-1) /(8%/12) =
Financial markets are often described by the maturities of the securities traded in them. Money markets are markets for short-term debt instruments with maturities of 1 year or less, while capital markets are markets for long-term financial instruments with maturities that extend beyond 1 year. (Select from the drop-down menus.)
MM CM
As the time to maturity increases, the maturity premium increases. True False
TRUE
Capital structure refers to the financing of long−term investments. True False
TRUE
Consider an investment that has cash flows of $500 the first year and $400 for the next four years. If your opportunity cost is 10%, you should be willing to pay $1,607.22 for this investment.
TRUE
Financial decisions can be difficult because the cost of investments can be estimated with greater confidence than future payoffs. True False
TRUE
If the issuing company becomes insolvent, the claims of the bondholders are honored before those of preferred stockholders. True False
TRUE
Mutual Funds and ETFs provide the investor a chance to diversify without having to buy shares in numerous corporations. True False
TRUE
One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.
TRUE
The difference between mutual funds and ETFs is that ETFs are traded on exchanges and mutual funds are not. True False
TRUE
Determine the present value of an ordinary annuity of $3,500 per year for 19 years, assuming it earns 12 percent. Assume that the first cash flow from the annuity comes at the end of year 9 and the final payment at the end of year 27. That is, no payments are made on the annuity at the end of years 1 through 8. Instead, annual payments are made at the end of years 9 through 27. The present value of the annuity at the end of year 8 is $nothing. (Round to the nearest cent.)
To find the present value =PV (.12, 19, 3500, 0) To find TODAY present value = PV(.12, 8, 0, 25780.22)
To find the present value of an annuity due, one could
find the present value of an ordinary annuity and multiply by 1+i.
Limited partnerships have two classes of partners. The ▼ limited general partner actually runs the business and faces unlimited liability for the firm's debt, while the ▼ limited general partner is only liable up to the amount the ▼ limited general partner invested. (Select from the drop-down menus.)
general limited limited
(Present value of a complex stream) Don Draper has signed a contract that will pay him $60,000 at the beginning of each year for the next 5 years, plus an additional $110,000 at the end of year 5. If 7 percent is the appropriate discount rate, what is the present value of this contract? The present value of the contract is $nothing. (Round to the nearest cent.)
present = future (1 - (1 + r)^-n) / r) p = 110000 (1 - 1.07^-5) / .07)
