FIN 3715 EXAM 2

The net present value (NPV) of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________.

$-114.21

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________.

$1,445,531

A home buyer buys a house for $2,155,000 . She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment?

$10,311.34

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________.

$100,000

Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000 . If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense?

$100,251

A firm issues two -year bonds with a coupon rate of 6.7%, paid semiannually. The credit spread for this firmʹs two -year debt is 0.8%. New two -year Treasury notes are being issued at par with a coupon rate of 3.1%. What should the price of the firmʹs outstanding two -year bonds be per $100 of face value?

$105.34

A mining company needs to raise $100 million in order to begin open -pit mining of a coal seam. The company will fund this by issuing 30-year bonds with a face value of $1,000 and a coupon rate of 6.5%, paid annually. The above table shows the yield to maturity for similar 30-year corporate bonds of different ratings. If the companyʹs bonds are rated A, what will be their selling price?

$1054.48

A five-year bond with a $1,000 face value has a yield to maturity is 5.0% and itʹs coupon rate is 6.0% paid annually. The dirty price of this bond exactly 6 months after its second coupon payment is closest to ________.

$1057.23

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 7.3%, then the price that this bond trades for will be closest to ________.

$1063

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.5% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Lutherʹs bonds are rated AAA, their price will be closest to ________.

$1064

A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments?

$109

If the current market rate of interest is 8%, then the future value (FV) of this stream of cash flows is closest to ________.

$11,699

What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments?

$11.25

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________.

$110,793

Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%?

$116,667

You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to ________.

$12,000

You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?

$12,151.67

If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________.

$12,635

Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________.

$12,727

A perpetuity has a PV of $20,000 . If the interest rate is 6%, how much will the perpetuity pay every year?

$1200

A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year?

$13,240.79

An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity at the end of that 53 years given that the discount rate is 9%?

$13,764.85

A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan?

$1316.69

An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%?

$142.67

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900 . After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.)

$145

A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan?

$1512.22

Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%, what is the maximum price he can pay for the car?

$16,598

You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years?

$16,770.33

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________.

$160,463

You are purchasing a new home and need to borrow $260,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.80% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 6.50% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $5200 to cover points you are paying the lender. Assuming you pay the points and borrow from the mortgage lender at 6.50%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________.

$1676

If the current market rate of interest is 6%, then the future value (FV) of this stream of cash flows is closest to ________.

$1723

A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent?

$18,287

Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?

$18,653.76

A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?

$19,433

Shown above is information from FINRA regarding one of Bank of Americaʹs bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually?

$2.15

Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________.

$20,000

If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________.

$20,227

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest?

$200,000.00

The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years?

$22,639

Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pays interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four yearsʹ time?

$220

You are purchasing a new home and need to borrow $380,000 from a mortgage lender. The mortgage lender quotes you a rate of 5.75% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 5.45% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $7600 to cover points you are paying the lender. Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________.

$2218

The Sisyphean Company has a bond outstanding with a face value of $5000 that matures in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.9% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be?

$222.5

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $240,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4800 (paid at the end of each month). Your firm can borrow at 7.80% APR with quarterly compounding. The present value (PV) of the lease payments for the delivery truck is closest to ________.

$238,132

A small foundry agrees to pay $220,000 two years from now to a supplier for a given amount of coking coal. The foundry plans to deposit a fixed amount in a bank account every three months, starting three months from now, so that at the end of two years the account holds $220,000 . If the account pays 12.5% APR compounded monthly, how much must be deposited every three months?

$24,602

Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity?

$250,000.00

Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value (PV), how much will Joe receive for selling the family business?

$254,641

An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity at the end of those 22 years, given that the discount rate is 8%?

$2606.47

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

$2839 ; $184,565

The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________.

$3010

Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of$432,000 . He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan?

$306,206

A truck costing $111,000 is paid off in monthly installments over four years with 8.10% APR. After three years the owner wishes to sell the truck. What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck?

$31,195

If $8000 is invested in a certain business at the start of the year, the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year?

$316.25

Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%?

$3189.80

You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months) at 12% APR (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________.

$3193

Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770 . How much was the loan amount for this extension?

$33,436

Consider a zero-coupon bond with $100 face value and 15 years to maturity. If the YTM is 7.4%, this bond will trade at a price closest to ________.

$34.27

What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly?

$353,818

Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.

$37,086.78

Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the YTM of this bond is 10.2%, then the price of this bond is closest to ________.

$379

Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)?

$392,957

Shown above is information from FINRA regarding one of Caterpillar Financial Servicesʹ bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually?

$4.00

If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________.

$40,799

A bond has a $10,000 face value, ten years to maturity, and 8% semiannual coupon payments. What would be the expected difference in this bondʹs price immediately before and immediately after the next coupon payment?

$400

A risk-free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If the YTM is 6.1%, which of the following would be closest to the price this bond will trade at?

$4114

What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments?

$450

You are considering purchasing a new automobile with the upfront cost of $25,000 or leasing it from the dealer for a period of 60 months. The dealer offers you 4.00% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $25,000 through the dealer, your monthly payments will be closest to ________.

$460

If the current market rate of interest is 8%, then the present value (PV) of this stream of cash flows is closest to ________.

$484

What is the present value (PV) of an investment that will pay $500 in one yearʹs time, and $500 every year after that, when the interest rate is 10%?

$5000

An investor holds a Ford bond with a face value of $5000 , a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?

$5212.50

Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.

$53,635

A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%?

$5390

A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%?

$553.15

You are considering purchasing a new automobile with the upfront cost of $26,000 or leasing it from the dealer for a period of 48 months. The dealer offers you 2.80% APR financing for 48 months (with payments made at the end of the month). Assuming you finance the entire $26,000 through the dealer, your monthly payments will be closest to ________.

$573

A business promises to pay the investor of $6000 today for a payment of $1500 in one yearʹs time, $3000 in two yearsʹ time, and $3000 in three yearsʹ time. What is the present value of this business opportunity if the interest rate is 6% per year?

$603.94

What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 20 years to maturity if YTM is 7.8% APR?

$800.68

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________.

$61,303

You are interested in purchasing a new automobile that costs $33,000 . The dealership offers you a special financing rate of 9% APR (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealerʹs financing deal, then your monthly car payments would be closest to ________.

$685

A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is11 %?

$7,681,257.74

An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525 . How much cash will the investor have from the sale, once the mortgage is paid off?

$71,521

A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten yearsʹ time. How much greater is the present value (PV) of this payment if the interest rate is 9% rather than 8%?

$7178

A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan?

$72,416

An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year?

$79, 228

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.0% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 11.1%, then the price that this bond trades for will be closest to ________.

$816

The above table shows the yields to maturity on a number of three-year, zero-coupon securities. What is the price per $100 of the face value of a three-year, zero-coupon corporate bond with a BBB rating?

$82.55

What must be the price of a $10,000 bond with a 6.1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR?

$8494.26

The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of a zero-coupon, four-year, risk-free bond of $100?

$87.99

A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.1% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What is the new price of the bond?

$883.91

A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit spread for this firmʹs 5-year debt is 1.2%. New 5-year Treasury notes are being issued at par with a coupon rate of 5.1%. What should the price of the firmʹs outstanding 5-year bonds be if their face value is $1,000?

$932.28

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 6.0% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Lutherʹs bonds receive a AA rating, the price of the bonds will be closest to ________.

$941

The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in two yearsʹ time, what is the present value (PV) of that cash flow?

$95,647

An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%?

$9626

A 20-year bond with a $1,000 face value was issued with a yield to maturity of 4.3% and pays coupons semi-annually. After ten years, the yield to maturity is still 4.3% and the clean price of the bond is $959.71 . After three more months go by, what would you expect the dirty price to be?

$969.21

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $300,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to ________.

0.6623%

The credit spread of the BBB corporate bond is closest to ________.

0.8%

In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009?

-2.6%

A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.7% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What was the percentage change in the price of the bond over the past two years?

-8.13%

A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month?

0.56%

The credit spread of the B corporate bond is closest to ________.

1.4%

In 2007, interest rates were about 4.5% and inflation was about 2.8%. What was the real interest rate in 2007?

1.65%

A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750 . What is the yield to maturity of this bond?

1.936%

A pottery factory purchases a continuous belt conveyor kiln for $68,000 . A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22 , over what term is this loan being paid?

10 years

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 8%, which of the following coupon rates will cause the bond to be issued at a premium?

10%

A 10% APR with quarterly compounding is equivalent to an EAR of ________.

10.38%

The effective annual rate (EAR) for a loan with a stated APR of 11% compounded quarterly is closest to ________.

11.46%

A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.6% per year?

118 million

A 12% APR with bi-monthly compounding is equivalent to an EAR of ________.

12.62%

Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt?

122 months

The above table shows the yields to maturity on a number of two -year, zero-coupon securities. What is the credit spread on a two -year, zero-coupon corporate bond with a B rating?

2.0%

The above table shows the price per $100-face value bond of several risk-free, zero-coupon bonds. What is the yield to maturity of the two year, zero-coupon, risk-free bond shown?

2.85%

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.3% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Lutherʹs bonds receive a AAA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________.

23,724

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 5.6% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Lutherʹs bonds receive a AA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________.

27,848

What is the yield to maturity of a(n) eight-year, $5000 bond with a 4.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $4723.70 ?

5.26%

The current zero-coupon yield curve for risk-free bonds is shown above. What is the risk-free interest rate on a 4-year maturity?

3.25%

A ten-year, zero-coupon bond with a yield to maturity of 4% has a face value of $1000 . An investor purchases the bond when it is initially traded, and then sells it four years later. What is the rate of return of this investment, assuming the yield to maturity does not change?

4.00%

How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000 ?

4.25 years

Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31 , then the four year risk-free interest rate is closest to ________.

4.51%

What is the coupon rate of an eight-year, $10,000 bond with semiannual coupons and a price of $9006.6568 , if it has a yield to maturity of 6.5%?

4.888%

What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time?

40%

The effective annual rate (EAR) for a savings account with a stated APR of 5% compounded daily is closest to ________.

5.13%

Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ?

5.3 years

The yield to maturity for the three-year zero-coupon bond is closest to ________.

5.40%

A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60% APR. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?

5.5 years

Consider a zero-coupon bond with a $1000 face value and 15 years left until maturity. If the bond is currently trading for $431 , then the yield to maturity on this bond is closest to ________.

5.77%

Joseph buys a Hummer for $59,000 , financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions?

57.07months

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par?

6%

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________.

6.0%

The highest effective rate of return you could earn on any of these investments is closest to ________.

6.1610%

Abankpaysinterestsemiannually withanEARof13%.Whatistheperiodicinterestrate applicable semiannually ?

6.30%

What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face value and a price of $9400 when released?

6.383%

The lowest effective rate of return you could earn on any of these investments is closest to ________.

6.3830%

What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9207.93 ?

6.49%

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in five years. The bond certificate indicates that the stated coupon rate for this bond is 8.5% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1081.73 , then the YTM for this bond is closest to ________.

6.56%

A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000 . Which of the following is closest to the interest rate being offered by the dealer?

6.8%

What is the real interest rate given a nominal rate of 8.9% and an inflation rate of 1.9%?

6.9%

If the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9%, then the real rate of interest on your investment is closest to ________.

7.0%

A bank offers a loan that will requires you to pay 7% interest compounded monthly . Which of the following is closest to the EAR charged by the bank?

7.23%

A house costs $148,000 . It is to be paid off in exactly ten years, with monthly payments of $1737.54 . What is the APR of this loan?

7.25%

Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282 . Which of the following loans offers monthly payments closest to $282 ?

7.8% APR for 72 months

Consolidated Insurance wants to raise $35 million in order to build a new headquarters. The company will fund this by issuing 10-year bonds with a face value of $1,000 and a coupon rate of 6.3%, paid semiannually. The above table shows the yield to maturity for similar 10-year corporate bonds of different ratings. Which of the following is closest to how many more bonds Consolidated Insurance would have to sell to raise this money if their bonds received an A rating rather than an AA rating?

781 bonds

Elinore is asked to invest $5100 in a friendʹs business with the promise that the friend will repay $5610 in one year. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case?

8%

The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to ________.

8.30%

An investor purchases a 30-year, zero-coupon bond with a face value of $5000 and a yield to maturity of 8.4%. He sells this bond ten years later. What is the rate of return on his investment, assuming yield to maturity does not change?

8.40%

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firmʹs borrowings is closest to ________.

9.31%

If the current inflation rate is 2.0%, then the nominal rate necessary for you to earn a(n) 7.3% real interest rate on your investment is closest to ________.

9.4%

A bond has five years to maturity, a $1000 face value, and a 5.5% coupon rate with annual coupons. What is its yield to maturity if it is currently trading at $846.11 ?

9.51%

The Sisyphean Company has a bond outstanding with a face value of $5000 that reaches maturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $4541.53 , then the YTM for this bond is closest to ________.

9.9%

The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a BBB rating is closest to ________.

93.90

The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating is closest to ________.

94.61

What rating must Luther receive on these bonds if they want the bonds to be issued at par?

A

Which of the following statements is true of bond prices?

A rise in interest rates causes bond prices to fall.

Which of the following is true about perpetuities?

All of the above are true statements.

A bond is currently trading below par. Which of the following must be true about that bond?

B or C above

Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds?

U.S. Treasury securities are widely regarded to be risk-free.

Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments?

B) Investment Y has a higher present value.

Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the production of ceramic tiles. The company funded this by issuing 15-year bonds with a face value of $1,000 and a coupon rate of 6.2%, paid annually. The above table shows the yield to maturity for similar 15-year corporate bonds of different ratings issued at the same time. When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the following is most likely to be the rating these bonds received?

BBB

Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Lutherʹs bonds received?

BBB

Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it?

Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.

Which of the following statements regarding bonds and their terms is FALSE?

By convention, the coupon rate is expressed as an effective annual rate.

Inflation is calculated as the rate of change in the _______.

Consumer Price Index

Before it matures, the price of any bond is always less than its face value.

False

Bond traders generally quote bond yields rather than bond prices, since yield to maturity depends on the face value of the bond.

False

Cash flows from an annuity occur every year in the future.

False

For a free-risk investment, the opportunity cost of capital will generally be more than the interest rate offered by U.S. Treasury securities with a similar term.

False

Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. Joe has taken out an amortizing loan.

False

Prior to its maturity date, the price of a zero-coupon bond is its face value.

False

The annual percentage rate indicates the amount of interest, including the effect of any compounding.

False

The coupon value of a bond is the face value of the bond.

False

The credit spread of a bond shrinks if it is perceived that the probability of the issuer defaulting increases.

False

The real interest rate is the rate of growth of oneʹs purchasing power due to money invested.

False

The term opportunity in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested.

False

Treasury bonds have original maturities from one to ten years, while Treasury notes have original maturities of more than ten years.

False

Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.

False

When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high.

False

Which of the following statements is FALSE?

For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

Which of the following statements is FALSE?

Fundamentally, interest rates are determined by the Federal Reserve.

Which alternative offers you the lowest effective rate of return?

Investment A

Which alternative offers you the highest effective rate of return?

Investment D

Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true?

Investment X has a higher growth rate than Investment Y.

Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct?

Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.

What is the effective annual rate (EAR)?

It is the interest rate that would earn the same interest with annual compounding.

When the costs of an investment come before that investmentʹs benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors?

It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).

An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright?

Leasing costs $145 more than buying.

In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe?

Long-term interest rates will tend to be higher than short-term interest rates.

Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon?

Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities.

A university issues a bond with a face value of $5000 and a coupon rate of 4.41% that matures on July 15, 2018. The holder of such a bond receives coupon payments of $110.25 . How frequently are coupon payments made in this case?

Semiannually

Which of the following is/are TRUE? The EAR can never exceed the APR. The APR can never exceed the EAR. The APR and EAR can never be equal.

Only II is true.

Given the above term structure of interest rates, which of the following is most likely in the future? Option I. Option II. Option III. Interest rates will fall.Economic growth will slow.Long-term rates will rise relative to short term rates.

Option I only

Which of the following formulas is INCORRECT?

PV of a growing annuity

Which of the following statements regarding perpetuities is FALSE?

PV of a perpetuity = r/C

Which of the following statements regarding bonds and their terms is FALSE?

Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.

Which of the following is true about perpetuities?

Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate.

Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period?

Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity.

How are investors in zero-coupon bonds compensated for making such an investment?

Such bonds are purchased at a discount, below their face value.

A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).

TRUE

Which of the following statements is FALSE about interest rates?

The annual percentage rate indicates the amount of interest including the effect of compounding.

Which of the following statements regarding annuities is FALSE?

The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.

Which of the following situations would result in lowering of interest rates by the banking authority of a country?

The economy is slowing down.

Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?

The loan values are very sensitive to changes in market interest rates.

Which of the following statements is FALSE?

The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities.

Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?

The loan will be for a long period of time.

Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by?

The monthly payment will decrease by $104.79

Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE?

The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments.

Which of the following statements regarding bonds and their terms is FALSE?

The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date.

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?

The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.

A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, what will happen to the price of the bond?

The price of the bond will fall by $15.78 .

A $5000 bond with a coupon rate of 5.7% paid semiannually has ten years to maturity and a yield to maturity of 6.4%. If interest rates fall and the yield to maturity decreases by 0.8%, what will happen to the price of the bond?

The price of the bond will rise by $293.50 .

Historically, why were high inflation rates associated with high nominal interest rates?

The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.

Which of the following statements regarding bonds and their terms is FALSE?

The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond.

A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%?

There is no solution to this problem

A bond is said to mature on the date when the issuer repays its notional value.

True

A bond will trade at a discount if its coupon rate is less than its yield to maturity.

True

Bonds with a high risk of default generally offer high yields.

True

Market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend.

True

Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it.

True

The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero.

True

The only cash payment an investor in a zero-coupon bond receives is the face value of the bond on its maturity date.

True

The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.

True

The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.

True

When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today.

True

Which of the following statements regarding bonds and their terms is FALSE?

Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity.

The yield curve is typically ________.

Upward sloping

Which of the following statements regarding growing perpetuities is FALSE?

We assume that r < g for a growing perpetuity.

Which of the following best illustrates why a bond is a type of loan?

When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future.

Which of the following statements regarding bonds and their terms is FALSE?

When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.

When computing a present value, which of the following is TRUE?

You should adjust the discount rate to match the interval between cash flows.

A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond?

a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments

A corporation issues a bond that generates the above cash flows. If the periods are of 3 -month intervals, which of the following best describes that bond?

a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?

a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually

Which of the following bonds will be most sensitive to a change in interest rates?

a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

Which of the following bonds is trading at par?

a bond with a $1,000 face value trading at $1,000

If the yield to maturity of all of the following bonds is 6%, which will trade at the greatest premium per $100 face value?

a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments

What is the dirty price of a bond?

a bond's actual cash price

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 8.1% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 10.6%, then this bond will trade at ________.

a discount

Which of the following bonds is trading at a premium?

a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at ________.

a premium

Which of the following bonds will be least sensitive to a change in interest rates?

a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually

Which of the following is true about the face value of a bond?

all the above

A(n) 12% APR with monthly compounding is closest to ________.

an EAR of 12.68 %

A corporate bond which receives a BBB rating from Standard & Poorʹs is considered ________.

an investment grade bond

The above information is for a corporate bond issued by the Markel Corporation. What sort of bond is this?

an investment grade bond

define perpetuity

is a stream of equal cashflows that occur at regular intervals and lasts forever.

Which of the following best describes a bond rated by Standard & Poorʹs and Moody as B?

generally lacks the characteristics of a desirable investment

Which of the following computes the growth in purchasing power?

growth of money / growth of prices

What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?

inverted; lower

The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR?

investment A

define growing perpetuity

is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.

define annuity

is a stream of N equal cashflows paid at regular intervals.

define growing annuity

is a stream of N growing cash flows, paid at regular intervals.

Which of the following accounts has the highest EAR?

one that pays 1.0% per month

Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?

one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity

A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?

semiannual compounding

Based upon the information provided in the table above, you can conclude ________.

that the yield curve is downward sloping

What, typically, is used to calculate the opportunity cost of capital on a risk-free investment?

the interest rate on U.S. Treasury securities with the same term

Which of the following best describes the annual percentage rate?

the quoted interest rate which, considered with the compounding period, gives the effective interest rate

A bond certificate includes ________.

the terms of the bond

In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r) + C2/(1 + r)2 + . . . . + Cn/(1 + r)n when determining the present value (PV) of a cash flow stream?

when short-term and long-term interest rates vary widely.