fin exam 2-hw and practice exams

Suppose that General Motors Acceptance Corporation issued a bond with 10 years until​ maturity, a face value of $1,000 and a coupon rate of ​(annual payments). The yield to maturity on this bond when it was issued was 6.4%. What was the price of this bond when it was​ issued?

$1,108.34 (price of bond formula)

Consider the following timeline: 0:$500 1:? 2:-$500 If the current market rate of interest is 7%, then the value as of year 1 is closest to ________. The question can be rephrased as follows: What should the value in Year 1 be so that PV equals to 500?

$1002.29 Let's call the value in Year 1 "A" then 500 = A / 1.07 + (-500)/ (1.07)2 500 = A / 1.07 - 436.72 936.72 = A / 1.07 Then, A = 936.72 x 1.07 = 1002.29

Security: AAA Corporate AA Corporate A Corporate BBB Corporate BB Corporate Yield (%): 5.6 5.7 6.1 6.4 7.0 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 company's bonds are rated A, what will be their selling price?

$1058.48 same as above formula wise

What is the present value of $8,000 paid at the end of each of the next 95 years if the interest rate is 7% per​ year?

$114,100.99 (fv=0,pmt=8000,n=95,IY=7,pv=?)

You want to endow a scholarship that will pay $10,000 per year​ forever, starting one year from now. If the​ school's endowment discount rate is ​5% what amount must you donate to endow the​ scholarship?How would your answer change if you endow it​ now, but it makes the first award to a student 10 years from​ today?

$128921.78 (formula in notes)

A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the 18) monthly payments on this loan?

$1512.22 N=36I = 3/12 PV = 52,000Compute PMT = 1,512.22

You want to endow a scholarship that will pay $8,000 per year​ forever, starting one year from now. If the​ school's endowment discount rate is ​5% what amount must you donate to endow the​ scholarship?

$160,000 (annual cash flow/discount rate)

Suppose Capital One is advertising a 60​-month, 5.52% APR motorcycle loan. If you need to borrow $8,800 to purchase your dream​ Harley-Davidson, what will be your monthly​ payment?​

$168.17 (formula in notes)

You are saving for retirement. To live​ comfortably, you decide you will need to save $2 million by the time you are 65. Today is your 35th ​birthday, and you​ decide, starting today and continuing on every birthday up to and including your 65th ​birthday, that you will put the same amount into a savings account. If the interest rate is 7% how much must you set aside each year to make sure that you will have $2 million in the account on your ​65th birthday?

$19,594 (idk)

You are thinking of purchasing a house. The house costs $250,000. You have $36,000 in cash that you can use as a down payment on the​ house, but you need to borrow the rest of the purchase price. The bank is offering a ​30-year mortgage that requires annual payments and has an interest rate of 9% per year. What will be your annual payment if you sign this​ mortgage?

$20,830 (formula in notes)

25) 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 fromeach monthly paycheck in order to have $14,000 in the account in four years' time?

$220 We have to compute APR/m first (formula sheet!) Then N = 48FV = 14,000 I = 1.1495 Compute PMT 220

Your company wants to raise ​$10 million by issuing ​25-year zero-coupon bonds. If the yield to maturity on the bonds will be ​6% (annual compounded APR​), $what total face value amount of bonds must you​ issue?

$42918707.20 (formula in notes)

You have just sold your house for $900,000 in cash. Your mortgage was originally a​ 30-year mortgage with monthly payments and an initial balance of $750,000. The mortgage is currently exactly​ 18½ years​ old, and you have just made a payment. If the interest rate on the mortgage is 6.25% (APR), how much cash will you have from the sale once you pay off the​ mortgage? ​

$446,284 (formula in notes) but idk

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 15 years. You expect that the​ drug's profits will be ​$5 million in its first year and that this amount will grow at a rate of 5% per year for the next 15 years. Once the patent​ expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is 11% per​ year?

$47.125 million (formula in notes)

Consider the following timeline: 0:? 1:$100 2:$200 3:$300 If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________.

$502.21 100 / (1.08)^1= 92.59 200 / (1.08)^2 = 171.47 300 / (1.08)^3 = 238.15 Sum = $502.21, which is approximately $502.

You plan to deposit $500 in a bank account now and $200 at the end of the year. If the account earns 5% interest per​ year, what will be the balance in the account right after you make the second​ deposit?

$725 (pv=500,pmt=0,n=1,IY=5,fv=? then fv + 200) NOT BEG

A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit spread for this firm's 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 firm's outstanding 5-year bonds be if their face value is $1,000?

$932.28 FV = 1000 PMT = 23.5 (47/2) N = 10I = 3.15 [(5.1 + 1.2) ÷ 2] PV =? 932.28

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% Compute the price at the beginning of the third year as follows: FV = 1000 N = 16 [8 × 2] PMT=33.5 [6.7÷2] I = 4.05 [8.1 ÷ 2] PV =? % change in price =(918.73-1000)/1000=-8.13%

Consider the following timeline: 0:-150 1:40 2:80 3:100 If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________.

-98.7

If $440 invested today yields $470 in a year's time, what is the discount factor?

.936 (Discount factor = PV/FV = 440/470 = 0.936)

Consider the following yields to maturity on various one-year, zero-coupon securities: Security Yield (%) Treasury 4.7 AAA Corporate 4.9 BBB Corporate 5.7 B Corporate 6.1 The credit spread of the B corporate bond is closest to ________.

1.4% spread formula 6.1-4.7=1.4

A local bank is running the following advertisement in the​ newspaper: "For just $4,000 we will pay you ​$360 forever!" The fine print in the ad says that for a ​$4,000 deposit, the bank will pay $360 every year in​ perpetuity, starting one year after the deposit is made. What interest rate is the bank advertising​ (what is the rate of return of this​ investment)?

10% (formula in notes) (annual cash flow amount/PV of perpetuity) (small/big)

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

11.46% EAR FORMULA

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

12.62% normal EAR

You are borrowing money to buy a car. If you can make payments of $420 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 5 years?

18,881.12 N = 60 I=1 PMT = 420 FV = 0 Compute PV 18,881.12

Consider the following timeline detailing a stream of cash flows: 0: ? 1: 5,000 2: 6,000 3: 7,000 4: $8,000 If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________.

20,227.44 by computing NPV

Dan buys a property for $300,000. He is offered a 20-year loan by the bank, at an interest rate of 8% per year. The bank requires him to make a down payment of 10%. What is the annual loan payment he must make?

27,500.096 The loan amount = 300,000 - 30,000 = 270,000 Then,PV = -270,000N = 20I=8Compute PMT, you will get 27,500.096

What is the future value (FV) of $60,000 in twenty years, assuming the interest rate is 8% per year?

279,657.43 PV = -60,000 I=8 N = 20 FV=?

Suppose a​ five-year, $1,000 bond with annual coupons has a price of $898.04 and a yield to maturity of 6.1%. What is the​ bond's coupon​ rate?

3.673 (idk)

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 PMT=2400 I=6 N=4 FV=0 PV=?You will get - 8,316.25 for PV, which means the PV of those four payments of 2400 equals to 8,316.25Then you subtract the initial investment of 8000, and you get 316.25.

Adam 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, Adam has been offered an immediate payment of $200,000. He will also receive payments of $50,000 in one year, $70,000 in two years, and $75,000 in three years. The current market rate of interest for Adam is 6%. In terms of present value (PV), how much will Adam receive for selling the family business?

372,441.01 Immediate payment of 200,000 means he will get the first payment NOW! 200000 CF50000 CF70000 CF75000 CF6ICompute NPV, you will get 372,441.01

Since your first birthday, your grandparents have been depositing $1400 into a savings account on every one of your birthdays. The account pays 5% 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 ________.

39,385.34 N=18 I=5 PMT=1400 FV= 39,385.34

How long will it take $70,000 placed in a savings account at 8% interest to grow into $100,000?

4.63 years PV = -70000 FV = 100000 I=8 Compute N, you will get 4.63This means it will take 4.63 years for 70,000 to grow into 100,000 at 8% interest.

If the one-year discount factor is equal to 0.95, the interest must be equal to ________,

5.26% (By definition, Discount factor = 1 / (1+r)Then, r = (1 / Discount factor) - 1 = (1/0.95) - 1 = 5.26%)

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in ten years. If the bond is currently selling for $596.45, then the internal rate of return (IRR) for investing in this bond is closest to ________.

5.3% RATE OF RETURN IN INVESTMENT ACCOUNT

Your company currently has $1,000 ​par, 7% coupon bonds with 10 years to maturity and a price of $1,081. If you want to issue new​ 10-year coupon bonds at​ par, what coupon rate do you need to​ set? Assume that for both​ bonds, the next coupon payment is due in exactly six months.

5.92% (price of bond formula)

The current​ zero-coupon yield curve for​ risk-free bonds is as​ follows: 5 yrs: 6.06% What is the​ risk-free interest rate for a​ five-year maturity?

6.06% (from chart)

Consider the following investment alternatives: 8) Investment APR compounding A 6.0860 %: annual B 5.9320 %: daily C 5.9997%: quarterly D 5.9936 %: monthly The highest effective rate of return you could earn on any of these investments is closest to ________.

6.1610% formula sheet, EAR A 6.086% B ^365 C ^4 D ^12

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

6.9% real interest rate

17) 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% real rate

A bank offers a loan that will requires you to pay 7% interest compounded monthly . Which of 10) the following is closest to the EAR charged by the bank?

7.23% EAR

If the rate of inflation is 4.7%​, what nominal interest rate is necessary for you to earn a 2.7% real interest rate on your​ investment?

7.52% (formula in notes) (percents as decimal)

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 monthlypayments closest to $282?

7.8% for 72 months She will borrow 19,000 - 2,800 = 16,200 We need to solve for N APR = 7.8% Then PV = 16,200 PMT = -282 I = 7.8/12Computer N = 72.15 72 months

Adam has the opportunity to invest in a scheme which will pay $7000 at the end of each of the next 5 years. He must invest $15,000 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%?

7349.21 So using CF key-15,000 CF-3000 CF (-10000+7000) 7000 CF7000 CF7000 CF7000 CF3ICompute NPV, you will get 7349.21

What is the present value (PV) of $100,000 received five years from now, assuming the interest rate is 6% per year?

74,725.82 FV = 100,000I=6 N=5PV=?You will get -74,725.82So, the answer is 74,725.82

Which of the following statements is FALSE?

Fundamentally, interest rates are determined by the Federal Reserve. true: The interest rates that are quoted by banks and other financial institutions are nominal interest rates. The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan.

What is the present value (PV) of an investment that will pay $600 in one year's time, and $600 every year after that, when the interest rate is 10%?

Since the question does not specify for how long, we understand this is perpetuity as well. PV=600/0.1=6000

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 The higher the time to maturity and the lower the coupon rate, the more sensitive bond prices.

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 When YTM > coupon rate → discountYTM < coupon rate → premiumSo we're looking for the one where YTM < coupon rate so the answer is D

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

You are trying to decide how much to save for retirement. Assume you plan to save $4,000 per year with the first investment made one year from now. You think you can earn ​9.5% per year on your investments and you plan to retire in ​40 years, immediately after making your last $4,000 investment. a. How much will you have in your retirement account on the day you​ retire? b.​ If, instead of investing $4,000 per​ year, you wanted to make one​ lump-sum investment today for your retirement that will result in the same retirement​ saving, how much would that lump sum need to​ be? c. If you hope to live for 25 years in​ retirement, how much can you withdraw every year in retirement​ (starting one year after​ retirement) so that you will just exhaust your savings with the 25th withdrawal​ (assume your savings will continue to earn ​9.5% in​ retirement)?

a. $1,546,079.97 (normal calculator) b. $40,,988.99 (normal calculator) c. $163,821.69 (formula in notes)

Assume that your parents wanted to have $110,000 saved for college by your 18th birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and earned 12.5% per year on their investments. a. How much would they have to save each year to reach their​ goal? b. If they think you will take five years instead of four to graduate and decide to have $150,000 saved just in​ case, how much would they have to save each year to reach their new​ goal?

a. $1,875.36 (fv=110,000,n=18,IY=12.5,pv=0,pmt=?) b. $2,557.31 (same as above just fv=150,000)

You have just taken out a $24,000 car loan with a 5% APR, compounded monthly. The loan is for five years. When you make your first payment in one​ month, how much of the payment will go toward the principal of the loan and how much will go toward​ interest?

a. $352.91 (idk) b. $100 (Pxr) but idk

A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $5,000. Each year after​ that, you will receive a payment on the anniversary of the last payment that is 2% larger than the last payment. This pattern of payments will go on forever. Assume that the interest rate is 15% per year. a. What is​ today's value of the​ bequest? b. What is the value of the bequest immediately after the first payment is​ made?

a. $38,461.54 (formula in notes) b. $39,231 (formula in notes)

You are thinking about investing $4,546 in your​ friend's landscaping business. Even though you know the investment is risky and you​ can't be​ sure, you expect your investment to be worth $5,612 next year. You notice that the rate for​ one-year Treasury bills is 1%. However, you feel that other investments of equal risk to your​ friend's landscape business offer an expected return of 11% for the year. What should you​ do?

a. $5055.86 (formula in notes) b. invest in the business (you should invest in the business if the present value of the benefit (of the return) is greater than the amount you originally invested.)

Assume that a bond will make payments every six months as shown on the following timeline​ (using six-month​ periods): The timeline starts at Period 0 and ends at Period 20. The timeline shows a cash flow of $ 20.54 each from Period 1 to Period 19. In Period 20, the cash flow is $ 20.54 plus $ 1,000. a. What is the maturity of the bond​ (in years)? b. What is the coupon rate​ (as a​ percentage)? c. What is the face​ value?

a. 10 years (number of periods/frequency of periods) b. 4.12% (formula in notes) c. $1,000

A​ BBB-rated corporate bond has a yield to maturity of 6.7%. A U.S. Treasury security has a yield to maturity of 4.7%. These yields are quoted as APRs with semiannual compounding. Both bonds pay​ semi-annual coupons at a rate of 5.6% and have five years to maturity. a. What is the price​ (expressed as a percentage of the face​ value) of the Treasury​ bond? b. What is the price​ (expressed as a percentage of the face​ value) of the​ BBB-rated corporate​ bond? c. What is the credit spread on the BBB​ bonds?

a. 103.969 b. 95.391 c. 2.00

You have found three investment choices for a​ one-year deposit: 10.8% APR compounded​ monthly, 10.8% APR compounded​ annually, and 10.1% APR compounded daily. Compute the EAR for each investment choice.​ (Assume that there are 365 days in the​ year.)

a. 11.351% (formula in notes) b. 10.8% (formula in notes) c. 10.626% (formula in notes)

You have an investment account that started with ​$3,000, 10 years ago and which now has grown to ​$12,000 a. What annual rate of return have you earned​ (you have made no additional contributions to the​ account)? b. If the savings bond earns 16% per year from now​ on, what will the​ account's value be 10 years from​ now?

a. 14.87% (formula in notes) b. $52,937.22 calculator: (pv=fv number (higher number given),IY=16,n=10,fv=?)

You are considering two ways of financing a spring break vacation. You could put it on your credit​ card, at 18% APR, compounded​ monthly, or borrow the money from your​ parents, who want an interest payment of 10% every six months. Which is the lower​ rate? ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

a. 19.56% (formula in notes) b. 21% (APR = x2) c. Credit card, cause its lower

Your bank is offering you an account that will pay 24% interest​ (an effective​ two-year rate) in total for a​ two-year deposit. Determine the equivalent discount rate for the following​ periods: a. Six months b. One year c. One month ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

a. 5.53% (formula in notes) b. 11.36% c. .90%

For each of the following pairs of Treasury securities​ (each with $1,000 par​ value), identify which will have the higher​ price: a. A​ three-year zero-coupon bond or a​ five-year zero-coupon​ bond? b. A​ three-year zero-coupon bond or a​ three-year 4% coupon​ bond? c. A​ two-year 5% coupon bond or a​ two-year coupon​ bond?

a. A​ three-year zero-coupon​ bond, because the future value is received sooner and the present value is higher. b. The​ three-year 4% coupon​ bond, because the 4% coupon bond pays interest​ payments; whereas the​ zero-coupon bond is a pure discount bond. c. The​ two-year 6% coupon​ bond, because the coupon​ (interest) payments are​ higher, even though the timing is the same.

What is the shape of the yield curve given in the following term​ structure? What expectations are investors likely to have about future interest​ rates? ​(Click on the following icon in order to copy its contents into a​ spreadsheet.) 1 year: 2.01 2 years: 2.43 3 years: 2.76 5 years: 3.33

a. The yield curve is a normal yield curve​ (increasing). b. Interest rates might rise in the future.

The prices of several bonds with face values of $1,000 are summarized in the following​ table: Bond A: $973.45 B: $1040.09 C: $1151.76 D: $1000 For each​ bond, state whether it trades at a​ discount, at​ par, or at a premium.

a. discount b. premium c. premium d. par

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

false

In which of the following situations would it not be appropriate to use the following formula: 3) PV=C0 +C1/(1+r)+C2/(1+r)2+. . . .+Cn/(1+r)n

when short-term and long-term interest rates vary widely YES: when the discount rate is high when yield curves are flat when the inflation rate is high

$6200You have just taken out a​ five-year loan from a bank to buy an engagement ring. The ring costs . You plan to put down $1600 and borrow $4600. You will need to make annual payments of $1200 at the end of each year. Show the timeline of the loan from your perspective. How would the timeline differ if you created it from the​ bank's perspective?

your perspective: The timeline starts at Year 0 and ends at Year 5. The timeline shows a cash flow of $ 4,600 in Year 0 and a cash flow of -$ 1,200 each year from Year 1 to Year 5. bank perspective: The timeline starts at Year 0 and ends at Year 5. The timeline shows a cash flow of -$ 4,600 in Year 0 and a cash flow of $ 1,200 each year from Year 1 to Year 5.

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

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

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

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

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

The real interest rate is the rate of growth of one's purchasing power due to money invested

false

When there are large numbers of people looking to save their money and there is little demand 2) for loans, one would expect interest rates to be high.

false

Which of the following best describes the annual percentage rate?

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

A homeowner has five years of monthly payments of $1400 before she has paid off her house. If 19) the interest rate is 6 % APR, what is the remaining balance on her loan?

$72,416 N=60 I = 6/12 PMT = -1,400 so PV = 72,416

The current​ zero-coupon yield curve for​ risk-free bonds is as​ follows: YTM=5.52% What is the price per $100 face value of a​ two-year, zero-coupon,​ risk-free bond?

$89.81 (formula in notes)

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 FV=100 N = 15 I = 7.4 PMT = 0 PV =? PV = 34.27

Security: AAA Corporate AA Corporate A Corporate BBB Corporate BB Corporate Yield (%): 6.2 6.4 6.7 7.0 7.5 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 Calculate the PV of the bond under each rating and compute the # of bonds and then take the difference. A rating: FV = 1000 I = 3.35 [6.7 ÷ 2] PMT = 31.5 N = 20 PV = ? PV = 971.19 # of bonds = $35 million ÷ 971.19 = 36,038.43AArating:FV=1000 I=3.2 [6.4÷2] PMT=31.5 N=20 PV=? PV=992.7 # of bonds = $35 million ÷ 992.7 = 35,257.49 Difference = 36,038.43 - 35,257.49 = 781

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% FV = 1000 N=5 PMT = 55 PV = -846.11 I =? I = 9.51

Consider the following yields to maturity on various one-year, zero-coupon securities: Security Yield (%) Treasury 5.5 AAA Corporate 5.7 BBB Corporate 6.5 B Corporate 7.1 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 ________.

93.90 100 ÷ 1.065 = 93.9

You have a loan outstanding. It requires making 3 annual payments of $3,000 each at the end of the next 3 years. Your bank has offered to allow you to skip making the next 2 payments in lieu of making one large payment at the end of the​ loan's term in 3 years. If the interest rate on the loan is 4% what final payment will the bank require you to make so that it is indifferent to the two forms of​ payment?

9365 (normal financial calculator, looking for FV as answer)

Which of the following accounts has the highest EAR?

A EAR=9.6% B EAR = (1 + 0.054)2 - 1 =11.09% C EAR = (1 + 0.024)2 - 1 =9.95% -D EAR = (1 + 0.01)2 - 1 =12.68%

Which of the following statements is TRUE of bond prices?

A rise in interest rates causes bond prices to fall FALSE: A fall in interest rates causes a fall in bond prices. Bond prices and interest rates are not connected. A fall in bond prices causes interest rates to fall.

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 7.0% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: 3) Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Luther's bonds received?

BBB FV=1000 PMT=70 (coupon rate of 7%) N=10 PV=-972.42 I=? I=7.4 = BBB

Terminyears: 2 5 10 30 1) Rate: 2.25% 3.125% 3.5% 4.375% 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 years' time, what is the present value (PV) of that cash flow?

FV = 100,000 N=2 I = 2.25 Compute PV If the question were to say $100,000 in 10 years' time then we would do: FV = 100,000 N = 10I = 3.5 Compute PV

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

False

Michelle has $22,000 in her savings account and can save an additional $5000 per year. If interest rates are 10%, how long will it take her savings to grow to $75,000?

PV = -22000 FV = 75000PMT = -5000I = 10Compute N, you will get 5.79

A firm issues two-year bonds with a coupon rate of 6.7%, paid semiannually. The credit spread for this firm's 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 firm's outstanding two-year bonds be per $100 of face value?

PV=$105.34 FV=100 PMT = 3.35 [6.7 ÷ 2] I = 1.95 [(3.1 + 0.8) ÷ 2] N=4

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 years' time. What is the present value (PV) of this donation, given that the interest rate is 11%?

Plug in 1,040,000 for C, 11% for r, 6% for g and 10 for N PV = 20,800,000 x 0.3693 = 7,681,257.74Where 20,800,000 = 1,040,000 / (0.11 - 0.06)0.3693 = 1 - (1.06/1.11)10 PV OF GROWING ANNUITY

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 most likely: The borrower is judged to have a low degree of risk. The number of borrowers seeking funds is low. The expected inflation rate is expected to be low.

Five years ago you took out a 30 -year mortgage with an APR of 6.5% for $200,000. If you were 13) to refinance the mortgage today for 20 years at an APR of 4.25%, how much would yourmonthly payment change by?

The monthly payment will decrease by $104.79 N = 360 I = 6.5/12PV = 200,000Compute PMT = 1264.14 Then after refinancingN = 240I = 4.25/12PV = 187,221.96 Compute PMT = 1,159.35 Will decrease by $1,264.14 - $1,159.35 = $104.79

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.

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.)

This is a perpetuity ("forever"), on the exam forever will not be in bold! 2900 = C / 0.05So C = 2900 x 0.05 = 145

Suppose a​ ten-year, $1,000 bond with an 8.9% coupon rate and semiannual coupons is trading for $1,035.78. a. What is the​ bond's yield to maturity​ (expressed as an APR with semiannual​ compounding)? b. If the​ bond's yield to maturity changes to ​9.3% APR, what will be the​ bond's price?

a. 8.36% (see formula and notes to use formula) b. $974.32 (APR/2 as IY) (looking for PV)

The following table summarizes the yields to maturity on several​ one-year, zero-coupon​ securities: a. What is the price​ (expressed as a percentage of the face​ value) of a​ one-year, zero-coupon corporate bond with a AAA​ rating? b. What is the credit spread on​ AAA-rated corporate​ bonds? c. What is the credit spread on​ B-rated corporate​ bonds? d. How does the credit spread change with the bond​ rating? Why?

a. 96.824 b. .13 c. 1.85 d. The credit spread increases as the bond rating falls because​ lower-rated bonds are riskier.

A bond certificate includes ________.

the terms of the bond NOT: the yield to maturity of the bond the price of the bond the individual to whom payments will be made