FINC 3610 Exam 2 - Ch. 5-7

7.34 percent

A Treasury bond is quoted at a price of 101:14 with a current yield of 7.236 percent. What is the coupon rate?

$5,273.44

A Treasury bond is quoted at a price of 105:15. What is the market price of this bond if the face value is $5,000?

3.28 percent

A Treasury bond is quoted at a price of 106:23 with a 3.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

protective covenants

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:

$2,500

The present value of the following cash flow stream is $5,933.86 when discounted at 11 percent annually. What is the value of the missing cash flow?

$101.02

You are buying a previously owned car today at a price of $3,500. You are paying $300 down in cash and financing the balance for 36 months at 8.5 percent. What is the amount of each loan payment?

19.44 percent

Your credit card company quotes you a rate of 17.9 percent. Interest is billed monthly. What is the actual rate of interest you are paying?

6.30 percent

A corporate bond is quoted at a price of 103.16 and carries a 6.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

$1.80

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $6,000?

pure discount

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

effective annual rate

A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?

greater than 7 percent.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

$22.13

A preferred stock pays an annual dividend of $2.60. What is one share of this stock worth today if the rate of return is 11.75 percent?

early bond redemption

A sinking fund is managed by a trustee for which one of the following purposes?

$1,400,000

A wealthy benefactor just donated some money to the local college. This gift was established to provide scholarships for worthy students. The first scholarships will be granted one year from now for a total of $35,000. Annually thereafter, the scholarship amount will be increased by 5.5 percent to help offset the effects of inflation. The scholarship fund will last indefinitely. What is the value of this gift today at a discount rate of 8 percent?

$9,234.97 less

A year ago, you deposited $30,000 into a retirement savings account at a fixed rate of 5.5 percent. Today, you could earn a fixed rate of 6.5 percent on a similar type account. However, your rate is fixed and cannot be adjusted. How much less could you have deposited last year if you could have earned a fixed rate of 6.5 percent and still have the same amount as you currently will when you retire 38 years from today?

$13.58

A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56. The bond matures in 25 years. What is the implicit interest, in dollars, for the first year of the bond's life?

$1,195.84

Dexter Mills issued 20-year bonds a year ago at a coupon rate of 11.4 percent. The bonds make semiannual payments. The yield-to-maturity on these bonds is 9.2 percent. What is the current bond price?

$11,628.09

Downtown Bank is offering 3.4 percent compounded daily on its savings accounts. You deposit $8,000 today. How much will you have in your account 11 years from now?

annual percentage rate

What is the interest rate charged per period multiplied by the number of periods per year called?

$6,067.36

What is the present value of $1,100 per year, at a discount rate of 10 percent if the first payment is received 6 years from now and the last payment is received 28 years from now?

$65,088.97

What is the present value of $150,000 to be received 8 years from today if the discount rate is 11 percent?

The factors are reciprocals of each other.

What is the relationship between present value and future value interest factors?

$3,280.78

When you retire 40 years from now, you want to have $1.2 million. You think you can earn an average of 12 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 2 years from today. How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit?

may have equal or increasing amounts applied to the principal from each loan payment.

An amortized loan:

5.74 percent

An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 4.5 percent. What does Sam believe the inflation rate will be for the next year?

equal payments paid at regular intervals over a stated time period

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

Barb will earn interest on interest

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

increases at a decreasing rate.

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

4.20 percent

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

9.00 percent

Assume the total cost of a college education will be $300,000 when your child enters college in 16 years. You presently have $75,561 to invest. What rate of interest must you earn on your investment to cover the cost of your child's college education?

13.28 years

At 11 percent interest, how long would it take to quadruple your money?

registered form

Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: in ______ ____

$167,489.11

Atlas Insurance wants to sell you an annuity which will pay you $3,400 per quarter for 25 years. You want to earn a minimum rate of return of 6.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?

Cat

"_____" bonds are primarily designed to help: insurance companies fund excessive claims.

unending equal payments paid at equal time intervals

Which one of the following accurately defines a perpetuity?

yield to maturity

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

call-protected bond

A ____ ____ ____ is a bond that: cannot be called during a certain period of time.

9.00 percent

What is the annual percentage rate on a loan with a stated rate of 2.25 percent per quarter?

1.29 percent

A bond that pays interest annually yielded 7.47 percent last year. The inflation rate for the same period was 6.10 percent. What was the actual real rate of return on this bond for last year?

Face value

A bond's coupon rate is equal to the annual interest divided by which one of the following?

investment grade to speculative grade.

A "fallen angel" is a bond that has moved from:

call premium

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following?

$987.00

A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today?

2.14 percent decrease

A 16-year, 4.5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

The yield-to-maturity is less than the coupon rate.

A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years. The bond was originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today?

two month's interest

A 6-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will the difference, if any, be between this bond's clean and dirty prices today?

$3.13

A Treasury bond is quoted as 99:11 asked and 99:09 bid. What is the bid-ask spread in dollars on a $5,000 face value bond?

maturity

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

for 100 and 11/32nds percent of face value.

A U.S. Treasury bond that is quoted at 100:11 is selling:

deferred call provision

A _____ ______ _____ is which one of the following? prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

zero coupon

A ______ ______ bond: has more interest rate risk than a comparable coupon bond.

II and IV only

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

clean price

A bond is quoted at a price of $989. This price is referred to as which one of the following?

callable

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

zero coupon

A bond that has only one payment, which occurs at maturity, defines which one of the following?

bearer form

A bond that is payable to whomever has physical possession of the bond is said to be in:

double your money in 8 years at 9 percent interest

According to the Rule of 72, you can do which one of the following?

5-year TIPS

Al is retired and enjoys his daily life. His one concern is that his bonds provide a steady stream of income that will continue to allow him to have the money he desires to continue his active lifestyle without lowering his present standard of living. Although he has sufficient principal to live on, he only wants to spend the interest income provided by his holdings and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns?

$13,020 Explained: Ending value = $10,500 + ($10,500 x .06 x 4) = $13,020

Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years?

$2,333,572

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

a discount; less than

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

I and IV only

An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent? I. a structure as an interest-only loan II. a current yield that equals the coupon rate III. a yield-to-maturity equal to the coupon rate IV. a market price that differs from the face value

indenture

An ________ is: the legal agreement between the bond issuer and the bondholders.

$21,630.44

Beginning three months from now, you want to be able to withdraw $1,500 each quarter from your bank account to cover college expenses over the next 4 years. The account pays 1.25 percent interest per quarter. How much do you need to have in your account today to meet your expense needs over the next 4 years?

Face value

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

5.08 percent

Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The bonds have a 5 percent coupon rate. What is the current yield on these bonds?

$24,487.78

Blackwell, Inc. has a $75,000 liability it must pay three years from today. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. The plan is to make an initial deposit today and then deposit an additional $15,000 each year for the next three years, starting one year from today. The account pays a 4.5 percent rate of return. How much does the firm need to deposit today?

-12.92 percent

Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond. Both bonds have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7 percent. If interest rates suddenly rise by 2 percent, what will the percentage change in the price of Bond T be?

are considered to be free of default risk.

Bonds issued by the U.S. government:

6.60 percent

Bonner Metals wants to issue new 18-year bonds for some much-needed expansion projects. The company currently has 11 percent bonds on the market that sell for $1,459.51, make semiannual payments, and mature in 18 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

7.80 percent

Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, and a current price of $895.09. The bonds make semiannual payments. What is the coupon rate?

8.06 percent

City Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.75 percent annual percentage rate on its loans. What is the maximum rate the bank can actually earn based on the quoted rate?

8.90 percent

Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 18.5 years. The bonds have a par value of $1,000 and a market price of $964.20. Interest is paid semiannually. What is the yield to maturity?

8.23 percent

Consider a firm with a contract to sell an asset 3 years from now for $90,000. The asset costs $71,000 to produce today. At what rate will the firm just break even on this contract?

9.84 percent

What is the effective annual rate if a bank charges you 9.50 percent compounded quarterly?

6.42 percent

Fifteen years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today, that account has increased in value to $330,592. What rate of interest is the firm earning on this money?

9.53 percent

First Century Bank wants to earn an effective annual return on its consumer loans of 10 percent per year. The bank uses daily compounding on its loans. By law, what interest rate is the bank required to report to potential borrowers?

11.78 percent

Forty years ago, your mother invested $5,000. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment?

9.34 percent

Fourteen years ago, your parents set aside $7,500 to help fund your college education. Today, that fund is valued at $26,180. What rate of interest is being earned on this account?

300.43 days

Gene's Art Gallery is notoriously known as a slow-payer. The firm currently needs to borrow $27,500 and only one company will even deal with them. The terms of the loan call for daily payments of $100. The first payment is due today. The interest rate is 21.9 percent, compounded daily. What is the time period of this loan? Assume a 365 day year.

$9,300 Explained: Ending value = $6,200 + ($6,200 x .05 x 10) = $9,300

Gerold invested $6,200 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years?

1.13 percent

Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a 5.28 percent yield to maturity, and a face value of $1,000. The current rate of inflation is 4.1 percent. What is the real rate of return on these bonds?

$3,646.81

Given an interest rate of 8 percent per year, what is the value at date t = 9 of a perpetual stream of $500 annual payments that begins at date t = 17?

12.53 years

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

$895.43

Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?

The bonds will sell at a premium if the market rate is 5.5 percent.

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct?

6.94 percent

Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest annually. The face value is $1,000 and the current market price is $1,062.50 per bond. The bonds mature in 16 years. What is the yield to maturity?

$3,277,973

Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service. HT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.65 percent on the funds. How much must HT set aside each year for this purpose?

The principal is repaid in a lump sum at the end of the loan period.

How is the principal amount of an interest-only loan repaid?

$176,067,311

Imprudential, Inc. has an unfunded pension liability of $850 million that must be paid in 25 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. The relevant discount rate is 6.5 percent. What is the present value of this liability?

$505,697

In 1895, the winner of a competition was paid $110. In 2006, the winner's prize was $70,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate?

compound interest

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

nominal rates

Interest rates that include an inflation premium are referred to as:

16.07 percent

What is the effective annual rate of 14.9 percent compounded continuously?

$96,120

John's Auto Repair just took out an $89,000, 10-year, 8 percent, interest-only loan from the bank. Payments are made annually. What is the amount of the loan payment in year 10?

12.00 percent

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate?

$22,322.35

Kingston Development Corp. purchased a piece of property for $2.79 million. The firm paid a down payment of 15 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent, compounded monthly. What is the amount of each mortgage payment?

note

Last year, Lexington Homes issued $1 million in unsecured, non-callable debt. This debt pays an annual interest payment of $55 and matures 6 years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?

maintained a fixed real rate of return

Last year, you purchased a "TIPS" at par. Since that time, both market interest rates and the inflation rate have increased by 0.25 percent. Your bond has most likely done which one of the following since last year?

$33,883

Lucas will receive $6,800, $8,700, and $12,500 each year starting at the end of year one. What is the future value of these cash flows at the end of year five if the interest rate is 7 percent?

In today's dollars, Luis' money is worth more than Soo Lee's.

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

Martin earned a lower interest rate than he expected.

Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true?

7- year income bond

Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?

Coupon

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

10.24 percent

What is the effective annual rate of 9.75 percent compounded continuously?

4.32 years

Meadow Brook Manor would like to buy some additional land and build a new assisted living center. The anticipated total cost is $23.6 million. The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire construction project. Management has decided to save $1.2 million a quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on the funds it saves. How long does the company have to wait before expanding its operations?

$1,231,776

Miley expects to receive the following payments: Year 1 = $60,000; Year 2 = $35,000; Year 3 = $12,000. All of this money will be saved for her retirement. If she can earn an average of 10.5 percent on her investments, how much will she have in her account 25 years after making her first deposit?

$2,329.05

Nadine is retiring at age 62 and expects to live to age 85. On the day she retires, she has $348,219 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death?

350,448

Northern Warehouses wants to raise $11.4 million to expand its business. To accomplish this, it plans to sell 40-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 8.75 percent. What is the minimum number of bonds it must sell to raise the $11.4 million it needs?

$991.47

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

$603.32

On June 1, you borrowed $212,000 to buy a house. The mortgage rate is 8.25 percent. The loan is to be repaid in equal monthly payments over 15 years. The first payment is due on July 1. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.)

$5,937.50

On the day you entered college you borrowed $25,000 from your local bank. The terms of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much total interest will you pay on this loan?

$945

On the day you entered college, you borrowed $18,000 on an interest-only, four-year loan at 5.25 percent from your local bank. Payments are to be paid annually. What is the amount of your loan payment in year 2?

8.45 percent

On this date last year, you borrowed $3,400. You have to repay the loan principal plus all of the interest six years from today. The payment that is required at that time is $6,000. What is the interest rate on this loan?

age 30

On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?

$310,868

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

$56,792

One year ago, Deltona Motor Parts deposited $16,500 in an investment account for the purpose of buying new equipment three years from today. Today, it is adding another $12,000 to this account. The company plans on making a final deposit of $20,000 to the account one year from today. How much will be available when it is ready to buy the equipment, assuming the account pays 5.5 interest?

6.92 percent

One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?

$3,619,990

What is the future value of $15,000 a year for 30 years at 12 percent interest?

8.78 percent

Penn Station is saving money to build a new loading platform. Two years ago, they set aside $24,000 for this purpose. Today, that account is worth $28,399. What rate of interest is Penn Station earning on this investment?

dirty price

Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the:

$8,752.84

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

warrant

Phil has researched TLM Technologies and believes the firm is poised to vastly increase in value. He wants to invest in this company. Phil has decided to purchase TLM Technologies bonds so that he can have a steady stream of interest income. However, he still wishes that he could share in the firm's success along with TLM's shareholders. Which one of the following bond features will help Phil fulfill his wish?

inflation

Real rates are defined as nominal rates that have been adjusted for which of the following?

$5.71

Suppose that the first comic book of a classic series was sold in 1954. In 2000, the estimated price for this comic book in good condition was about $340,000. This represented a return of 27 percent per year. For this to be true, what was the original price of the comic book in 1954?

I and IV only

Recently, you discovered a putable income bond that is convertible. If you purchase this bond, you will have the right to do which of the following? I. force the issuer to repurchase the bond prior to maturity II. choose when you wish to receive interest payments III. convert the bond into a TIPS IV. convert the bond into equity shares

7.08 years

Redesigned Computers has 5.25 percent coupon bonds outstanding with a current market price of $546.19. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

$1,004.47

Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 6.69 percent?

Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest.

Samantha opened a savings account this morning. Her money will earn 5 percent interest, compounded annually. After five years, her savings account will be worth $5,600. Assume she will not make any withdrawals. Given this, which one of the following statements is true?

$26,872.94

Samuelson Engines wants to save $750,000 to buy some new equipment six years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. The firm can earn 4.75 percent on its savings. How much does the firm have to save each quarter to achieve its goal?

simple interest

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning?

present value

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

0.05/(1 - t*) = 0.07.

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

One year ago, Alicia's investment was worth less than Travis' investment.

Sixteen years ago, Alicia invested $1,000. Eight years ago, Travis invested $2,000. Today, both Alicia's and Travis' investments are each worth $2,400. Assume that both Alicia and Travis continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments?

17.64 years

Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 10.5 percent per year?

10.04 percent

Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent. The bonds make semiannual payments. These bonds currently sell for 102 percent of par value. What is the yield-to-maturity?

$503,098

Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $187,000, $220,000, and $245,000 over the next three years, respectively. After that time, they feel the business will be worthless. Southern Tours has determined that a 13.5 percent rate of return is applicable to this potential acquisition. What is Southern Tours willing to pay today to acquire Holiday Vacations?

$2,123,007

Stephanie is going to contribute $300 on the first of each month, starting today, to her retirement account. Her employer will provide a 50 percent match. In other words, her employer will contribute 50 percent of the amount Stephanie saves. If both Stephanie and her employer continue to do this and she can earn a monthly rate of 0.90 percent, how much will she have in her retirement account 35 years from now?

interest on interest

Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as:

discount rate

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

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

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

13.27 percent

Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity on this bond? Coupon: 9.595 Maturity: April 15, 2023 Last Price: 76.915 EST Spread: 431 UST: 10

11.47 percent

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

$76,584.79

Suppose you are committed to owning a $140,000 Ferrari. You believe your mutual fund can achieve an annual rate of return of 9 percent and you want to buy the car in 7 years. How much must you invest today to fund this purchase assuming the price of the car remains constant?

9.18 percent

Sylvan Trees has a 7 percent coupon bond on the market with ten years left to maturity. The bond makes annual payments and currently sells for $861.20. What is the yield-to-maturity?

8.58 percent

Technical Sales, Inc. has 6.6 percent coupon bonds on the market with 9 years left to maturity. The bonds make semiannual payments and currently sell for 88.79 percent of par. What is the effective annual yield?

discounting

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

II, III, and IV only

Texas Foods has a 6 percent bond issue outstanding that pays $30 in interest every March and September. The bonds are investment grade and sell at par. The bonds are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus 0.50 percent. Which of the following correctly describe the features of this bond? I. bond rating of B II. "make whole" call price III. $1,000 face value IV. offer price of $1,000

$54

The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054. What is the amount of the call premium on a $1,000 par value bond?

The bond price will decrease by 5.43 percent.

The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 6.5 percent?

$80,760.79

The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 4.5 percent interest compounded monthly. The first deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years?

inflation

The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return.

real rates, inflation rates, and nominal rates

The Fisher effect is defined as the relationship between which of the following variables?

debenture

The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

23.32 percent

The Pawn Shop loans money at an annual rate of 21 percent and compounds interest weekly. What is the actual rate being charged on these loans?

decrease the market price

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?

7.04 percent

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

interest rate risk premium

The _____ ____ _____ ______ is the: compensation investors demand for accepting interest rate risk.

6.14 percent

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

coupon rates

The collar of a floating-rate bond refers to the minimum and maximum:

market price

The current yield is defined as the annual interest on a bond divided by which one of the following?

spread

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

pure discount loan

The entire repayment of which one of the following loans is computed simply by computing a single future value?

$422,497.56

The government has imposed a fine on the Corner Tavern. The fine calls for annual payments of $150,000, $100,000, $75,000, and $50,000, respectively, over the next four years. The first payment is due one year from today. The government plans to invest the funds until the final payment is collected and then donate the entire amount, including the investment earnings, to help the local community shelter. The government will earn 6.25 percent on the funds held. How much will the community shelter receive four years from today?

stated interest rate

The interest rate that is quoted by a lender is referred to as which one of the following?

the lack of an active market wherein a bond can be sold for its actual value.

The liquidity premium is compensation to investors for:

6.40 percent

The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon. The bonds have a face value of $1,000 and are currently quoted at 101.6. What is the current yield on these bonds?

7.85 percent

The outstanding bonds of Winter Time Products provide a real rate of return of 3.03 percent. The current rate of inflation is 4.68 percent. What is the actual nominal rate of return on these bonds?

$3.25

The preferred stock of Casco has a 5.48 percent dividend yield. The stock is currently priced at $59.30 per share. What is the amount of the annual dividend?

discounted cash flow valuation

The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?

term structure of interest rates

The pure time value of money is known as the:

$42.25

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?

maturity

The specified date on which the principal amount of a bond is payable is referred to as which one of the following?

a bond's unfavorable tax status

The taxability risk premium compensates bond holders for which one of the following?

5.08 percent

The yield to maturity on a bond is currently 8.46 percent. The real rate of return is 3.22 percent. What is the rate of inflation?

14.89 percent

The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today, you buy a 12 percent annual coupon bond for $1,000. The bond has 13 years to maturity. Two years from now, the yield-to-maturity has declined to 11 percent and you decide to sell. What is your holding period yield?

12.73 years

The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of $1,000, and a yield to maturity of 9.17 percent. How many years is it until these bonds mature? Assume semi-annual compounding.

$1,138.90

Theo needs $40,000 as a down payment for a house 6 years from now. He earns 3.5 percent on his savings. Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum. How much additional money must he deposit if he waits for one year rather than making the deposit today?

$54,999.88 Future value = $7,189 ´ (1 + .0925)23 = $54,999.88 Enter: N 23 I/Y 9.25 PV -7,189 PMT Solve for FV = 54,999.88

What is the future value of $7,189 invested for 23 years at 9.25 percent compounded annually?

$8,062

Theresa adds $1,000 to her savings account on the first day of each year. Marcus adds $1,000 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years?

The present value of this investment is equal to $1,000.

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in forty years. Which one of the following statements is correct?

$3,651.82 Future value = $80,000 x (1 + .05)^4 = $97,240.50 Future value = $80,000 x (1 + .04)^4 = $93,588.68 Difference = $97,240.50 - $93,588.68 = $3,651.82 Enter N = 4 I/Y = 5 PV = -80,000 PMT = FV = 97,240.50 Enter N = 4 I/Y = 4 PV = -80,000 PMT = FV = 93,588.68

This morning, TL Trucking invested $80,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings?

$277.61

This morning, you borrowed $150,000 to buy a house. The mortgage rate is 7.35 percent. The loan is to be repaid in equal monthly payments over 20 years. The first payment is due one month from today. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.)

$12,757.92

This morning, you borrowed $9,500 at 7.65 percent annual interest. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today. How much will you have to repay?

dirty price

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

48.19 years

Today, you are retiring. You have a total of $411,016 in your retirement savings and have the funds invested such that you expect to earn an average of 7.10 percent, compounded monthly, on this money throughout your retirement years. You want to withdraw $2,500 at the beginning of every month, starting today. How long will it be until you run out of money?

6.93 years

Today, you borrowed $6,200 on your credit card to purchase some furniture. The interest rate is 14.9 percent, compounded monthly. How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $120?

$55,032.54 Future value = $36,000 ´ (1 + .036)12 = $55,032.54 Enter N = 12 I/Y = 3.6 PV = -36,000 PMT = FV = 55,032.54

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

11.85 percent

Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40th birthday. In an attempt to reach this goal, you decide to save $50 a day, every day until you turn 40. You open an investment account and deposit your first $50 today. What rate of return must you earn to achieve your goal?

$789.22

Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 4.5 years. How much will you receive for your bond if the market yield to maturity is currently 5.33 percent? Ignore any accrued interest.

compounding

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

$773.58 Explained: Simple interest = $9,250 + ($9,250 x .06 x 7) = $13,135 Compound interest = $9,250 x (1 + .06)^7 = $13,908.58 Difference = $13,908.58 - $13,135 = $773.58 Enter: N = 7 I/Y = 6 PV = -9,250 PMT Solve for FV= 13,908.58

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

$118.63

Trish receives $480 on the first of each month. Josh receives $480 on the last day of each month. Both Trish and Josh will receive payments for next three years. At a 9.5 percent discount rate, what is the difference in the present value of these two sets of payments?

$4,542.62

Western Bank offers you a $21,000, 6-year term loan at 8 percent annual interest. What is the amount of your annual loan payment?

II and IV only

Which of the following are characteristics of a premium bond? I. coupon rate < yield-to-maturity II. coupon rate > yield-to-maturity III. coupon rate < current yield IV. coupon rate > current yield

II and III only

Which of the following are negative covenants that might be found in a bond indenture? I. The company shall maintain a current ratio of 1.10 or better. II. No debt senior to this issue can be issued. III. The company cannot lease any major assets without approval by the lender. IV. The company must maintain the loan collateral in good working order.

I and II only

Which of the following correctly describe U.S. Treasury bonds? I. have a "tick" size of 1/32 II. highly liquid III. quoted in dollars and cents IV. quoted at the dirty price

II and III only

Which of the following defines a note?I. securedII. unsecuredIII. maturity less than 10 yearsIV. maturity in excess of 10 years

I and IV only

Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate

II and IV only

Which of the following relationships apply to a par value bond? I. coupon rate < yield-to-maturity II. current yield = yield-to-maturity III. market price = call price IV. market price = face value

I and II only

Which of the following statements concerning bonds are correct? I. Bonds provide tax benefits to issuers. II. The risk of a firm financially failing increases when the firm issues bonds. III. Most long-term bond issues are referred to as unfunded debt. IV. All bonds are treated equally in a bankruptcy proceeding.

I, II, and III only

Which of the following statements is correct concerning the term structure of interest rates? I. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. II. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. III. The real rate of return has minimal, if any, affect on the slope of the term structure of interest rates. IV. The term structure of interest rates and the time to maturity are always directly related.

II and IV only

Which of the following statements related to interest rates are correct? I. Annual interest rates consider the effect of interest earned on reinvested interest payments. II. When comparing loans, you should compare the effective annual rates. III. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. IV. Annual and effective interest rates are equal when interest is compounded annually.

3-year; 6 percent coupon

Which one of the following bonds is the least sensitive to interest rate risk?

continuous

Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate?

bid price

Which one of the following is the price a dealer will pay to purchase a bond?

inflation

Which one of the following premiums is compensation for expected future inflation?

real rate

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

Decreasing the time to maturity increases the price of a discount bond, all else constant.

Which one of the following relationships is stated correctly?

default risk

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer?

interest rate risk

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Split rated bonds are called crossover bonds.

Which one of the following statements concerning bond ratings is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of the following statements concerning interest rates is correct?

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

Which one of the following statements correctly states a relationship?

As long as the discount rate is positive, Project B will always be worth less today than will Project A.

Which one of the following statements is correct given the following two sets of project cash flows? Project A Project B year 1 $6,000 $2,000 year 2 0 3,000 year 3 2,500 3,000 year 4 2,500 3,000

The real rate must be less than the nominal rate given a positive rate of inflation.

Which one of the following statements is correct?

A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.

Which one of the following statements related to annuities and perpetuities is correct?

balloon loan

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?

interest-only loan

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?

amortized loan

Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal?

time

Which one of the following variables is the exponent in the present value formula?

6 percent interest for five years

Which one of the following will produce the highest present value interest factor?

The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of these statements related to growing annuities and perpetuities is correct?

III and IV only

Which two of the following factors cause the yields on a corporate bond to differ from those on a comparable Treasury security? I. inflation risk II. interest rate risk III. taxability IV. default risk

$1,500,000

Wicker Imports established a trust fund that provides $90,000 in scholarships each year for needy students. The trust fund earns a fixed 6 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest income is distributed?

14.68 percent

Will has been purchasing $25,000 worth of New Tek stock annually for the past 11 years. His holdings are now worth $598,100. What is his annual rate of return on this stock?

$366.05

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

$10,877.04

You are borrowing money today at 8.48 percent, compounded annually. You will repay the principal plus all the interest in one lump sum of $12,800 two years from today. How much are you borrowing?

Annuity B has a smaller present value than annuity A.

You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities?

$5,438

You are comparing two annuities with equal present values. The applicable discount rate is 8.75 percent. One annuity pays $5,000 on the first day of each year for 20 years. How much does the second annuity pay each year for 20 years if it pays at the end of each year?

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

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

$15,103

You are considering a project which will provide annual cash inflows of $4,500, $5,700, and $8,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a 9 percent discount rate?

15 years

You are considering an annuity which costs $160,000 today. The annuity pays $18,126 a year at an annual interest rate of 7.50 percent. What is the length of the annuity time period?

$117,333

You are considering changing jobs. Your goal is to work for three years and then return to school full-time in pursuit of an advanced degree. A potential employer just offered you an annual salary of $41,000, $44,000, and $46,000 a year for the next three years, respectively. All salary payments are made as lump sum payments at the end of each year. The offer also includes a starting bonus of $2,500 payable immediately. What is this offer worth to you today at a discount rate of 6.75 percent?

A; the effective annual rate is 8.06 percent.

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.75 percent, compounded daily. Loan B offers a rate of 8 percent, compounded semi-annually. Which loan should you select and why?

II and III only

You are considering two projects with the following cash flows: Project X Project Y year 1 $9,000 $7,000 year 2 8,000 7,500 year 3 7,500 8,000 year 4 7,000 9,000 Which of the following statements are true concerning these two projects? I. Both projects have the same future value at the end of year 4, given a positive rate of return. II. Both projects have the same future value given a zero rate of return. III. Project X has a higher present value than Project Y, given a positive discount rate. IV. Project Y has a higher present value than Project X, given a positive discount rate.

$5,080

You are considering two savings options. Both options offer a 7.4 percent rate of return. The first option is to save $900, $2,100, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. If you want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select, how much do you need to save today if you select the lump sum option?

$11,790.90

You are depositing $1,500 in a retirement account today and expect to earn an average return of 7.5 percent on this money. How much additional income will you earn if you leave the money invested for 45 years instead of just 40 years?

$1.14

You are going to loan a friend $900 for one year at a 5 percent rate of interest, compounded annually. How much additional interest could you have earned if you had compounded the rate continuously rather than annually?

future value

You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?

15.79 percent

You are looking at a one-year loan of $10,000. The interest rate is quoted as 10 percent plus 5 points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. The interest rate quotation in this example requires the borrower to pay 5 points to the lender up front and repay the loan later with 10 percent interest. What is the actual rate you are paying on this loan?

17.50 percent

You are paying an effective annual rate of 18.974 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

$3,113.04

You are planning to save for retirement over the next 15 years. To do this, you will invest $1,100 a month in a stock account and $500 a month in a bond account. The return on the stock account is expected to be 7 percent, and the bond account will pay 4 percent. When you retire, you will combine your money into an account with a 5 percent return. How much can you withdraw each month during retirement assuming a 20-year withdrawal period?

108

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

$119.52

You are purchasing a 25-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price?

$44,079.84

You are scheduled to receive $30,000 in two years. When you receive it, you will invest it for 5 more years, at 8 percent per year. How much money will you have 7 years from now?

$1,999

You are scheduled to receive annual payments of $4,800 for each of the next 7 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

You should accept the $200,000 because the payments are only worth $195,413 to you today.

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money. Which option should you take and why?

comparable real rate

You are trying to compare the present values of two separate streams of cash flows which have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

$250,332

You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

$266,498

You buy an annuity that will pay you $24,000 a year for 25 years. The payments are paid on the first day of each year. What is the value of this annuity today if the discount rate is 8.5 percent?

$115.32

You collect old coins. Today, you have two coins each of which is valued at $250. One coin is expected to increase in value by 6 percent annually while the other coin is expected to increase in value by 4.5 percent annually. What will be the difference in the value of the two coins 15 years from now?

$674.50

You estimate that you will owe $42,800 in student loans by the time you graduate. The interest rate is 4.25 percent. If you want to have this debt paid in full within six years, how much must you pay each month?

long-term; zero coupon

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

21.90 years

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

4.80 percent

You grandfather won a lottery years ago. The value of his winnings at the time was $50,000. He invested this money such that it will provide annual payments of $2,400 a year to his heirs forever. What is the rate of return?

3.25 percent, compounded semi-annually

You have $5,600 that you want to use to open a savings account. There are five banks located in your area. The rates paid by banks A through E, respectively, are given below. Which bank should you select if your goal is to maximize your interest income?

8.94 percent

You have been investing $250 a month for the last 13 years. Today, your investment account is worth $73,262. What is your average rate of return on your investments?

$17,289.75

You have just made a $1,500 contribution to your individual retirement account. Assume you earn a 12 percent rate of return and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would be if you waited another 10 years before making this contribution?

4.98 percent

You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price. The monthly payment on this loan will be $11,000. What is the effective annual rate on this loan?

$6,404.20

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

$6,906,372

You have just won the lottery and will receive $540,000 as your first payment one year from now. You will receive payments for 26 years. The payments will increase in value by 4 percent each year. The appropriate discount rate is 10 percent. What is the present value of your winnings?

You should accept the second offer because it has the larger net present value.

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

$7,249

You have won a contest and will receive $2,500 a year in real terms for the next 3 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 6.3 percent and the inflation rate is 4.5 percent. What are your winnings worth today?

$119,176.06

You have your choice of two investment accounts. Investment A is a 5-year annuity that features end-of-month $2,500 payments and has an interest rate of 11.5 percent compounded monthly. Investment B is a 10.5 percent continuously compounded lump sum investment, also good for five years. How much would you need to invest in B today for it to be worth as much as investment A five years from now?

$99,517.41 Future value = $82,500 x (1 + .048)^4 = $99,517.41 Enter N = 4 I/Y = 4.8 PV = -82,500 PMT = FV = 99,517.41

You hope to buy your dream car four years from now. Today, that car costs $82,500. You expect the price to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?

$1,077.94 Explained: Simple interest = $1,650 + ($1,650 x .05 x 20) = $3,300 Annual compounding = $1,650 x (1.05)^20 = $4,377.94 Difference = $4,377.94 - $3,300 = $1,077.94 Enter: N = 20 I/Y = 5 PV = -1,650 PMT = Solve for: FV = 4,377.94

You invested $1,650 in an account that pays 5 percent simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually?

$1,403.44

You just acquired a mortgage in the amount of $249,500 at 6.75 percent interest, compounded monthly. Equal payments are to be made at the end of each month for thirty years. How much of the first loan payment is interest? (Assume each month is equal to 1/12 of a year.)

6.00 percent

You just paid $750,000 for an annuity that will pay you and your heirs $45,000 a year forever. What rate of return are you earning on this policy?

$1,189,576 Future value = $225,000 x (1 + .105)^25 = $2,730,483 Future value = $225,000 x (1 + .08)^25 = $1,540,907 Difference = $2,730,483 - $1,540,907 = $1,189,576 Enter N = 25 I/Y = 10.5 PV = -225,000 PMT = FV =2,730,483 Enter N = 25 I/Y = 8 PV = -225,000 PMT = FV = 1,540,907

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

$60,923.52 Future value = $5,000 x (1 + .085)^50 = $295,431.58 Future value = $5,000 x (1 + .08)^50 = $234,508.06 Difference = $295,431.58 - $234,508.06 = $60,923.52 Enter N = 50 I/Y = 8.5 PV = -5,000 PMT = FV = 295,431.58 N = 50 I/Y = 8 PV = -5,000 PMT = FV = 234,508.06

You just received a $5,000 gift from your grandmother. You have decided to save this money so that you can gift it to your grandchildren 50 years from now. How much additional money will you have to gift to your grandchildren if you can earn an average of 8.5 percent instead of just 8 percent on your savings?

Option C is the best choice because it is has the largest current value.

You just received an insurance settlement offer related to an accident you had six years ago. The offer gives you a choice of one of the following three offers: Option A: $1,565 a month for 72 months Option B: $1, 012 a month for 10 years Option C: $100,000 as a lump sum payment today You can earn 7.5 percent on your investments. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period. Which one of the following statements is correct given this information?

$80,192.76

You just settled an insurance claim. The settlement calls for increasing payments over a 10-year period. The first payment will be paid one year from now in the amount of $10,000. The following payments will increase by 4.5 percent annually. What is the value of this settlement to you today if you can earn 8 percent on your investments?

$133,554

You just signed a consulting contract that will pay you $35,000, $52,000, and $80,000 annually at the end of the next three years, respectively. What is the present value of these cash flows given a 10.5 percent discount rate?

$277,777.78

You just won a national sweepstakes! For your prize, you opted to receive never-ending payments. The first payment will be $12,500 and will be paid one year from today. Every year thereafter, the payments will increase by 3.5 percent annually. What is the present value of your prize at a discount rate of 8 percent?

$172,252.71

You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you today?

amortized loan with equal principal payments

You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.

$810,220

You need a 25-year, fixed-rate mortgage to buy a new home for $240,000. Your mortgage bank will lend you the money at a 7.5 percent APR for this 300-month loan, with interest compounded monthly. However, you can only afford monthly payments of $850, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment. What will be the amount of the balloon payment if you are to keep your monthly payments at $850?

$144.57

You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $25 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 1.5 percent interest per month. How much money are you borrowing?

You will realize a capital gain on the bond if you sell it today.

You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?

$277,628.63 Future value = $147,900 x (1 + .065)^10 = $277,628.63 Enter N = 10 I/Y = 6.5 PV = -147,900 PMT = FV = 277,628.63

You own a classic automobile that is currently valued at $147,900. If the value increases by 6.5 percent annually, how much will the automobile be worth ten years from now?

$17,444.86

Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?

$13,621.57

You plan on saving $5,200 this year, nothing next year, and $7,500 the following year. You will deposit these amounts into your investment account at the end of each year. What will your investment account be worth at the end of year three if you can earn 8.5 percent on your funds?

$1,436.50

You purchase a bond with an invoice price of $1,460. The bond has a coupon rate of 9.4 percent, and there are 3 months to the next semiannual coupon date. What is the clean price of this bond?

$22,004

You purchased an investment which will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 7.5 percent and the inflation rate is 2.9 percent. What is the present value of these payments?

$240.29

You want to be a millionaire when you retire in 40 years. You can earn an 11 percent annual return. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month?

8.38 percent

You want to borrow $47,170 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,160, but no more. Assume monthly compounding. What is the highest rate you can afford on a 48-month APR loan?

asked price

You want to buy a bond from a dealer. Which one of the following prices will you pay?

$1,058.01

You want to buy a new sports car for $55,000. The contract is in the form of a 60-month annuity due at a 6 percent APR, compounded monthly. What will your monthly payment be?

8.95 percent

You want to buy a new sports coupe for $41,750, and the finance office at the dealership has quoted you an 8.6 percent APR loan compounded monthly for 48 months to buy the car. What is the effective interest rate on this loan?

I and III only

You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner.

$7,433.02

You want to have $1.04 million in real dollars in an account when you retire in 46 years. The nominal return on your investment is 8 percent and the inflation rate is 3.5 percent. What is the real amount you must deposit each year to achieve your goal?

$733.94

You want to have $35,000 saved 6 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.

$2,086,957

You would like to establish a trust fund that will provide $120,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 5.75 percent. How much money must you deposit today to fund this gift for your heirs?

$20,270.17

You would like to give your daughter $75,000 towards her college education 17 years from now. How much money must you set aside today for this purpose if you can earn 8 percent on your investments?

18.02 years

You're trying to save to buy a new $160,000 Ferrari. You have $56,000 today that can be invested at your bank. The bank pays 6 percent annual interest on its accounts. How many years will it be before you have enough to buy the car? Assume the price of the car remains constant.

$10,386.99

Your car dealer is willing to lease you a new car for $245 a month for 48 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease?

$4,551,172

Your coin collection contains fifty-four 1941 silver dollars. Your grandparents purchased them for their face value when they were new. These coins have appreciated at a 10 percent annual rate. How much will your collection be worth when you retire in 2060?

19.80 percent

Your credit card company charges you 1.65 percent interest per month. What is the annual percentage rate on your account?

$40,384.69

Your employer contributes $75 a week to your retirement plan. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.5 percent. Given these assumptions, what is this employee benefit worth to you today?

5.15 percent

Your father helped you start saving $20 a month beginning on your 5th birthday. He always made you deposit the money into your savings account on the first day of each month just to "start the month out right." Today completes your 17th year of saving and you now have $6,528.91 in this account. What is the rate of return on your savings?

$31,699.15

Your grandfather left you an inheritance that will provide an annual income for the next 10 years. You will receive the first payment one year from now in the amount of $4,000. Every year after that, the payment amount will increase by 6 percent. What is your inheritance worth to you today if you can earn 9.5 percent on your investments?

decreases

Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

$4,299.88

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

$41,516.01

Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $3,600 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 6.75 percent?

0.48 payments

Your holiday ski vacation was great, but it unfortunately ran a bit over budget. All is not lost. You just received an offer in the mail to transfer your $5,000 balance from your current credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a rate of 9.4 percent. You plan to make payments of $510 a month on this debt. How many less payments will you have to make to pay off this debt if you transfer the balance to the new card?

6.20 percent

Your insurance agent is trying to sell you an annuity that costs $200,000 today. By buying this annuity, your agent promises that you will receive payments of $1,225 a month for the next 30 years. What is the rate of return on this investment?

$86,376

Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica. The package requires that you pay $25,000 today, $30,000 one year from today, and a final payment of $45,000 on the day you depart three years from today. What is the cost of this vacation in today's dollars if the discount rate is 9.75 percent?

$360.43

Your older sister deposited $5,000 today at 8.5 percent interest for 5 years. You would like to have just as much money at the end of the next 5 years as your sister will have. However, you can only earn 7 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years?

$28,216

Your parents have made you two offers. The first offer includes annual gifts of $10,000, $11,000, and $12,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

Municipal bonds

_____ ____: pay interest that is federally tax-free.

Treasury bonds

_____ _____ are: generally issued as semi-annual coupon bonds.

Callable bonds

______ ______ generally: have a sinking fund provision.

Protective covenants

_________ ________: are primarily designed to protect bondholders.