FIN INST & MKTS EXAM 1

You are evaluating JPMorgan Chase (JPM) stock. Stock paid dividend at theend of last year of $3.50. Dividends have grown at constant rate of 2% peryear, and this constant growth rate is expected to continue into the future.Required rate of return (𝑦𝑦𝑠𝑠) on stock is 10%. Fair present value (or price) ofJPM stock is calculated as follows:

= $44.625 Po = [DivO (1+g)]/(rs-g) =3.50(1+0,02)/0.10-0.02

You are evaluating Bank of America (BOA) stock. Stock paid dividend at theend of last year of $4.80. Dividends have grown at constant rate of 1.75% peryear, and this constant growth rate is expected to continue into the future.Stock is currently selling at price of $52 per share. Expected rate of return on BOA stock is calculated as follows:

=0.1114 11.14% rs = [Divo (1+g) /Po]+ g =[4.8(1+0.0175)/52] +0.0175

Upon graduating from college this year, you expect to earn $25,000 per year. If you get your MBA, in one year you can expect to start at $35,000 per year. Over the year, inflation is expected to be 5 percent. In today's dollars, how much additional (less) money will you make from getting your MBA (to the nearest dollar) in your first year?

A. $-2,462 B. $8,333 C. $8,750 D. $9,524 E. $10,000 B. (35,000/1.05) − 25,000

An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required return is 6 percent and the bond pays interest semiannually? A. $1,062.81 B. $1,062.10 C. $1,053.45 D. $1,052.99 E. $1,049.49

A. $1,062.81 Price = $35.00 × PVIFA (6%/2, 8 years × 2) + $1,000 × PVIF (6%/2, 8 years × 2) OR Calculator Method: N = 16 PMT = −35 I/Y = 3 FV = −1,000 Solve for PV which is $1,062.81.

Consider four-year bond with 10% coupon paid ANNUALLY and 8% rate of return. Bond's duration is 3.42 years, and its current price is$1,066.2425. Suppose that rate of return increases by 10 basis points from 8 to 8.10%. Then, using ANNUAL compounding version of duration model, what is the future price of this bond? A) $1,062.866. B) $1,052.866. C) $1,042.866. D) $1,032.866. E) $1,022.866.

A. $1,062.866 = -3.42(0.001/(1+0.08))(1,066.2425) + (1,066.2425)

You want to have $5 million when you retire in 40 years. You believe you can earn 9 percent per year on your investment. How much must you invest each year to achieve your goal when you retire? (Ignore all taxes.)

A. $10,412 B. $11,619 C. $14,798 D. $15,295 E. $None C. $5 million/[(1.09^40 − 1)/0.09] N= 40 I= 9 FV = 5,000,000 PMT =?

Investment A pays 8 percent simple interest for 10 years. Investment B pays 7.75 percent compound interest for 10 years. Both require an initial $10,000 investment. The future value of A minus the future value of B is equal to ______________ (to the nearest penny).

A. $2,500 B. $-2,500 C. $1,643.32 D. $3,094.67 E. $-3,094.67 E. [10,000 + (800 × 10)] − [10,000 × 1.0775^10]

You are evaluating a company's stock. The stock just paid a dividend of $1.75. Dividends are expected to grow at a constant rate of 5 percent for a long time into the future. The required rate of return (Rs) on the stock is 12 percent. What is the fair present value? A. $26.25 B. $22.50 C. $35.26 D. $50.25 E. none of these choices are correct

A. $26.25 P0 = ($1.75 × 1.05)/(0.12 − 0.05) = $26.25

A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter into the future. The required rate of return, Rs, on the preferred stock is 13.5 percent. What is the fair value (or price) of this stock? A. $37.04 B. $24.36 C. $52.36 D. $18.65 E. none of these choices are correct

A. $37.04 Rs = (4 × $1.25) / 0.135 = $37.04

You buy a car for $38,000. You agree to a 60-month loan with a monthly interest rate of 0.55 percent. What is your required monthly payment?

A. $634.24 B. $745.29 C. $605.54 D. $764.07 E. None B. Pmt = 38,000/PVIFA (i = 0.55%, n = 60)

You have been offered 10% annual coupon bond with a face value of$1,000 that matures in ten years. If appropriate annual interest rate on investment is 11.25 percent, what is the present value of this investment? A. $927.1500 B. $937.1500 C. $947.1500 D. $957.1500 E. $967.1500

A. $927.1500 N=10 I=11.25 PMT= -100 FV = -1000 PV=?

One-year Treasury bill rate in 2018 averaged 2.25% and inflation (measured by CPI) for the year was 1.90%. If investors had expected the same inflation rate as that actually realized (i.e., 1.90%), then according to exact form of Fisher effect, real interest rate (RFR) for 2018 was: A. 0.3435% B. 0.4435% C. 0.5435% D. 0.6435% E. 0.7435%

A. 0.3435% RFR = i - E(IP) = 2.25% - 1.90% =0.35%

Suppose that the current one-year Treasury-bill rate is 3.15 percent and the expected one-year rate 12 months from now is 4.25 percent. According to the Unbiased expectations theory, what should be the current rate for a two-year Treasury security? A. 3.70% B. 4.15% C. 2.36% D. 4.74% E. 5.50%

A. 3.70% 1R2 = [(1.0315)(1+0.0425)]^1/2 -1 = 3.6985

An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate, a 6 percent promised yield to maturity, and six years to maturity. What is the bond's duration? A. 5.31 years B. 5.25 years C. 4.76 years D. 4.16 years E. 3.19 years

A. 5.31 years Σ[(t × CFt/(1.06)t)]/$950.83

Suppose that the current one-year Treasury-bill rate is 3.15 percent and the expected one-year rate 12 months from now is 4.25 percent. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security? A. 3.70% B. 4.15% C. 2.36% D. 4.74% E. 5.50%

A. == 1R2 = [(1 + .0315)(1 + .0425)]^0.5 − 1 = .03699, or 3.699% which is 3.70% rounded.

You plan to invest $10,000 on the last day of every quarter for next six years. If interest rate on investment is 8 percent, future value of your investment in six years is computed as follows. A) $301,218.6 B) $302,218.6 C) $303,218.6 D) $304,218.6 E) None of these choices are correct

FV = 304,218.6247 N= 6(4) = 24 I = 8/4 =2 PMT = -10,000 FV = ?

Walmart bond is now selling for $925. Bond pays $100 per year in coupon interest on the last day of each year. You intend to hold bond for four years and project that you will be able to sell it atthe end of year 4 for $960. Given risk associated with bond, its required rate of return (𝑦𝑦) overnext four years is 11.25%. Accordingly, bond's fair present value is:

PV = $935.3123 N = 4 I= 11.25 PMT = -100 FV =-960 PV = ?

Assume an investment will return $100 per year over a period of 4 years, and discountrate required is 8%. If so, what is its present value?

PV = 331.2127 N=4 I=8 PMT = -100 PV = ?

At a rate of 8%, what is the present value of the following cash flow stream?$0 at Time 0; $100 at the end of Year 1; $300 at the end of Year 2; $0 at the end ofYear 3; and $500 at the end of Year 4? A. $707 B. $717 C. $727 D. $737 E. $747

B. $717 CFo = 0 CO1 = 100 CO2 = 300 CO3 = 0 CO4 = 500 I = 8 NPV = ?

An eight-year, annual payment, 7 percent coupon Treasury bond has a price of $1,075. The bond's annual expected rate of return must be: A. 13.49% B. 5.80% C. 7.00% D. 1.69% E. 4.25%

B. 5.80% $1,075 = $70 × PVIFA (E(r)%, 8 years) + $1,000 × PVIF (E(r)%, 8 years); Solve using trial and error or a calculator. OR Calculator Method: N = 8 PMT = 70 PV = −1,075 FV = 1,000 Solve for I/Y which is 5.80%.

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is: A. $924.18 B. $1,000 C. $879.68 D. $1,124.83 E. not possible to determine from the info given

B. $1,000.00 When coupon rate = required return, price = par.

You are buying your first house for $220,000, and are paying $30,000as a down payment. You have arranged to finance the remaining $190,00030‐year mortgage with a 7% nominal interest rate and monthly payments.What are the equal monthly payments you must make? A) $1,064 B) $1,164 C) $1,264 D) $1,364 E) $1,464

C. $1,264 N = 30*12 I= 7/12 = 0.5833% PV=-190,000 PMT = ?

On September 4, 2019, existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were asfollows: 1 𝑅𝑅1 = 1.698%; 1𝑅𝑅2 = 1.452%; 1𝑅𝑅3 = 1.375%; 1𝑅𝑅4 = 1.359% Using Unbiased Expectation Theory, one-year forward rates on zero-coupon Treasury bonds for year 3 as of September 4, 2019, were: A) 3.703% B) 2.152% C) 1.221% D) 0.740% E) -1.529%

C. 1.221% 3𝑓𝑓1 = (1 + 1𝑅𝑅3)^3/(1 + 1𝑅𝑅2)^2 − 1= (1 + 0.01375)^3/(1 + 0.01452)^2 − 1= 0.01221 = 1.221%

A common stock paid a dividend at the end of last year of $3.50. Dividends have grown at a constant rate of 6 percent per year over the last 20 years, and this constant growth rate is expected to continue into the future. The stock is currently selling at a price of $35 per share. What is the expected rate of return on this stock? A. 18.7% B. 22.5% C. 16.6% D. 8.4% E. None of these choices are correct

C. 16.6% E(Rs) = ($3.50 × 1.06/$35) + 0.06 = 0.166, or 16.6%

Suppose you owned stock in a company for the last three years. You originally bought the stock three years ago for $30 and just sold it for $56. The stock paid an annual dividend of $1.35 on the last day of each of the past three years. What is your realized return on this investment? A. 15.36% B. 36.14% C. 26.85% D. 37.58% E. None of these choices are correct

C. 26.85% Use a financial calculator to solve for IRR as follows: CF0 = −$30, CF1 = $1.35, CF2 = $1.35, CF3 = $57.35 Compute IRR = 26.85%. OR N= 3 PV = 30 PMT = -1.35 FV = -56 I=?

The treasury yield curve shows the following yields to maturity for the next 5 years: MAT IN YRS / YTM in % 1 1.3 2 2.1 3 2.7 4 3.2 5 3.7 What is the 1-year forward rate three years from now? A. 4.111% B. 4.011% C. 3.911% D. 3.811% E. 3.711%

C. 3.911% = [(1.0832/1.0424)-1]*100

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. Is the bond correctly priced, overpriced, or underpriced? If it is overpriced or underpriced, then list by how much. A. Correctly priced B. Overpriced by $14.18 C. Underpriced by $14.18 D. Overpriced by $9.32 E. Underpriced by $9.32

C. Underpriced by $14.18 Price = $100 × PVIFA [9%, 10 years] + $1,000 × PVIF (9%, 10 years) = $1,064.18; Market value is underpriced by $1,064.18 − $1,050 = $14.18. OR Calculator Method: N = 10 PMT = −100 I/Y = 9 FV = −1,000 Solve for PV which is $1,064.18; Market value is underpriced by $1,064.18 − $1,050 = $14.18.

An investment pays $400 in one year, X amount of dollars in two years, and $500 in three years. The total present value of all the cash flows (including X) is equal to $1,500. If the nominal interest rate is 6 percent, what is X? A. $702.83 B.$822.41 C. $789.70 D. $749.67 E. $600.00

C. X = [$1,500 − ($400/1.06) − ($500/1.06^3)] × (1+0.06)^2

A stock you are evaluating is expected to experience supernormal growth in dividends of 12 percent over the next three years. Following this period, dividends are expected to grow at a constant rate of 4 percent. The stock paid a dividend of $1.50 last year and the required rate of return on the stock is 11 percent. Calculate the stock's fair present value. (Do not round intermediate calculations.) A. $16.24 B. $21.56 C. $24.25 D. $27.48 E. None of these choices are correct.

D. $27.48 VALUE DURING SUPERNATURAL GROWTH D1 = $1.50 × 1.12 = $1.68 D2 = $1.68 × 1.12 = $1.88 D3 = $1.88 × 1.12 = $2.11 VALUE DURING NORMAL GROWTH D4 = $2.11 × 1.04 = $2.19 P3 = $2.19/(0.11 − 0.04) = $31.31 CF3 = $2.1074 + $31.31 = $33.4172. Use the Calculator to solve for the NPV: CF0 = 0, CF1 = $1.68, CF2 = $1.88, CF3 = $33.42, I/Y = 11 to get NPV = $27.48

Consider a 2-year coupon bond with a face and redemption value of $100 and a coupon rate of 10% per annum payable semiannually and a yield to maturity of 12% per annum. Find the duration. A) 1.56 years B) 1.66 years C) 1.76 years D) 1.86 years E) 1.96 years

D. 1.86 YRS CFO = 0 C01 = ((0.10/2)*100) * 1 = 5 CO2 = 5(2) = 10 CO3 = 5(3) = 15 CO4 = (5+100)*4 = 420 I= 12/2 = 6 NPV1 = ? CFO = 0 CO1 = 5 C02 = 5 CO3 = 5 CO4 = (5+100) = 105 I = 12/2 =6 NPV2 =? D = NPV1/NPV2 = ?PERIODS = ?YEARS HAVE TO DIVIDE BY 2

An investor requires a 3 percent increase in purchasing power in order to induce her to lend. She expects inflation to be 2 percent next year. The nominal rate she must charge is about: A. 3% B. 2% C. 1% D. 5% E. 7%

D. 5%

An investor requires a 3 percent increase in purchasing power in order to induce her to lend. She expects inflation to be 2 percent next year. The nominal rate she must charge is about: A. 3% B. 2% C. 1% D. 5% E. 7%

D. 5% I= RFR + E(IP)

Addico Corp's 2005 earnings per share were $2, and its growth rate during the prior 5 years was 11.0% per year. If that growth rate were maintained, how long would it take for Addico's EPS to double? A. 3.64 YRS B. 4.64 YRS C. 5.64 YRS D. 6.64 YRS E. 7.64 YRS

D. 6.64 YRS I = 11 PV = -2 FV = 2(2) = 4 N=?

A 10-year, annual payment corporate coupon bond has an expectedreturn of 11 percent and a required return of 10 percent. The bond's marketprice is:• A) greater than its present value. B) less than par.• C) less than its expected rate or return.• D) less than its present value. E) $1,000.00

D. LESS THAN ITS PRESENT VALUE

Suppose that current one-year rate (one-year spot rate) and expected one-year T-bond rates over the following three years (i.e., years 2, 3, and4, respectively) are as follows: 1𝑅𝑅1 = 1.94%; 𝐸𝐸(2𝑟𝑟1) = 3.00%; 𝐸𝐸(3𝑟𝑟1) = 3.74%; 𝐸𝐸(4𝑟𝑟1) = 4.10% In addition, investors charge liquidity premium on longer-term securities such that: 𝐿𝐿 2 = 0.10%; 𝐿𝐿 3 = 0.20%; 𝐿𝐿 4 = 0.30% Using Liquidity Premium Theory, current (or today's) rates for two -year maturity Treasury securities should be: A) 6.70% B) 5.15% C) 4.36% D) 3.74% E) 2.52%

E. 2.52% 1𝑅𝑅2 = [(1 + 1𝑅𝑅1)(1 + 𝐸(2𝑟1) + 𝐿 2)]^(1/2) − 1= [(1 + 0.0194)(1 + 0.03 + 0.0010)]^(1/2) − 1= 0.0252 = 2.52%

An annual payment bond has a 9 percent required return. Interest rates are projected to fall 25 basis points. The bond's duration is 12 years. What is the predicted price change? A. -2.75% B. 33.33% C. 1.95% D. -1.95% E. 2.75%

E. 2.75% −12 × (−0.0025/1.09) = 0.0275, or 2.75%

The treasury yield curve shows the following yields to maturity for the next 5 years: MAT IN YRS / YTM in % 1 1.3 2 2.1 3 2.7 4 3.2 5 3.7 What is the 1-year forward rate two years from now? A. 2.506% B. 2.606% C. 2.706% D. 2.806% E. 2.906%

E. 2.906% = [(1.0424/1.0130)-1]*100

A corporate bond returns 12 percent of its cost (in present value terms) in the firstyear, 11 percent in the second year, 10 percent in the third year, and the remainder in thefourth year. What is the bond's duration in years? A. 3.68 B. 2.50 C. 4.00 D. 3.75 E. 3.32

E. 3.32 YRS = 0.12(1) + 0.11(2) + 0.10(3) + (1-0.12-0.11-0.10)*(4)

A corporate bond returns 12 percent of its cost (in present value terms) in the first year, 11 percent in the second year, 10 percent in the third year, and the remainder in the fourth year. What is the bond's duration in years? A. 3.68 years B. 2.50 years C. 4.00 years D. 3.75 years E. 3.32 years

E. 3.32 years 3.32 = (12% × 1) + (11% × 2) + (10% × 3) + (67% × 4)

The yield on 12-month Treasury bills is 1.9% and the yield on 2-year Treasury notes is 2.7%. What is the 1-year forward rate two years from now? A. 3.106% B. 3.206% C. 3.306% D. 3.406% E. 3.506%

E. 3.506% [(1.0547/1.0190)-1] *100

An ANNUAL payment bond with a $1,000 par has a 5 percent quoted coupon rate, a 6 percent promised yield tomaturity, and six years to maturity. What is the bond's duration? A) 5.31 years B) 5.25 years C) 4.76 years D) 4.16 years E) 3.72 years

E. 3.7177 YRS INT = CPN *M = 0.05*1000 = 50 CFO = 0 C01 = 50(1) = 50 CO2 = 50(2) = 100 CO3 = 50(3) = 150 CO4 = (50+1000)*4 = 4200 I=6 NPV1 = ? CFO = 0 CO1 = 50 FO1 = 3 CO2 = 1050 I=6 NPV2 = ? D = NPV1/NPV2

A four-year maturity, zero-coupon corporate bond with a required rate of return of 12 percent has an annual duration of ________ years. A. 3.05 B. 2.97 C. 3.22 D. 3.71 E. 4.00

E. 4.00 Duration of zero-coupon bond definition

The U.S. Treasury offers to sell you a bond for $613.81. No paymentswill be made until the bond matures 10 years from now, at which time it willbe redeemed for $1,000. What interest rate would you earn if you bought thisbond at the offer price? A. 1.00% B. 2.00% C. 3.00% D. 4.00% E. 5.00%

E. 5.00% N = 10 PV = -613.81 PMT = 0 FV = 1000 I = ?

Walmart bond is now selling for $925. Bond paid $100 per year in coupon interest on the last day of each year. You intend to holdbond for four years and project that you will be able to sell it at the end of year 4 for $960. Given risk associated with bond, its required rate of return (𝑦𝑦) over next four years is 11.25%. Expected rate of return on bond over next four years is calculated asfollows

EXPECTED RATE OF RETURN= 11.6071 N = 4 PV = 925 PMT = -100 FV = -960 I = ? FAIR PRESENT VALUE N = 4 I= 11.25 PMT = -100 FV = -960 PV = ?

Walmart bond you purchased two years ago for $890 is now selling for $925. Bond paid $100 per year incoupon interest on the last day of each year. Realized rate of return you have earned on this bond over thelast two years is calculated as follows:

I = R = 13.0815% N = 2 PV = 890 PMT = -100 FV = -925 I=?

An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period, prices are expected to rise by 2 percent. Which statement(s) below is/are true? I. 4 percent is the desired real risk-free interest rate. II. 6 percent is the approximate nominal rate of interest required. III. 2 percent is the expected inflation rate over the period.

I, II and III

Suppose you owned stock in General Monstanto for the last two years. You originally boughtstock two years ago for $25 (𝑁𝑁−2) and just sold it for $35 (𝑁𝑁0). Stock paid annual dividend of$1.00 (𝐷𝐷𝑝𝑝𝑣𝑣) on the last day of each of past two years. Your realized rate of return on GeneralMonsanto stock investment can be calculated using the following TVM equation:

Rs = 22.0167% n= 2 PV = 25 PMT = -1.00 FV = -35 I = ?