FINA fINAL REVIEW PRACTICE QUESTIONS

What would be the future value after 18 years of $5,000 you deposit in a college fund for your child on the day of her birth, if the fund earns interest at a rate of 10% per year?

$27,799.59

What is the present value of a $50,000 investment that you hold for 5 years at 12% compounded semi-annually?

$27,919.74

A share of preferred stock has just paid a dividend of $2.50 today. If the expected long-run growth rate for this stock is 6%, and if investors require a 14% rate of return, what should the fair price of the stock?

$31.25

How much principal have you paid by year 10 on a 30year mortgage for $175,000, with a 5% interest rate, paid monthly

$32,651.38

Your cousin is planning on buying a house for $250,000. If that property is expected to increase in value by 5% per year, how much would it be worth in 7 years?

$351,775.10

You have an investment that pays the following payments: $100 a year for three years, $200 at year 4, $3000 in year 5, and $500 in year 6. Assuming 8% return on investment, what is the total future value of the payouts?

$4,382.23

Simple interest earned on $100 over 5 years at 8%?

$40.00

What is the future value at the end of a 5 year period of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15% interest rate?

1,348.476

Compute the Yield to Call of a 6% annual coupon bond, maturing 20 years from now, but callable in 15 years at a price of $1150. Assume the bond is currently selling for $800 in the market and that the coupons are paid semi-annually.

8.94%

A bond is currently selling at $950, with an 8.5% annual coupon, and it has 15 years left until maturity. What is the current yield?

8.95%

Compute the Yield to Call of a 6% annual coupon bond, maturing 20 years from now, but callable in 15 years at a price of $1150. Assume the bond is currently selling for $800 in the market and that the coupons are paid annually

8.99%

A bond is currently selling at $950, with an 8.5% annual coupon, and it has 15 years left until maturity. What is the Yield to Maturity?

9.12%

You just won the lottery. You have two options, take $800,000 today or take an annual payment of $200,000 starting today going on for four more years for a total of 5 payments. If your investment opportunity cost is 8%, which option is better?

Installments

Total value of investment of $1000 earning 5% simple interest over 8 years?

I=P⋅i⋅t I= 1000 x 0.05 x 8 I= 400.00 A= P+I A= 1000+ 400 A= $1400

What is the required rate of return of an 8% coupon bond with 5 years until maturity selling at par value?

8%

What is the price of a bond paying an 8.75% coupon, that matures in 5 years, with an 8% rate of return, with the coupons paid quarterly?

$1030.66

What is the future value of $100, if interest is compounded annually at a rate of 6% for five years?

$133.82

Total investment with compound interest on $1000 at 5% for 7 years?

$1407.10

What is the value of a stock that just paid a $5.00 dividend, and you expect this dividend to grow at a rate of 7% per year, indefinitely? Assume a 10% expected return.

$178.3

Total investment with compound interest on $1000 at 7% for 10 years?

$1967.15

Total investment with compound interest on $1500 at 8% for 5 years?

$2203.99

If your daughter's wedding will cost about $35,000 in 5 years, how much should you put away now earning 7% compounded monthly?

$24,690

3M's preferred stock, which pays an annual dividend of $8 per share, was trading for $50 per share yesterday. However, news broke early this morning that some of the materials the company used for one of his most popular home products is a well-known carcinogenic. Consequently, the required rate of return for the stock went up to 18%. What will be the new price of the shares

$44.44

How much compound interest is earned on $100 over 5 years at 8%?

$46.93

What is the value of a stock that expects to pay a $5.00 dividend at the end of the year, and then increase the dividend at 3% per year, assuming a 12% return

$55.56

Assume that you plan to buy a share of EMA stock today and to hold it for 3 years. You expect to receive a dividend of $3.00 at the end of year one, $3.50 at the end of year two, and a dividend of $4.00 at the end of year three. In addition, you expect to sell the stock for $75 at the end of year three.if your expected rate of return is 10%, how much should you be willing to pay for this stock today?

$64.97

Assume that you plan to buy a share of EMA stock today and to hold it for 3 years. You expect to receive a dividend of $3.50 at the end of Year 1, $3.75 at the end of Year 2, and a dividend of $4.25 at the end of Year 3. In addition, you expect to sell the stock for $80 at the end of Year 3. If your expected rate of return is 12%, how much should you be willing to pay for this stock today?

$66.08

What is the present value of a security that promises to pay you $150,000 in 15 years, assuming you can earn 5% on it.

$72,153

Current forecasts suggest XYZ will pay you dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return?

$75

What is the value of a stock that expects to pay a $3.00 dividend at the end of the year, and then increase the dividend at a rate of 8% per year, indefinitely? Assume a 12% expected return

$75.00

How much interest have you paid by year 10 on a 30 year mortgage for $175,000, with a 5% interest rate, paid monthly

$80,081.16

You just won the lottery. You have two options, take $800,000 today or take an annual payment of $200,000 starting today going on for four more years for a total of 5 payments. If your investment opportunity cost is 14%, which option is better?

$800,000 today

A bond is currently selling at $950, with an 8.5% annual coupon, and it has 15 years left until maturity. What is the annual coupon payment?

$85.00

What is the price of a bond with a coupon of 8%, maturity of 5 years, and a required return on investment of 9%?

$961.10

What is the coupon rate on a bond with a price of $1100.50, a required rate of return of 8% and 5 years until maturity?

10.51%

What is the yield to maturity of a 10 year bond with 3 years left until it matures, with a 5% semi-annual coupon, that is currently selling for $912.37 in the market?

8.36%

A $1,000 face value bond with a coupon rate of 7% is selling at a price of $879.50 and matures in 10 years, what is its yield to maturity?

8.87%

You have two investment choices: $1500 at 2.5% with daily compounding for one year, or $1500 at 3.0% compounded semi-annually for one year. Which is better?

3.0% semi-annually

What is the Current Yield of a 5% annual coupon bond, that matures in 4 years, with a current price of $1,010.78

4.95%

A preferred share of stock is currently trading for $48.00 on the New York Stock Exchange. If this instrument pays a dividend of $3.50 a year, what is its annual yield?

7.29%

Your brother-in-law is looking to get you to invest in his new start-up. He claims that if you give him $10,000 today he will pay you back $15,000 in 5 years. If your investment account pays an average of 8% per year, which is the better investment?

Brother-in-law is best

Which account pays better on a deposit of $1,000? An account paying a 5% rate with annual compounding or an account paying 4.9% with daily compounding?

Daily

You plan to save $4,000 at the end of every year for 20 years and then retire. Given a 10% rate of return, what will be the FV of your retirement account at the end of this 20 year period?

FV = 229,100

You just bought a new computer for $3,000. Due to a same-as-cash promotion you don't have to make any payments now. You must pay in full by the end of the second year. If you can earn 8% on your money, how much money should you set aside today in order to make the payment in two years?

FV = 3000 i = 8% N = 2 PV = $2,572

Interest earned on $1000, compounded at 6% for 4 years?

I= $262.48

Jack and Jill want to retire when they accumulate $1,500,000 in their individual retirement funds. They figure that they can just live off on the interest after that on perpetuity, no matter how long they live. Both of them are starting off today w/ $100,000 each, but jill hs her money invested in a mutual fund earning 11% per year, compounded semi-annually, while jack is earning 10.50% w/ daily compounding. How long will it take each to retire? Who will retire first?

Jack N= ? = 9,404.306/365 = 25.28 I=10.5/365 PV=-100,000 PMT=0 FV=1,500,000 Jill N=? = 50.5792/2 = 25.2496 I=5.5 PV=-100,000 PMT=0 FV=1,500,000

You are 50y.o. Proud of having $75,000 invested in a mutual fund earning an impressive 17% per year. You want to retire when you are 65 and confident youll reach your goal of $1,000,000 by then. Will you make it?

N =15 I = 17 PV = -75,000 PMT = 0 FV =? = 790,404.11 no

you just turned 18 years old today and decided you want to accumulate $5,000,000 for retirement. You figure you can start making weekly deposits into a mutual fund that promises to pay an average yield of 13% per year. You intend to make the first deposit at the end of this week and retire exactly on the day of your 65th birthday. Assuming that the predicted yield of 13% is indeed realized, how much money should you deposit weekly in the mutual fund to meet your goal?

N= 2,444 (47 * 52) I= 13/ 52 PV= 0 PMT= ? = -28.03 FV = 5,000,000

Assume that you plan to buy a share of EMA stock today and to hold it for 3 years. You expect to receive a dividend of $3.00 at the end of year one, $3.50 at the end of year two, and a dividend of $4.00 at the end of year three. In addition, you expect to sell the stock for $75 at the end of year three.if your expected rate of return is 10%, how much should you be willing to pay for this stock today?

P0 = Div 1/(1+k)^1 + Div 2/ (1+k) ^2 + Div 3+ P3/ (1+k)^3 = 64.97

What is the price of a preferred stock with a dividend of $10 per year and a required rate of return of 12%?

P0; preferred= Div/k = $10/ .12 = $83.33

A share of preferred stock in IBM promises to pay $10.00 of preferred dividends every year for eternity. If the relevant discount rate for such a company is 12%, what should the price of this preferred stock be?

PV = 10/0.12 = 83.33

In order to create an endowment that pays $100,000 per year, forever, how much money must be set aside today if the rate of interest is 10%?

PV = 100,000/0.10 = 1,000.000

What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

PV = 670.43

You are purchasing a car. You are scheduled to make 3 annual installments of $4,000 per year, starting at the end of this year. Given a rate of interest of 10%, what is the price you are paying for the car (i.e. what is the PV)?

PV = 9,947.41

A share of common stock has a projected dividend of $5.00, with a required rate of return of 10%, and it is currently trading for $57.00, it is trading at

Premium

A preferred share of stock is currently trading for $45.50 on the NYSE. if this instrument pays a dividend of $3.25 a year, what is its annual yield?

Pt = Div/k P0 = 45.50 Div = 3.25 K = 7.14%

A share of common stock is expected to pay a dividend of $3.75 at the end of the year. The expected long-run growth rate for this stock is 8% and investors require an 11% rate of return. a.) what should the fair price of the stock? b.) if the stock is currently trading for $110, what is the market's consensus rate of growth for the stocks dividends?

a.) P0 = Div 1/ k-g Div = 3.75 G =? K =.11 b.) 110 = 3.75/ .11-g

The US Savings Bonds your grandparents bought for you on your birthday will be worth $1,000 in 3 years. If bonds are currently paying 10% interest with annual compounding, what is the present value of your bond?

i = 10% N = 3 FV = 1000 PV = $751.30

you are indecisive about which stock to buy: Microsoft, which is selling for $96 a share; or Apple, which is selling for $170 a share. Microsoft stock promises to pay annual dividends of $4.50, $5.00, and $5.50 over the next three years respectively, and you estimate it can be sold for $110 at the end of the third year. You expect Apple to pay a dividend of $10.50 the first year, $11.50 and $12.50 over the next two years, respectively. You also expect Apple's stock to be trading at $200 in three years. Which stock would you buy if stocks from computer manufacturers typically yield 10%?

p0m= 4.50/(1+.1)^1 + 5/ (1+.1) ^2 + 5.50+ 110/ (1+.1)^3 = 95 P0a = 10.50/(1+.1)^1 + 11.50/ (1+.1) ^2 + 12.50+ 200/ (1+.1)^3 = 178.70