Finance 301 Session 15

Nate invested $1,200,000 in Melco Crown. He held the stock for 6 years, and the stock returned 15% annually. How much money did Nate make before taxes? $1,867,534 $1,575,673 $2,775,673 $3,067,534 None of the Above

$1,575,673

If you borrow $12,000 at a 6% interest rate for 5 years, how much would you have to pay each year? $16,058.71 $2,848.76 $8,967.10 $2,128.76 $3,120.00

$2,848.76

10 Years ago you took out a 30-year mortgage to buy a house. Your annual payment is $18,162 and your current interest rate is 6%. Suppose you now want to refinance and still pay off the house in 20 years, how much principal do you still owe on the mortgage? $208,316.71 $668,099.91 $363,240.00 $341,445.60 $133,673.90

$208,316.71

Matt needs $1,000,000 to retire in 35 years. How much does he need to invest today if he expects a 10% rate of return? $17,567 $101,748 $50,325 $26,667 $35,584

$35,584

You have an annuity with expected $50,000 payments each year for 20 years. If the discount rate is 8%, what is the present value of this annuity? $351,677 $500,101 $1,000,000 $490,907 $367,056

$490,907

Assuming a 6% discount rate, how much would you need to invest now to have $100,000 in 10 years with no additional investment? $23,299.86 $55,839.48 $94,000.00 $38,554.33 $75,867.96

$55,839.48

Tim invested $50,000 in securities that returned 7% annually for 5 years. How much was Tim's investment worth at the end of 5 years? $97,317 $97,436 $70,128 $70,355 None of the Above

$70,128

Kevin's parents have $10,000 saved for his college education. His parents invested the $10,000 and it grew to $100,000 at the end of 20 years. What annual interest rate did they earn if we assume compounding interest? 12% 20% 8% 10% 5%

12%

Suppose you have the choice between receiving $500 now, or $750 in 3 years. What discount rate would make these options worth the same to you? 4.82% 5.56% 14.47% 16.67% 43.65%

14.47%

Dale needs $10,000,000 in five years in order to buy his first yacht. If he can expect earn an interest rate of 13% for the next five years, how much does he need to invest today in order to purchase his yacht. 18,424,352 10,000,000 5,427,599 6,133,187 16,304,736

5,427,599

If you invest $2,300 today and after 20 years you have $12,890, what annual rate of return did you earn? a. 6% b. 4.6% c. 9% d. 11% e. 13%

9%

True or False: A higher discount rate will increase the present value of an annuity.

False

True or False: As market interest rates rise, the value of bonds rise as well.

False

True or False: Discounting is the same concept as multiplying a future value by a factor that is greater than one.

False

True or False: Investment A and B have the same future value and discount rate; however, investment A has a holding period of 6 years (n=6) while investment B has a holding period of 4 years (n=4). Given that information, investment B has a lower present value than investment A.

False

True or False: You just won the lottery. If you had the choice to receive $100,000 now or $150,000 in five years, you would prefer the $100,000 now. Assume an interest rate of 8%.

False

Which of the following is CERTAINLY true regarding interest rates? Increases in interest rates lead to increases in stock prices. Increases in interest rates lead to increases in bond prices. Increases in interest rates lead to decreases in bond prices. The effect of a change in interest rates on bond and stock prices is unknown. Interest rates do not affect stock or bond prices.

Increases in interest rates lead to decreases in bond prices.

John won the lottery and has the option to receive a lump sum of $5,000,000 now or receive a $500,000 annuity every year for the next 25 years. Assuming John can earn a 10% return on his money, what would you advise him to do? Take the annuity because it is worth $50,840 more than the lump sum Take the lump sum because it is worth $50,840 more than the annuity Take the annuity because it is worth $461,480 more than the lump sum Take the lump sum because it is worth $461,480 more than the annuity Whatever he wants, both are worth the same.

Take the lump sum because it is worth $461,480 more than the annuity

If you own a zero coupon bond that is that will pay $100,000 in 5 years and market interest rates for similar bonds fall from 8% to 6%, what happens to the value of your bond? a. The value will increase by $13,110.25 b. The value will decrease by $13,110.25 c. The value will not change d. The value will decrease by $6,667.50 e. The value will increase by $6,667.50

The value will increase by $6,667.50

True or False: Assuming a 10% discount rate, you would have to invest $77,108.66 now in order to have $200,000 at the end of 10 years.

True