finance practice questions

15) The Corner Grocer has a 7-year, 6.5 percent semiannual 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 7.25 percent? A) The bond price will decrease by 9.27 percent. B) The bond price will increase by 7.04 percent. C) The bond price will decrease by 8.64 percent. D) The bond price will increase by 7.16 percent. E) The bond price will increase by 3.86 percent.

A

5) Mr. Rich arranged for a mortgage loan for 65 percent of the $2.5 million purchase price of a home. The monthly payment will be $10,400 and the mortgage term is 30 years. What is the EAR on this loan? A) 6.82 percent B) 6.25 percent C) 6.46 percent D) 6.91 percent E) 6.62 percent

A

8) Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 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? A) $12,093.38 B) $12,113.33 C) $12,127.04 D) $12,211.12 E) $12,219.46

A

9) Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year? A) $2,170.39 B) $2,511.07 C) $2,021.18 D) $2,027.94 E) $2,304.96

A

16) You purchased an investment that 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 8.46 percent and the inflation rate is3.1 percent. What is the present value of these payments in real dollars? A) $20,720 B) $21,705 C) $20,447 D) $18,811 E) $18,529

B

17) A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. The face value is $100. What is the current yield? A) 4.24 percent B) 4.85 percent C) 5.36 percent D) 5.62 percent E) 4.66 percent

B

18) What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A) Maximal-growth model B) Constant-growth model C) Capital pricing model D) Realized-earnings model E) Realized-growth model

B

20) Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today? A) $11.23 B) $10.82 C) $10.68 D) $9.68 E) $11.57

B

21) GEO Inc. has paid annual dividends of $.41, $.47, and $.53 a share over the past three years, respectively. The company expects to now maintain a constant dividend. At a discount rate of 14.4 percent, what is the current value per share? A) $2.85 B) $3.68 C) $2.43 D) $3.09 E) $3.18

B

22) Flo's Flowers pays an annual dividend that increases by 1.8 percent per year, commands a market rate of return of 13.8 percent, and sells for $19.08 a share. What is the expected amount of the next dividend? [Hint: Next dividend = dividend in year 1] A) $2.24 B) $2.29 C) $2.37 D) $2.32 E) $2.17

B

3) Which one of the following statements related to annuities and perpetuities is correct? A) An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. B) A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. C) Most loans are a form of a perpetuity. D) The present value of a perpetuity cannot be computed but the future value can. E) Perpetuities are finite but annuities are not.

B

6) How much would you need to invest today as a lump sum at 10.5 percent, compounded continuously, to have $200,000 in five years? A) $108,206.67 B) $118,311.07 C) $124,318.08 D) $114,407.17 E) $131,008.15

B

12) A bond's principal is repaid on the ________ date. A) coupon B) yield C) maturity D) dirty E) clean

C

23) KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent? A) $11.22 B) $12.21 C) $12.32 D) $11.47 E) $12.03

C

7) You borrowed $185,000 for 30 years to buy a house. The interest rate is 4.35 percent, compounded monthly. If you pay all of your monthly payments as agreed, how much total interest will you pay on this mortgage? (Round the monthly payment to the nearest whole cent.) A) $150,408 B) $147,027 C) $146,542 D) $154,319 E) $141,406

C

10) The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity? A) 6.97 percent B) 6.92 percent C) 6.88 percent D) 7.22 percent E) 7.43 percent

D

11) Roadside Markets has 8.45 percent coupon bonds outstanding that mature in 10.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent? A) $1,199.80 B) $999.85 C) $903.42 D) $1,091.00 E) $1,007.52

D

14) Which one of the following relationships is stated correctly? A) The coupon rate exceeds the current yield when a bond sells at a discount. B) The call price must equal the par value. C) An increase in market rates increases the market price of a bond. D) Decreasing the time to maturity increases the price of a discount bond, all else constant. E) Increasing the coupon rate decreases the current yield, all else constant.

D

19) A decrease in which of the following will increase the current value of a stock according to the dividend growth model? A) Dividend amount B) Number of future dividends, provided the total number of dividends is less than infinite C) Dividend growth rate D) Discount rate E) Both the discount rate and the dividend growth rate

D

13) Which one of these equations applies to a bond that currently has a market price that exceeds par value? A) Market value < Face value B) Yield to maturity = Current yield C) Market value = Face value D) Current yield > Coupon rate E) Yield to maturity < Coupon rate

E

2) Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed) A) The cash flows for Project B are an annuity, but those of Project A are not. B) Both sets of cash flows have equal present values as of Time 0. C) The present value at Time 0 of the final cash flow for Project A will be discounted using an exponent of three. D) Both projects have equal values at any point in time since they both pay the same total amount. E) Project B is worth less today than Project A.

E

4) What is the EAR of 14.9 percent compounded continuously? A) 15.59 percent B) 15.62 percent C) 15.69 percent D) 15.84 percent E) 16.07 percent

E

Which one of the following statements correctly defines a time value of money relationship? A) Time and future values are inversely related, all else held constant. B) Interest rates and time are positively related, all else held constant. C) An increase in a positive discount rate increases the present value. D) An increase in time increases the future value given a zero rate of interest. E) Time and present value are inversely related, all else held constant

E