FIN 3320 Exam 2 | Questions with complete solutions

FIN 3320 Exam 2 | Questions with complete solutions Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then ...

FIN 3320 Exam 2 | Questions with complete solutions Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan? a 8.24% b 8.45% c 8.66% d 8.88% e 9.10% You sold a car and accepted a note with the following cash flow stream as your payment. The effective price you received for the car assuming an interest rate of 6.0% is closest to: Years: 0 1 2 3 4 CFs: 0 1k 2k 2k 2k a 5,987 b 6,286 c 6,000 d 6,930 e 7,277 Last year Tempe Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later? a 845.03 b 889.51 c 936.33 d 983.14 e 1,032.30 Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on this investment? a 6.77% b 7.13% c 7.50% d 7.88% e 8.27% Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity? a 3.44% b 3.79% c 4.17% d 4.58% e 5.04% Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be? a 3,704.02 b 3,889.23 c 4,083.69 d 4,287.87 e 4,502.26 Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account? a 34,502.10 b 28,243.21 c 29,729.70 d 31,294.42 e 32,859.14 You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a 5,493.71 b 5,782.85 c 6,087.21 d 6,407.59 e 6,744.83 What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year? a 8.95% b 9.39% c 9.86% d 10.36% e 10.88% What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%? a 11,262.88 b 11,826.02 c 12,417.32 d 13,038.19 e 13,690.10 You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? a $1,412.84 b $1,487.20 c $1,565.48 d $1,643.75 e $1,725.94 What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%? a $4,750 b $5,000 c $5,250 d $5,513 e $5,788 What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%? a $16,576 b $17,449 c $18,367 d $19,334 e $20,352 What is the present value of the following cash flow stream at a rate of 6.25%? Years: 0 - 4 CFs: $0 || $75 || $225 || $0 || $300 a $411.57 b $433.23 c $456.03 d $480.03 e $505.30 You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? a The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. b The discount rate increases. c The riskiness of the investment's cash flows decreases. d The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. e The discount rate decreases. What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly? a $969 b $1,020 c $1,074 d $1,131 e $1,187 Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.) a The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. b Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. c Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. d The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. e The outstanding balance declines at a slower rate in the later years of the loan's life. Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures? a $3,754.27 b $3,941.99 c $4,139.09 d $4,346.04 e $4,563.34 Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. The amount that will be in the account after 8 months, assuming each month has 30 days, is closest to: a $5,178.09 b $5,436.99 c $5,708.84 d $5,994.28 e $6,294.00 Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside? a 0.52% b 0.44% c 0.36% d 0.30% e 0.24% Dealer's spread refers to the _____. a. the difference between the bid and asked prices of a security and represents the dealer's revenue from the transaction b. the sum of the bid and asked prices of a security and represents the dealer's markup, or profit c. the ratio of the bid price of a security to its asked price and represents the dealer's markup, or profit d. the sum of the bid and asked prices of a security and represents the dealer's revenue from the transaction e. the difference between the bid and asked prices of a security and represents the dealer's markup, or profit The difference between the issuing price of a debt or equity issue and the net proceeds of the issue received by the issuing firm is known as the _____. Underwriter's spread A stock with a dual listing is _____. a. registered to be traded in the money market as well as the capital market b. registered to be traded in more than one money market c. registered to be traded in more than one capital market d. registered to be traded in the debt market and the stock market e. registered to be traded in the primary market as well as the secondary market Which of the following is the reason for the formation of underwriting syndicates? a. To regulate the issuance and trading of stocks and bonds b. To provide the issuing company with the most competitive underwriting bids c. To spread the risk associated with the purchase and distribution of a new issue of securities d. To enhance liquidity in large block trades by maintaining continuous up-to-date prices for the securities they are assigned e. To ensure that the auction trading process is completed in a fair and efficient manner Which of the following is the correct expression for the amount of common stock or debt that a company needs to issue after taking into account the flotation costs? a. Amount of issue = (Net proceeds - Other flotation costs in dollars) / (1 - Percentage flotation costs) b. Amount of issue = (Net proceeds + Other flotation costs in dollars) × (1 - Percentage flotation costs) c. Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 - Percentage flotation costs) d. Amount of issue = (Net proceeds - Other flotation costs in dollars) / (1 + Percentage flotation costs) e. Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 + Percentage flotation costs) Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time) a. Future value = Present value / (1 + r)n b. Future value = Present value - (1 + r)n c. Future value = Present value / ((1 + r) × n) d. Future value = Present value + (1 + r)n e. Future value = Present value × (1 + r)n Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. The number of months is will take her to have enough money to start college is closest to: a. 27.78 months b. 21.25 months c. 22.56 months d. 30.25 months e. 25.10 months Bill is considering investing $450 at the end of every month in a fixed income instrument. He will be receiving $27,000 at the end of 4 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment is closest to:? a. 13.58% b. 18.30% c. 15.07% d. 11.04% e. 22.25% Ibiza Corporation has been investing $20,000 for the last four years in an investment scheme that is maturing at the end of the current year. It will be receiving $120,000 at the time of maturity. The $120,000 received at maturity is referred to as _____. a. annuity due b. uneven cash flow c. deferred annuity d. lump-sum amount e. ordinary annuity Identify the correct expression for calculating the PRESENT value of an investment. a. Present value = Future value × (1 + r)n b. Present value = Future value + (1 + r)n c. Present value = Future value - (1 + r)n d. Present value = Future value / (1 + r)n e. Present value = Future value / ((1 + r) × n) An annuity with payments that occur at the beginning of each period is known as a(n) _____. annuity due Kim has just graduated from law school. She had taken an education loan of $45,000, which now needs to be repaid in equal monthly installments over the next 6 years. The amount of the monthly loan payment, if the loan carries a simple annual interest of 5% is closest to: a. $658.92 b. $663.85 c. $702.46 d. $724.72 e. $689.76 Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, the maximum amount he should be willing to pay for the investment today is closest to: a. $28,685 b. $30,534 c. $26,888 d. $25,526 e. $23,089 Shekhar invests $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made? a. $11,857.58 b. $13,351.39 c. $12,580.20 d. $11,125.76 e. $14,871.32 A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of payment represents a(n) _____. a. annuity due b. uneven cash flow stream c. ordinary annuity d. compounded cash flow e. lump-sum payment An investor invested in a 10-year bond that makes a $50 coupon payment at the end of every six-month period until the bond matures. These coupon payments received by the investor can be referred to as a(an) _____. a. compounded annuity b. perpetuity c. ordinary annuity d. annuity due e. discounted annuity Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is closest to: a. $2,314