Page 1 of 7
Sample Mid‐Session Exam Questions ‐ Solutions
Discussion Questions
1. Which one of the following is FALSE?
a. Shareholders in a corporation do not affect the daily operation of a company’s business.
b
...
Page 1 of 7
Sample Mid‐Session Exam Questions ‐ Solutions
Discussion Questions
1. Which one of the following is FALSE?
a. Shareholders in a corporation do not affect the daily operation of a company’s business.
b. The decision about which assets to buy is usually termed the investment decision.
c. Shareholder wealth in a corporation is best measured by share priceaccounting profit.
d. The further in the future you receive a dollar, the less it is worth today.
2. Which one of the following is TRUE?
a. The price of a coupon bond is equal to the present value of all future coupons and face value of
the bond.
b. The interest rate on a bond decreasesincreases with its bond rating.
c. The real rate of interest compensates for inflation.
d. Interest rate risk increases with the term to maturity.
3. Which one of the following statements regarding standard deviation is FALSE?
a. Standard deviation indicates the tendency of the historical returns to be different from the
average.
b. Because investors can eliminate UNsystematic risk, they do not require a risk premium for
it.
c. Standard deviation is the same things as the squared root of variance.
d. Beta is a measure of systematic risk.
4. The beta of a risk‐free security is ______and the risk associated with the overall market is referred to
as ___________risk.
a. 0; diversifiable
b. 1; unsystematic
c. 0; systematic
d. 1; non‐diversifiable
5. Investors who do not have a diversified portfolio of investments face ________________________.
a. Systematic risk
b. Unsystematic risk
c. Systematic risk and unsystematic risk
d. Less risk Page 2 of 7
Calculation Questions
1. If you wish to accumulate $140,000 in 13 years, how much do you have to deposit today in an account paying
14% per annum, compounded semi-annually?
FV or C = 140,000, n =13*2 =26, r=0.14/2=0.07
ܸܲ ൌ
ܥ
ሺ1 ݎሻ
ܸܲ ൌ
140,000
ሺ1 0.14 2 ሻଵଷ௫ଶ ൌ $24,107.37
2. How much will $153,000 grow in 13 years if it is invested today in an account paying 10% per annum,
compounded monthly?
PV or C= 153,000, n =13*12 =156, r=0.10/12=0.0083
ܸܨൌ ܥሺ1 ݎሻ
ܸܨൌ 153,000ሺ1
0.10
12 ሻଵଷ௫ଵଶ ൌ $558,386.38
3. Sarah is offered an investment paying 13% per annum, compounded quarterly. What is her effective annual
interest rate?
ܴܣܧൌ ሺ1
ܴܲܣ
݉
ሻ െ 1
ܴܣܧൌ ሺ1
0.13
4 ሻସ െ 1 ൌ 0.1365 ݎ13.65%
4. Ali is offered an annuity that will pay $24,000 per year (starting from next year) for 10 years. If the discount
rate is 13%, how much is the annuity worth today?
C=$24,000 , r = 0.13, n = 10 Type equation here.
1
1
(1 )
n
C
PV
r r
ܸܲ ൌ
24000
0.13 1 െ ሺ1.13ሻ 1 ଵ൨ ൌ 130,229.8
5. If Quynh deposits $16,000 every six months for 12 years in an account paying 14% per annum, how much
will her investment be worth at the end of 12 years?
C=$16,000, r = 0.14/2=0.07, n = 12x2=24
ܸ ൌܨ
ݎ ܥ
ሺሺ1 ݎሻ െ 1ሻሻ
ܸ ൌܨ
16,000
0.07 ሺሺ1 0.07ሻଶସ െ 1ሻሻ ൌ 930,826.73Page 3 of 7
6. Du plans to borrow $389,000 now and repay it in 25 equal annual installments at the end of each year. If the
annual interest rate is 14%, how much will her annual payments be?
PV=$389,000, r = 0.14, n = 25
1
1
(1 )
n
C
PV
r r
389,000 ൌ
ܥ
0.14 1 െ ሺ1.14 1 ሻଶହ൨
ൌܥ
389,000 ∗ 0.14
1 െ ሺ1.14 1 ሻଶହ൨
ܥൌ56,598.88
7. Gary recently bought a house. They financed the house with a $150,000, 30-year mortgage with a nominal
interest rate of 6 percent. Mortgage payments are made at the end of each month. What total dollar amount
of their mortgage payments during the first month will go towards repayment of principal?
PV=$150,000, r = 0.06/12=0.005, n = 30x12=360
1
1
(1 )
n
C
PV
r r
150,000 ൌ
ܥ
0.005 1 െ ሺ1.005 1 ሻଷ൨
ൌܥ
150,000 ∗ 0.005
1 െ ሺ1.005 1 ሻଷ൨
ܥൌ899.33
݈ܽ݅݅݊ܿݎܲ ൌݐ݊ݑ݉ ܽݐݏ݁ݎ݁ݐ݊ܫ െܥ
899.33 – (150000*0.005)=$149.33
8. The yield to maturity of a $1000 bond with a 7% coupon rate, semi-annual coupons and two years to
maturity is 7.6% APR, compounded semi-annually. What must its price be?
CPN= $1000*(0.07/2) = $35
y = 0.076/2 = 0.038
n= 2 years*2= 4
ܲ ൌ
ܲܰܥ
ݕ1 െ ሺ1 ݕሻ 1 ൨ ሺ1 ݕሻ ܸܨ
35
0.038 1 െ ሺ1.038ሻ 1 ସ൨ ሺ1.038ሻ 1000 ସ ൌ $989.06Page 4 of 7
9. FIN222 Ltd is issuing 8-year bonds with a coupon rate of 6.5 per cent and semi-annual coupon payments. If
the current market rate for similar bonds is 8 per cent, what will be the price of the bond assuming a face
value of $1000?
CPN= $1000*(0.065/2) = $32.5
y = 0.08/2 = 0.04
n= 8 years*2= 16
32.5
0.04 1 െ ሺ1.04ሻ 1 ଵ൨ ሺ1.04ሻ 1000ଵ ൌ $912.61
10. Lend Lease is planning to issue 10-year bonds. The going market rate for such bonds is 8.2 per cent. Assume
that coupon payments will be semi-annual and the face value is $1000. The company is trying to decide
between issuing an 8 per cent coupon bond or a zero coupon bond.
a. What will be the price of the 8 per cent coupon bonds?
CPN= $1000*(0.08/2) = $40
y = 0.082/2 = 0.041
n= 10 years*2= 20
40
0.041 1 െ ሺ1.041ሻ 1 ଶ൨ ሺ1.041ሻ 1000ଶ ൌ $986.53
b. What will be the price of the zero coupon bonds?
ܲ ൌ
ܸܨ
ሺ1 ݕሻ
ܲ ൌ
1000
ሺ1.041ሻଶ ൌ $447.70
11. Suppose you purchase a 10-year bond with 6% annual coupons. You hold the bond for four years, and sell it
immediately after receiving the fourth coupon. If the bond’s yield to maturity was 5% when you purchased
and sold the bond. What cash flows will you pay and receive from your investment in the bond per $1000
face value?
When bought
CPN= $1000*(0.06) = $60
y = 0.05
n= 10
60
0.05 1 െ ሺ1.05ሻ 1 ଵ൨ ሺ1.05ሻ 1000ଵ ൌ $1077.22Page 5 of 7
When sold
CPN= $1000*(0.06) = $60
y = 0.05
n= 6 years remaining
60
0.05 1 െ ሺ1.05ሻ 1 ൨ ሺ1.05ሻ 1000 ൌ $1050.76
12. Arthur secures an ordinary annuity of $1,000 payable monthly for 4 years. Find the capital sum required to
fund the annuity. The interest rate is 1% per month.
a. $3,902
b. $37,974
c. $3,037
d. $85,610
4 12
1000 1
1 37 973 96
PV , . 0 01 . ( . ) 1 01 X
13. James has just won the lottery and must choose one of the following guaranteed payoffs. Which one would
you choose? The interest rate is 7% per annum.
a. $100,000 paid today
b. $150,000 paid six years from today.
c. $50,000 paid one year from today and $68,000 paid four years from today
d. $15,000 paid per year for ten years (greatest PV!)
a. PV =100,000 c. PV =
4
50 000 68 000
98 605 85
1 07 1 07
, ,
, .
. ( . )
b. PV=
6
150 000
99 951 33
1 07
, $ , .
( . )
d. PV =
10
15 000 1
1 105 353 7
0 07 1 07
,
, .
. ( . )
Page 6 of 7
14. You purchase 800 shares of stock at a price of $20 per share. One year later the shares are selling for $23 per
share. In addition, a dividend of $0.45 per share is paid at the end of each year. What is the total return for
the investment?
a. 5.25%
b. 10.25%
c. 15%
d. 17.25%
0 45 23 20
0 1725
20
.
R .
15. Rain Ltd will pay dividends of $3.50, $4.20, $5.70, and $7.50 for the next four years. Thereafter, the
company expects its growth rate to be at a constant rate of 7%. If the required rate of return is 16%, what is
the current market price of the stock?
a. $63.18
b. $93.63
c. $59.04
d. $103.10
5
4 0
2 3 4
$7.5(1.07)
$89.17
0.16 0.07
$3.5 $4.2 $5.7 ($7.5 $89.17)
1.16 (1.16) (1.16) (1.16)
D E
P
r g
P
= $63.18
16. Snow Ltd is a fast growth stock and expects to grow at a rate of 25% for the next four years. It then will settle
to a constant-growth rate of 10%. The first dividend will be paid out in year 3 and will be equal to $5.00. If
the required rate of return is 18%, what is the current price of the stock?
a. $85.94
b. $97.19
c. $50.59
d. $65.68
3 4
5
4 0
2 3 4
5, 5(1.25) 6.25
$6.25(1.1)
$85.94
0.18 0.10
0 0 $5 ($6.25 $85.94)
1.18 (1.18) (1.18) (1.18)
= $50.59
E
D D
D
P
r g
PPage 7 of 7
17. Moon Ltd will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company
expects its growth rate to be at a constant rate of 7%. If the required rate of return is 15%, what is the current
market price of the stock?
a. $69.41
b. $93.63
c. $57.54
d. $80.29
5
4 0
2 3 4
$7(1.07)
$93.63
0.15 0.07
$4.75 $5.25 $5.75 ($7 $93.63)
1.15 (1.15) (1.15) (1.15)
= $69.41
D E
P
r g
P
18. The risk-free rate of return is currently 3.5% and the market risk premium is estimated to be 6%. The average
of annual realised returns and betas of four stocks are as follows.
Stock Realised Return Beta
AAA 7.7% 0.7
BBB 13.1% 1.6
CCC 9% 1.1
DDD 10.4% 0.4
Which of the following is TRUE?
a. AAA and BBB are fairly priced, CCC is overpriced and DDD is underpriced.
b. AAA and BBB are fairly priced, CCC is underpriced and DDD is overpriced.
c. BBB and DDD are fairly priced, AAA is underpriced and CCC is overpriced.
d. All stocks are fairly priced.
Stock Realised
return (%)
Beta Required
(CAPM)
AAA 7.7 0.7 3.5%+0.7*6%=7.7% Fairly priced
BBB 13.1 1.6 3.5%+1.6*6%=13.1% Fairly priced
CCC 9 1.1 3.5%+1.1*6%=10.1% Realised < Required, Overpriced, Sell
DDD 10.4 0.4 3.5%+0.4*6%=5.9% Realised > Required, Underpriced, Buy
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