Take-Home Exam

Name ____________________________ ID____________________

1. What is the total future value six years from now of $! re"eive# in one year$ $%!! re"eive# in two years$ an# $&!!
re"eive# in six years if the #is"ount rate is &'(
)* $1$+,,.1-
.* $1$+!-.//
0* $1$+-/.//
D* $1$!/&.1-
E* $1$!!.!!
+. 1ou nee# $%$!!! to 2uy a new stereo for your "ar. If you have $1$+!! to invest at 3' "om4oun#e# annually$ how
lon5 will you have to wait to 2uy the stereo(
)* 1/.- years
.* 1-.&% years
0* 11.3! years
D* 3.- years
E* ./+ years
%. The future value fa"tor for annuities is "al"ulate# as6
)* 78uture value fa"tor 9 1*:r
.* 8uture value fa"tor 9 r
0* 71:r* 9 7future value fa"tor;r*
D* 71:r* 9 future value fa"tor
E* 78uture value fa"tor < 1*:r
/. 1ou are "onsi#erin5 two 4er4etuities whi"h are i#enti"al in every way$ ex"e4t that 4er4etuity ) will 2e5in makin5
annual 4ayments of $= to you two years from to#ay while the first $= 4ayment for 4er4etuity . will o""ur one year
from to#ay. It must 2e true that the 4resent value of 4er4etuity6
)* ) is 5reater than that of . 2y $=.
.* ) ex"ee#s that of . 2y the => of $= for one year.
0* . is e?ual to that of 4er4etuity ).
D* . ex"ee#s that of ) 2y the => of $= for one year.
E* . is 5reater than that of ) 2y $=.
-. Di@@y 0or4. 2on#s 2earin5 a "ou4on rate of 1+'$ 4ay "ou4ons semiannually$ have % years remainin5 to maturity$
an# are "urrently 4ri"e# at $,/! 4er 2on#. What is the yiel# to maturity(
)* 1-.+-'
.* 1+.!!'
0* 1/.-/'
D* 1-.-&'
E* 1%.,,'
3. 1ou are 5oin5 to invest $-!! at the en# of ea"h year for ten years. Aiven an interest rate$ you "an fin# the 4resent
value of this investment 2y6
I. )##in5 the "ash flows to5ether an# fin#in5 the 4resent value of the sum usin5 the a44ro4riate 4resent value fa"tor.
II. )44lyin5 the 4ro4er 4resent value fa"tor to ea"h "ash flow$ then a##in5 u4 these 4resent values.
III. 8in#in5 the future value of ea"h "ash flow$ a##in5 all of the future values to5ether$ then fin#in5 the #is"ounte#
4resent value of this future value sum.
I>. 8in#in5 the future value of the entire 4ayment stream.
)* I$ II$ an# I> only
.* II$ III$ an# I> only
0* II only
D* III only
E* II an# III only
&. 1ou re"eive# a $1 savin5s a""ount earnin5 3' on your 1st 2irth#ay. How mu"h will you have in the a""ount on your
%!th 2irth#ay if you #onBt with#raw any money 2efore then(
)* $%.-3
.* $-.,!
0* $/.,!
D* $3.1%
E* $-./+
. 8ast E##ieBs Cse# 0ars will sell you a 1,, Da@#a Diata for $-$!!! with no money #own. 1ou a5ree to make
weekly 4ayments for + years$ 2e5innin5 one week after you 2uy the "ar. The state# rate on the loan is 1%'. How
mu"h is ea"h 4ayment(
)* $-/.33
.* $,,.3-
0* $&-.,!
D* $3.1,
E* $/+.,3
,. The interest rate ex4resse# as if it were "om4oun#e# on"e 4er year is "alle# the6
)* 0om4oun# interest rate.
.* =erio#i" interest rate.
0* Daily interest rate.
D* Etate# interest rate.
E* Effe"tive annual rate.
1!. The future value interest fa"tor is "al"ulate# as6
)* 71 9 rt*
.* 71 9 r*7t*
0* 1 9 r < t
D* 71 9 r*
t
E* None of the a2ove are "orre"t
11. 1ou have $!! that you woul# like to invest. 1ou have + "hoi"es6 Eavin5s a""ount ) whi"h earns ' "om4oun#e#
annually$ or savin5s a""ount . whi"h earns &.,!' "om4oun#e# semiannually. Whi"h woul# you "hoose an# why(
)* . 2e"ause it has the hi5her ?uote# rate.
.* . 2e"ause the future value in one year is lower.
0* ) 2e"ause it has the hi5her ?uote# rate.
D* . 2e"ause it has a hi5her effe"tive annual rate.
E* ) 2e"ause it has a hi5her effe"tive annual rate.
1+. 1ou Fust won the lottery. 1ou an# your heirs will re"eive $/!$!!! 4er year forever$ 2e5innin5 one year from now.
What is the 4resent value of your winnin5s at an 1!' #is"ount rate(
)* $%!!$!!!
.* $%&$-!!
0* $/%&$-!!
D* $/!!$!!!
E* $ //$!!!
1%. 1our 4arents a5ree to 4ay half of the 4ur"hase 4ri"e of a new "ar when you 5ra#uate from "olle5e. 1ou will 5ra#uate
an# 2uy the "ar two years from now. 1ou have $,$!!! to invest to#ay an# "an earn 1+' on investe# fun#s. If your
4arents mat"h the amount of money you have in two years$ what is the maximum you "an s4en# on the new "ar(
)* $1,$+-!
.* $++$-&,
0* $11$+,!
D* $1-$!!!
E* $ &$+3!
1/. Eu44ose you 4ur"hase a @ero "ou4on 2on# with fa"e value $1$!!!$ maturin5 in +- years$ for $1!. If the yiel# to
maturity on the 2on# remains un"han5e#$ what will the 4ri"e of the 2on# 2e - years from now(
)* $+&.-+
.* $%1!.,1
0* $-!!.!!
D* $+-%.3/
E* $%!.-
1-. 1ou nee# to 2orrow $+%$!!! to 2uy a tru"k. The "urrent loan rate is &.,' "om4oun#e# monthly an# you want to 4ay
the loan off in e?ual monthly 4ayments over - years. What is the si@e of your monthly 4ayment(
)* $---.33
.* $/3-.+3
0* $%&/.!/
D* $/,/.3,
E* $%+%.%,
13. The rate of return re?uire# 2y investors in the market for ownin5 a 2on# is "alle# the6
)* 1iel# to maturity.
.* 0ou4on rate.
0* Daturity.
D* 8a"e value.
E* 0ou4on.
1&. GHG Enter4rises wants to issue +!-year$ $1$!!! fa"e value @ero-"ou4on 2on#s. If ea"h 2on# is to yiel# &'$ what is
the minimum num2er of 2on#s GHG must sell if they wish to raise $- million from the sale( 7I5nore issuan"e "osts.*
)* 1,$%/
.* +3$1-,
0* 1&$+,!
D* +%$!
E* +!$13/
1. GHG Enter4rises wants to issue sixty +!-year$ $1$!!! @ero-"ou4on 2on#s. If ea"h 2on# is to yiel# &'$ how mu"h will
GHG re"eive 7i5norin5 issuan"e "osts* when the 2on#s are first sol#(
)* $1+$%,%
.* $1$!
0* $+!$!!!
D* $11$+1+
E* $1-$-!-
1,. ) 2on# with a fa"e value of $1$!!! has annual "ou4on 4ayments of $1!! an# was issue# & years a5o. The 2on#
"urrently sells for $1$!!! an# has years remainin5 to maturity. This 2on#Bs _______ must 2e 1!'.
I. yiel# to maturity
II. market 4remium
III. "ou4on rate
)* I$ II an# III
.* III only
0* I an# II only
D* I only
E* I an# III only
+!. 8resh out of "olle5e$ you are ne5otiatin5 with your 4ros4e"tive new em4loyer. They offer you a si5nin5 2onus of
$1$!!!$!!! to#ay or a lum4 sum 4ayment of $1$+-!$!!! three years from now. If you "an earn &' on your investe#
fun#s$ whi"h of the followin5 is true(
)* Take the si5nin5 2onus 2e"ause it has the lower 4resent value.
.* Take the lum4 sum 2e"ause it has the hi5her 4resent value.
0* Take the si5nin5 2onus 2e"ause it has the hi5her future value.
D* .ase# on these num2ers$ you are in#ifferent 2etween the two.
E* Take the lum4 sum 2e"ause it has the lower future value.
+1. How mu"h woul# you have to invest to#ay at ,' "om4oun#e# annually to have $%-$!!! availa2le for the 4ur"hase
of a "ar five years from now(
)* $+3$%&!.1!
.* $++$&/&.3!
0* $+!$+3&.+3
D* $+$1/,.-&
E* $+/$1/&.+-
++. 1our 5ran#father 4la"e# $-$!!! in a trust fun# for you. In 1+ years the fun# will 2e worth $1!$!!!. What is the rate
of return on the trust fun#(
)* ./+'
.* -.,-'
0* /.13'
D* 3.,!'
E* %.&!'
+%. )n annuity stream of "ash flow 4ayments is6
)* ) set of level "ash flows o""urrin5 ea"h time 4erio# for a fixe# len5th of time.
.* ) set of level "ash flows o""urrin5 ea"h time 4erio# forever.
0* ) set of in"reasin5 "ash flows o""urrin5 ea"h time 4erio# for a fixe# len5th of time.
D* ) set of in"reasin5 "ash flows o""urrin5 ea"h time 4erio# forever.
E* ) set of ar2itrary "ash flows o""urrin5 ea"h time 4erio# for no more than 1! years.
+/. The interest rate use# to "al"ulate the 4resent value of future "ash flows is "alle# the ________ rate.
)* sim4le interest
.* #is"ount
0* "om4oun# interest
D* annual interest
E* free interest
+-. Aiven r an# t 5reater than @ero6
I. =resent value interest fa"tors are less than one.
II. 8uture value interest fa"tors are 5reater than one.
III. =resent value interest fa"tors are 5reater than future value interest fa"tors.
I>. =resent value interest fa"tors 5row as t 5rows$ 4rovi#e# r is hel# "onstant.
)* I only
.* I an# I> only
0* II an# III only
D* II an# I> only
E* I an# II only
+3. Interest earne# on the reinvestment of 4revious interest 4ayments is "alle# ________.
)* annual interest
.* "om4oun# interest
0* free interest
D* interest on interest
E* sim4le interest
+&. DHA Enter4rises issues 2on#s with a $1$!!! fa"e value that make "ou4on 4ayments of $%! every % months. What is
the "ou4on rate(
)* %!.!!'
.* %.!!'
0* !.%!'
D* ,.!!'
E* 1+.!!'
+. In 1,$ >in"ent >an Ao5hBs 4aintin5$ IEunflowersJ$ sol# for $1+-. Kne hun#re# years later it sol# for $%3 million.
Ha# the 4aintin5 2een 4ur"hase# 2y your 5reat-5ran#father an# 4asse# on to you$ what annual return on investment
woul# your family have earne# on the 4aintin5(
)* 11.'
.* 11.,,'
0* ,.11'
D* 1%./!'
E* 1!.!,'
+,. The market 4ri"e of a 2on# is $1$+%3.,/$ it has 1/ years to maturity$ a $1$!!! fa"e value$ an# 4ays an annual "ou4on
of $1!! in semiannual installments. What is the yiel# to maturity(
)* %.1'
.* /.+3'
0* &.+&'
D* 3.11'
E* -.%&'
%!. The annual "ou4on of a 2on# #ivi#e# 2y its fa"e value is "alle# the 2on#Bs6
)* 1iel# to maturity.
.* 0ou4on rate.
0* 0ou4on.
D* 8a"e value.
E* Daturity.
%1. Whitesell )thleti" 0or4orationBs 2on#s have a fa"e value of $1$!!! an# a ,' "ou4on 4ai# semiannuallyL the 2on#s
mature in years. What "urrent yiel# woul# 2e re4orte# in The Wall Street Journal if the yiel# to maturity is &'(
)* 3'
.* /'
0* -'
D* '
E* &'
%+. Whi"h of the followin5 statements is false(
)* The )=M on a loan with monthly 4ayments is less than the annual interest you a"tually 4ay.
.* With monthly "om4oun#in5$ the )=M will 2e lar5er than the effe"tive annual rate.
0* The )=M is the interest rate 4er 4erio# multi4lie# 2y the num2er of 4erio#s 4er year.
D* When "om4arin5 investments it is 2est not to rely solely on ?uote# rates.
E* 0om4oun#in5 ty4i"ally lea#s to #ifferen"es 2etween ?uote# an# effe"tive rates.
%%. )n insuran"e "om4any 4romises to 4ay Gane $1 million on her 3-th 2irth#ay in return for a one-time 4ayment of
$1+-$!!! to#ay. 7Gane Fust turne# %!.* )t what rate of interest woul# Gane 2e in#ifferent 2etween a""e4tin5 the
"om4anyBs offer an# investin5 the 4remium on her own(
)* /.-'
.* -.1'
0* &.+'
D* 3.1'
E* %./'
%/. If you #ivi#e a 2on#Bs annual "ou4on 4ayment 2y its "urrent yiel# you 5et the _______.
)* 2on# 4ri"e
.* investorsB re?uire# rate of return
0* "ost of "a4ital
D* yiel# to maturity
E* annual "ou4on rate
%-. Whi"h of the followin5 statements is:are false$ all else the same(
I. =resent values in"rease as the #is"ount rate in"reases.
II. =resent values in"rease the further away in time the future value.
III. =resent values are always smaller than future values when 2oth r an# t are 4ositive.
)* III only
.* I only
0* I an# II only
D* II an# III only
E* II only
%3. Eu44ose you are tryin5 to fin# the 4resent value of two #ifferent "ash flows usin5 the same interest rate for ea"h.
Kne "ash flow is $1$!!! ten years from now$ the other $!! seven years from now. Whi"h of the followin5 is true
a2out the #is"ount fa"tors use# in these valuations(
)* The #is"ount fa"tor for the "ash flow ten years away is always less than or e?ual to the #is"ount fa"tor for the
"ash flow that is re"eive# seven years from now.
.* 1ou shoul# fa"tor in the time #ifferential an# "hoose the 4ayment that arrives the soonest.
0* .oth #is"ount fa"tors are 5reater than one.
D* Me5ar#less of the interest rate$ the #is"ount fa"tors are su"h that the 4resent value of the $1$!!! will always 2e
5reater than the 4resent value of the $!!.
E* Ein"e the 4ayments are #ifferent$ no statement "an 2e ma#e re5ar#in5 the #is"ount fa"tors.
%&. The 4resent value fa"tor for annuities is "al"ulate# as6
)* 71 < 4resent value fa"tor*:r
.* 7=resent value fa"tor;r* 9 71:r*
0* 71 9 4resent value fa"tor*:r
D* =resent value fa"tor 9 71:r*
%. What is the market value of a 2on# that will 4ay a total of fifty semiannual "ou4ons of $! ea"h over the remain#er
of its life( )ssume the 2on# has a $1$!!! fa"e value an# a 1+' yiel# to maturity.
)* $ ,/+.+3
.* $ &%/.3
0* $1$%1-.+/
D* $1$-/-.3+
E* $1$1%-.,!
%,. The interest rate "har5e# 4er 4erio# multi4lie# 2y the num2er of 4erio#s 4er year is "alle# the6
)* =erio#i" interest rate.
.* Daily interest rate.
0* )nnual 4er"enta5e rate 7)=M*.
D* Effe"tive annual rate 7E)M*.
E* 0om4oun# interest rate.
/!. Whi"h of the followin5 statements re5ar#in5 2on# 4ri"in5 is true(
)* When market interest rates rise$ 2on# 4ri"es will also rise$ all else the same.
.* )ll else the same$ 2on#s with lar5er "ou4on 4ayments will have a lower 4ri"e to#ay.
0* .on#s with hi5h "ou4on 4ayments are 5enerally 7all else the same* more sensitive to "han5es in interest rates
than 2on#s with lower "ou4on 4ayments.
D* The lower the #is"ount rate$ the more valua2le the "ou4on 4ayments are to#ay.
E* .on#s with short maturities are 5enerally 7all else the same* more sensitive to "han5es in interest rates than
2on#s with lon5er maturities.
/1. GHG Danufa"turin5 Fust issue# a 2on# with a $1$!!! fa"e value an# a "ou4on rate of '. If the 2on# has a life of +!
years$ 4ays annual "ou4ons$ an# the yiel# to maturity is &.-'$ what will the 2on# sell for(
)* $ ,&-
.* $1$!+!
0* $1$!-1
D* $1$13+
E* $1$!&
/+. 1ou have $!! that you woul# like to invest. 1ou have + "hoi"es6 Eavin5s a""ount ) whi"h earns ' "om4oun#e#
annually$ or savin5s a""ount . whi"h earns &.&!' "om4oun#e# monthly. Whi"h woul# you "hoose an# why(
)* ) 2e"ause the future value in one year is lower.
.* . 2e"ause the future value in one year is lower.
0* ) 2e"ause it has the hi5her ?uote# rate.
D* ) 2e"ause it has a hi5her effe"tive annual rate.
E* . 2e"ause it has a hi5her effe"tive annual rate.
/%. Eu44ose you 4ur"hase a @ero "ou4on 2on# with fa"e value $1$!!!$ maturin5 in +- years$ for $1!. What is the
im4li"it interest$ in #ollars$ in the first year of the 2on#Bs life(
)* $1+.&
.* $ ,./
0* $ +.3
D* $%!.!!
E* $1,.+&
//. ) 2on# sol# five weeks a5o for $1$1!!. The 2on# is worth $1$!-! in to#ayBs market. )ssumin5 no "han5es in risk$
whi"h of the followin5 is false(
)* The 2on# has less maturity to#ay than it #i# five weeks a5o.
.* The 2on#Bs "urrent yiel# has in"rease# from five weeks a5o.
0* The "ou4on 4ayment of the 2on# must have in"rease#.
D* Interest rates must 2e hi5her now than they were five weeks a5o.
E* The 2on# has a smaller 4remium to#ay than it #i# five weeks a5o.
/-. )n a""ount was o4ene# with an investment of $+$!!! 1! years a5o. The en#in5 2alan"e in the a""ount is $%$-!!. If
interest was "om4oun#e# annually$ what rate was earne# on the a""ount(
)* -.&3'
.* %.,-'
0* /.1'
D* %.++'
E* +.33'
/3. The s4e"ifie# #ate on whi"h the 4rin"i4al amount of a 2on# is re4ai# is "alle# the 2on#Bs6
)* 8a"e value.
.* 0ou4on rate.
0* 1iel# to maturity.
D* 0ou4on.
E* Daturity.
/&. The monthly mort5a5e 4ayment on your house is $+1.3,. It is a %! year mort5a5e at 3.-' "om4oun#e# monthly.
How mu"h #i# you 2orrow(
)* $1!!$!!!
.* $1/!$!!!
0* $11-$!!!
D* $ -$!!!
E* $1%!$!!!
/. The 4resent value interest fa"tor is "al"ulate# as6
)* 1:71 9 r*
t
.* 1:71 9 rt*
0* 1:71 9 r < t*
D* 1 9 r 9 t
E* 1:71 9 r*7t*
/,. 1ou are 5oin5 to with#raw $-$!!! at the en# of ea"h year for the next four years from an a""ount that 4ays interest
at a rate of ,' "om4oun#e# annually. The a""ount 2alan"e will re#u"e to @ero when the last with#rawal is ma#e.
How mu"h interest will you earn on the a""ount over the four year life(
)* $/$!!!.!!
.* $-$&11.+!
0* $%$!1./!
D* $ !.!!
E* $+$/!,.3!
-!. )n a""ount 4ayin5 annual "om4oun# interest was o4ene# with $+$!!! 1! years a5o. To#ay$ the a""ount 2alan"e is
$%$-!!. If the same interest rate is offere# on an a""ount 4ayin5 sim4le interest$ how mu"h in"ome woul# 2e earne#
ea"h year over the same time 4erio#(
)* $11-.+!
.* $ -3.,!
0* $ ,+.3!
D* $1-!.!!
E* $ !./!
-1. The annual "ou4on 4ayment of a 2on# #ivi#e# 2y its market 4ri"e is "alle# the6
)* 0ou4on rate.
.* .i#-ask s4rea#.
0* 1iel# to maturity.
D* 0a4ital 5ains yiel#.
E* 0urrent yiel#.
-+. Interest earne# only on the ori5inal 4rin"i4al amount investe# is "alle# _________.
)* free interest
.* "om4oun# interest
0* interest on interest
D* annual interest
E* sim4le interest
-%. 1ou have $+!! in an a""ount whi"h 4ays -' "om4oun# interest. How mu"h a##itional #ollars of interest woul# you
earn over 3 years if you move# the money to an a""ount earnin5 3'(
)* $+/.,/
.* $1.,%
0* $11.,
D* $1-.3
E* $++.
-/. 1our 2roker offers you the o44ortunity to 4ur"hase a 2on# with "ou4on 4ayments of $,! 4er year an# a fa"e value of
$1!!!. If the yiel# to maturity on similar 2on#s is '$ this 2on# shoul#6
)* Eell for the same 4ri"e as the similar 2on# re5ar#less of their res4e"tive maturities.
.* Eell at a 4remium.
0* Eell at a #is"ount.
D* Eell for either a 4remium or a #is"ount 2ut itBs im4ossi2le to tell whi"h.
E* Eell for 4ar value.
--. 1ou are "hoosin5 2etween investments offere# 2y two #ifferent 2anks. Kne 4romises a return of 1!' for three years
usin5 sim4le interest while the other offers a return of 1!' for three years usin5 "om4oun# interest. 1ou shoul#6
)* 0hoose the "om4oun# interest o4tion only if you are investin5 less than $-$!!!.
.* 0hoose the sim4le interest o4tion 2e"ause 2oth have the same 2asi" interest rate.
0* 0hoose the "om4oun# interest o4tion 2e"ause it 4rovi#es a hi5her return.
D* 0hoose the sim4le interest o4tion only if "om4oun#in5 o""urs more than on"e a year.
E* 0hoose the "om4oun# interest o4tion only if the "om4oun#in5 is for monthly 4erio#s.
-3. The state# interest 4ayment$ in #ollars$ ma#e on a 2on# ea"h 4erio# is "alle# the 2on#Bs6
)* 1iel# to maturity.
.* Daturity.
0* 0ou4on.
D* 0ou4on rate.
E* 8a"e value.
-&. Aranny 4uts $+-$!!! into a 2ank a""ount earnin5 3'. 1ou "anBt with#raw the money until the 2alan"e has #ou2le#.
How lon5 will you have to leave the money in the a""ount(
)* , years
.* 3 years
0* 1/ years
D* +! years
E* 1+ years
-. 1ou Fust won the lottery an# want to 4ut some money away for your "hil#Bs "olle5e e#u"ation. 0olle5e will "ost
$&-$!!! in 1- years. 1ou "an earn &' "om4oun#e# annually. How mu"h #o you nee# to invest to#ay(
)* $+%$3,!.+
.* $+&$1%./-
0* $+1$&3%.!&
D* $1,$+.1
E* $+-$+-.1&
-,. Interest earne# on 2oth the initial 4rin"i4al an# the interest reinveste# from 4rior 4erio#s is "alle# _____.
)* "om4oun# interest
.* sim4le interest
0* free interest
D* annual interest
E* interest on interest
3!. What is the total 4resent value of $! re"eive# in one year$ $%!! re"eive# in two years$ an# $&!! re"eive# in six
years if the #is"ount rate is &'(
)* $!%.+/
.* $31.3
0* $-+.%
D* $&-&.+-
E* $-+.&+