Fin 3312 Sample Exam 1 Questions

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1 Fin 3312 Sample Exam 1 Questions Here are some representative type questions. This review is intended to give you an idea of the types of questions that may appear on the exam, and how the questions might be worded. Study your notes and pay particular to the areas of the textbook related to the notes we discussed in class. 1. An annuity stream of cash flow payments is: A) A set of level cash flows occurring each time period for a fixed length of time. B) A set of level cash flows occurring each time period forever. C) A set of increasing cash flows occurring each time period for a fixed length of time. D) A set of increasing cash flows occurring each time period forever. E) A set of arbitrary cash flows occurring each time period for no more than 10 years. 2. Annuities where the payments occur at the end of each time period are called, whereas refer to annuity streams with payments occuring at the beginning of each time period. A) ordinary annuities; early annuities B) late annuities; straight annuities C) straight annuities; late annuities D) annuities due; ordinary annuities E) ordinary annuities; annuities due 3. The interest rate charged per period multiplied by the number of periods per year is called the: A) Effective annual rate (EAR). B) Annual percentage rate (APR). C) Periodic interest rate. D) Compound interest rate. E) Daily interest rate. 4. You are trying to compare the desirability of two alternative investments with rates of return quoted using different compounding periods. To make the proper decision, you should: A) Convert each quoted return to an effective annual rate. B) Convert each quoted return to an annual nominal rate. C) Convert each quoted return to a monthly nominal rate. D) Compare the investments by using the quoted returns. E) Convert each quoted return to an APR. Page 1

2 5. You have $800 that you would like to invest. You have 2 choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.90% compounded semiannually. Which would you choose and why? A) A because it has a higher effective annual rate. B) A because it has the higher quoted rate. C) B because it has a higher effective annual rate. D) B because the future value in one year is lower. E) B because it has the higher quoted rate. 6. You are going to withdraw $5,000 at the end of each year for the next four years from an account that pays interest at a rate of 9% compounded annually. How much must there be in the account today in order for the account to reduce to a balance of zero after the last withdrawal? A) $14, B) $16, C) $18, D) $19, E) $20, At the end of each year for the next 8 years you will receive cash flows of $500. If the appropriate discount rate is 7.5%, how much would you pay for this annuity? A) $4, B) $5, C) $1, D) $2, E) $3, Your brother-in-law borrowed $3,000 from you 5 years ago and then disappeared. Yesterday he returned and expressed a desire to pay back the loan, including the interest accrued. Assuming that you had agreed to charge him 12%, and assuming that he wishes to make 5 equal annual payments beginning in one year, how much would your brotherin-law have to pay you annually in order to pay off the debt? (Assume that the loan continues to accrue interest at 12% per year.) A) $ B) $1, C) $1, D) $1, E) $3, Page 2

3 Answer 9-12 based on the following You and your spouse have found your dream home. The selling price is $220,000; you will put $50,000 down and obtain a 30-year fixed-rate mortgage at 7.5% APR for the balance. 9. Assume that monthly payments begin in one month. What will each payment be? A) $ B) $1, C) $1, D) $1, E) $1, How much interest will you pay (in dollars) over the lifetime of the loan? (Assume you make each of the required 360 payments on time.) A) $235,101 B) $245,583 C) $257,919 D) $290,457 E) $370, Although you will get a 30-year mortgage, you plan to prepay the loan by making an additional payment each month along with your regular payment. How much extra must you pay each month if you wish to pay off the loan in 20 years? A) $ B) $ C) $ D) $ E) $ Your banker suggests that, rather than obtaining a 30-year mortgage and paying it off early, you should simply obtain a 15-year loan for the same amount. The rate on this loan is 6.75% APR. By how much will your monthly payment be (higher/lower) for the 15-year loan than the regular payment on the 30-year loan? A) lower; $ B) lower; $ C) higher; $ D) higher; $ E) higher; $ Page 3

4 13. The stated interest payment, in dollars, made on a bond each period is called the bond's: A) Coupon. B) Face value. C) Maturity. D) Yield to maturity. E) Coupon rate. 14. A bond with a face value of $1,000 that sells for $1,000 in the market is called a bond. A) par B) discount C) premium D) zero coupon E) floating rate 15. In the event of default, debt holders must give preference to more debt holders in the priority of repayment distributions. A) short-term; long-term B) long-term; short-term C) senior; junior D) senior; subordinated E) subordinated; senior 16. J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what will the bond sell for? A) $ 975 B) $1,020 C) $1,051 D) $1,087 E) $1, The bonds of Microhard, Inc. carry a 12% annual coupon, have a $1,000 face value, and mature in 5 years. Bonds of equivalent risk yield 9%. What is the market value of Microhard's bonds? A) $1, B) $1, C) $1, D) $1, E) $1, Page 4

5 18. King Noodles' bonds have a 9% coupon rate. Interest is paid quarterly and the bonds have a maturity of 10 years. If the appropriate discount rate is 10% on similar bonds, what is the price of King Noodles' bonds? A) $ B) $ C) $ D) $ E) $ The yield to maturity on a semiannual payment bond is quoted as. A) an EAR B) a six-month rate C) an APR D) a compound rate E) a current yield 20. The annual coupon payment of a bond divided by its market price is called the: A) Coupon rate. B) Current yield. C) Yield to maturity. D) Bid-ask spread. E) Capital gains yield. Answer Key 1. A 2. E 3. B 4. A 5. C 6. B 7. D 8. D 9. B 10. C 11. C 12. D 13. A 14. A 15. E 16. C 17. D 18. A 19. C 20. B Page 5

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