#### Description of this paper

##### accounts data bank

**Description**

solution

**Question**

Question;1.;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.;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.;2.Your bank;account pays an 8% nominal rate of interest. The interest is compounded;quarterly. Which of the following statements is CORRECT?;a. The;periodic rate of interest is 2% and the effective rate;of interest is 4%.;b. The;periodic rate of interest is 8% and the effective rate;of interest is greater than 8%.;c. The;periodic rate of interest is 4% and the effective rate;of interest is less than 8%.;d The;periodic rate of interest is 2% and the effective rate;of interest is greater than 8%.;e. The;periodic rate of interest is 8% and the effective rate;of interest is also 8%.;3.Which of;the following investments would have thehighest future valueat the end of 10 years? Assume that the;effective annual rate for all investments is the same and is greater than zero.;a Investment;A pays $250 at the beginning of every year for the next 10;years (a total of 10 payments).;b. Investment;B pays $125 at the end of every 6-month period for the next 10;years (a total of 20 payments).;c. Investment;C pays $125 at the beginning of every 6-month period for the;next 10 years (a total of 20 payments).;d. Investment;D pays $2,500 at the end of 10 years (just one payment).;e. Investment;E pays $250 at the end of every year for the next 10 years (a;total of 10 payments).;4.You;deposit $1,000 today in a savings account that pays 3.5% interest, compounded;annually. How much will your account be worth at the end of 25 years?;a. $2,245.08;b $2,363.24;c. $2,481.41;d. $2,605.48;e. $2,735.75;5.;Suppose the real risk-free rate is 2.50% and the future rate of inflation is;expected to be constant at 3.05%. What rate of return would you;expect on a 5-year Treasury security, assuming the pure expectations theory is;valid? Disregard cross-product terms, i.e., if averaging is;required, use the arithmetic average.;a. 5.15%;b. 5.25%;c. 5.35%;d. 5.45%;5.55%;r = r* + IP + DRP + LP +;MRP;r = 2.50% + 3.05% = 5.55%;6.;Suppose the real risk-free rate is 3.50%, the average future;inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity;applies, i.e., MRP = 0.10%(t), where t is the years to;maturity. What rate of return would you expect on a 1-year Treasury;security, assuming the pure expectations theory is NOT;valid? Disregard cross-product terms, i.e., if averaging is;required, use the arithmetic average.;a. 5.75%;b5.85%;c. 5.95%;d. 6.05%;e. 6.15%;r = r* + IP + DRP + LP +;MRP;r = 3.50% + 2.25% + 0 + 0 +;.10% = 5.85%;7.;The real risk-free rate is 2.50%, inflation is expected to be 3.00% this year;and the maturity risk premium is zero. Taking account of the;cross-product term, i.e., not ignoring it, what is the equilibrium rate of;return on a 1-year Treasury bond?;a. 4.975%;b. 5.175%;c. 5.375%;d.5.575%;e. 5.775%;(1 + r) = (1 + r*) (1+ IP);(1+r) = (1.025) (1.03) = 1.05575 - 1 = 5.575%;<>8.Suppose;the U.S. Treasury offers to sell you a bond for $3,000.No payments will be made until the bond matures;10 years from now, at which time it will be redeemed for $5,000.What interest rate would you earn if you bought;this bond at the offer price?;a. 3.82%;b. 4.25%;c. 4.72%;d.5.24%;e. 5.77%;n = 10;i =?;PV = -3000;PMT = 0;FV = 5000;Solve for;"i" which will be 5.2410 %;9. Keys Corporation's 5-year bonds;yield 6.50%, and T-bonds with the same maturity yield 4.40%. The;default risk premium for Keys' bonds is DRP = 0.40%, the liquidity premium on;Keys' bonds is LP = 1.70% versus zero on T-bonds, inflation premium (IP) is;1.5%, and the maturity risk premium (MRP) on 5-year bonds is;0.40%. What is the real risk-free rate, r*?;a. 2.10%;b. 2.20%;c. 2.30%;d. 2.40%;e.. 2.50%;Simply subtract the IP of;1.50% and the MRP of.40% from the T-bond yield of 4.40% to arrive at 2.50%;10. The Carter;Company's bonds mature in 10 years have a par value of $1,000 and an annual;coupon payment of $80.The market interest rate for the bonds is 9%.What is the price of these bonds?;a $935.82;b. $941.51;c. $958.15;d. $964.41;e. $979.53

Paper#44744 | Written in 18-Jul-2015

Price :*$22*