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##### Financial Planning Problems

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Question;1. If theinterest is compounded quarterly with 8% APR, 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%.;2. What is the coefficient of;variation for security a?;Probability;Ra(State=?);Rb(State=?);Boom;35%;0.30;0.06;Average;40%;0.10;0.06;Recession;25%;--0.15;-0.05;a.;1.00;b.;1.25;c.;1.36;d.;1.73;e.;1.90;3. You plan to save $6,400 per year, beginning immediately. You will make 4 deposits in an account that;pays 5.7% interest. How much will you have 4 years from today?;a. $22,980.31;b. $22,685.69;c. $26,221.12;d. $29,461.93;e. $31,524.26;4. Which;of the following investments would have the highest future value at 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).;-250;5. Your;uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end;of each year, starting at the end of this year.;He also wants to have $25,000 left to give you when he ceases to;withdraw funds from the account. For how;many years can he make the $35,000 withdrawals and still have $25,000 left in;the end?;a. 13.48;b. 14.96;c. 15.71;d. 16.49;e. 17.32;6. Suppose;you just won the state lottery, and you have a choice between receiving;$2,550,000 today or a 20-year annuity of $250,000, with the first payment;coming one year from today. What rate of;return is built into the annuity?;Disregard taxes.;a. 7.12%;b. 7.49%;c. 7.87%;d. 8.26%;e. 8.67%;7. Which;indenture provision may affect the price of the bond differently?;a. convertibility;b. sinking fund;c. call;d. restrictions on;dividends;e. collateral;8. Suppose;1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 4.80%. Assuming the pure expectations theory is;correct, what is the yield on a 1-year T-bond expected to be one year from now?;a. 5.61%;b. 5.72%;c. 6.22%;d. 5.44%;e. 6.11%;9. Which;of the following factors would be most likely to lead to an increase in nominal;interest rates?;a. Households reduce their consumption and;increase their savings.;b. A new technology like the Internet has just;been introduced, and it increases investment opportunities.;c. There is a decrease in expected inflation.;d. The economy falls into a recession.;e. The Federal Reserve decides to try to;stimulate the economy.;10. You;are comparing saving;$100 every month for a year vis-?-vis $1,200 at the beginning of the year. How much extra will you have at the end of;the year by saving $ 1,200 at the beginning of the year instead of saving $100;each month at the end of each month. Use 6% interest rate.;a. $35.51;b. $38.44;c. $60.90;d. $63.90;e. $76.71;11. The real risk-free rate is 3.05%, inflation is expected to;be 2.75% this year, and the maturity risk premium is zero. IBM stock has a risk premium of 0.9%. What is;the equilibrium rate of return on a 1-year Treasury bond?;a. 5.51%;b. 5.80%;c. 6.09%;d. 6.39%;e. 6.71%;12. Suppose the real risk-free rate is 3.25%, the average;future inflation rate is 4.35%, and a maturity risk premium of 0.07% per year;to maturity applies to both corporate and T-bonds, i.e., MRP = 0.07%(t), where;t is the years to maturity. Suppose also;that a liquidity premium of 0.50% and a default risk premium of 0.90% apply to;A-rated corporate bonds but not to T-bonds.;How much higher would the rate of return be on a 10-year A-rated;corporate bond than on a 5-year Treasury bond?;a. 1.75%;b. 1.84%;c. 1.93%;d. 2.03%;e. 2.13%;13. Dyl Inc.'s bonds currently sell for;$1,180 and have a par value of $1,000.;They pay a $65 annual coupon and have a 15-year maturity, but they can;be called in 5 years at $1,100. What is;their yield to maturity (YTM)?;a. 4.79%;b. 3.69%;c. 4.65%;d. 5.08%;e. 4.36%;14. Sadik Inc.'s bonds currently sell for;$1,270 and have a par value of $1,000.;They pay a $105 annual coupon;and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)?;a. 6.89%;b. 5.89%;c. 5.18%;d. 6.54%;e. 6.30%;15. Bonds sell at a discount from par;value when market rates for similar bonds are;a. Less than the bond?s coupon rate.;b. Greater than the bond?s coupon rate.;c. Equal to the bond?s coupon rate.;d. Both lower than and equal to the bond?s;coupon rate.;e. Market rates are irrelevant in determining;a bond?s price.;16. Which of the following bonds would;have the greatest percentage increase in value if all interest rates in the;economy fall by 1%?;a. 10-year, zero coupon bond.;b. 20-year, 10% coupon bond.;c. 20-year, 5% coupon bond.;d. 1-year, 10% coupon bond.;e. 20-year, zero coupon bond.;17. O'Brien Ltd.'s outstanding bonds have;a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%;they pay interest semiannually, and they sell at a price of $975. What is the bond's nominal coupon interest;rate?;a. 7.32%;b. 7.71%;c. 8.12%;d. 8.54%;e. 8.99%;18. Cooley Company's stock has a beta of;1.32, the risk-free rate is4.25%, and the market risk premium is5.50%. What is the firm's required rate of return?;a. 10.93%;b. 11.51%;c. 10.13%;d. 8.75%;e. 10.01%;19. Porter Inc's stock has an expected;return of 10.75%, a beta of 1.25, and;is in equilibrium. If the risk-free rate;is 5.00%, what is the market risk premium?;a. 5.15%;b. 4.28%;c. 4.32%;d. 4.60%;e. 4.55%;20. Consider the following information and;then calculate the required rate of return for the Global Investment Fund;which holds 4 stocks. The market?s required rate of return is;9.50%, the risk-free rate is 7.00%, and the Fund's assets are as follows;Stock Investment Beta;A $200,000 1.50;B $300,000 -0.50;C $500,000 1.25;D $1,000,000 0.75;a. 8.91%;b. 10.06%;c. 6.77%;d. 8.64%;e. 10.42%;21. Which of the following statements best;describes what you should expect if;you randomly select stocks and add them to your portfolio?;a. Adding more such stocks will reduce the;portfolio's unsystematic, or;diversifiable, risk.;b. Adding more such stocks will increase the;portfolio's expected rate of return.;c. Adding more such stocks will reduce the;portfolio's beta coefficient and thus;its systematic risk.;d. Adding more such stocks will have no effect;on the portfolio's risk.;e. Adding more such stocks will reduce the;portfolio's market risk but not its;unsystematic risk.;22. Stock A has a beta of 0.7, whereas;Stock B has a beta of 1.3. Portfolio P;has 50% invested in both A and B. Which;of the following would occur if the market risk premium increased by 1% but the;risk-free rate remained constant?;a. The required return on Portfolio P would increase by 1%.;b. The required return on both stocks would increase by 1%.;c. The required return on Portfolio P would remain unchanged.;d. The required return on Stock A would increase by more than 1%, while the return;on Stock B would increase by less than 1%.;e. The required return for Stock A would fall;but the required return for Stock B would increase.;23. Assume that you manage a $10 million;mutual fund that has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. You now receive another $5 million, which you;invest in stocks with an average beta of 0.65.;What is the required rate of return on the new portfolio? (Hint: You must first find the market risk;premium, then find the new portfolio beta.);a. 8.83%;b. 9.05%;c. 9.27%;d. 9.51%;e. 9.74%;24. If the current one year CD rate is 3%;and the best estimate of one year CD which will be available one year from today;is 5%, what is the current two year CD rate with 1% liquidity premium?;a.;4.00%;b.;4.50%;c.;5.00%;d.;5.50%;e.;5.75%;25. How long approximately does it take to;triple your investment at 6% per year?;a. 18.9 years;b. 19.5 years;c. 19.7 years;d. 20.0 years;e. 22.7 years

Paper#50922 | Written in 18-Jul-2015

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