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Question;1. You plan to;analyze the value of a potential investment by calculating the sum of the;pre-sent values of its expected cash flows.;Which of the following would lower the calcu-lated 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.;B. 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 re-ceived 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 com-pounded 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 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).;4. You deposit $1,000;today in a savings account that pays 3.5% interest, com-pounded 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%;E. 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 securi-ty, 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%;B. 5.85%;c. 5.95%;d. 6.05%;e. 6.15%;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%;<>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 re-deemed 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%;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 premi-um (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%;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#51053 | Written in 18-Jul-2015

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