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Question;11. You?ve decided to buy a house that is;valued at $1 million. You have $500,000 as a down payment on the house and you;take out a mortgage for the rest. Your bank is offering you a 30-year standard;mortgage at a fixed nominal rate of 9% or a 15-year mortgage at a fixed nominal;rate of 9%. How much more interest will you pay if you took out a 30-year;mortgage instead of a 15-year mortgage?;a.;$535,480.20;b.;$631,866.64;c.;$685,414.66;d.;$738,962.68;e.;$876,543.21;12. How long will it take for you to pay;off $1,000 charged on your credit card, if you plan to make the;minimum payment of $15 per month;and the credit card charges 24% per annum?;a.;10;years;b.;12;years;c.;15;years;d.;17;years;e.;You;may not be able to pay off the debt;13. Which of the following investments;would have the lowest present value?;Assume that the effective annual rate for all investments is the same;and is greater than zero.;a. Investment A pays $250 at the end 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 beginning;of every year for the next 10 years (a total of 10 payments).;14. Which of the following statements is CORRECT?;a. The cash flows for an ordinary annuity all;occur at the beginning of the periods.;b. If a series of unequal cash flows occurs at regular intervals, then the series;is an annuity.;c. The cash flows for an annuity due must all occur at the ends of the periods.;d. The cash flows for an annuity must all be;equal, and they must occur at regular intervals, such as once a year or once a;month.;e. If some cash flows occur at the beginning of the periods while others occur;at the ends, then we have what the textbook defines as a variable annuity.;15. You have 2 options to buy a membership. One is to pay;$5,000 upfront today and the other one is to pay;$500 each year;starting today. If the prevailing;discount rate is 8%, how many years do you remain as a member before the $500;annual payment becomes more expensive than the one-time membership?;a. 14.5 years;b. 17.5 years;c. 18.5 years;d. 19.5 years;e. 21.5 years;16. You observed an upward-sloping normal;yield curve. Which of following statement is the MOST correct?;a.;Pure;expectation theory must be correct.;b.;There;is a positive maturity risk premium.;c.;If;the pure expectation theory is correct, future (short-term) rates are expected;to be higher than current (short-term) rates.;d.;Inflation;must be expected to change in the future.;e.;Default;risk premium or liquidity premium must be increasing in the future.;17. Charles Townsend Agency issues;15-year, AA-rated bonds. What is the yield on these bonds? Disregard;cross-product terms, i.e., if average is necessary, use the arithmetic average.;Relationship;between bond ratings and DRP;Rating;Default Risk Premium;U.S. Treasury;-;AAA;0.60%;AA;0.80%;A;1.05%;BBB;1.45%;Real risk-free rate (r*) = 2.8%;(expected to remain constant);Inflation rate = 5%/yr for each;of next five years, 4% thereafter;MRP = 0.1*(t ? 1)%, t is the;security?s maturity, LP = 0.55%;a.;5.55%;b.;8.48%;c.;9.33%;d.;9.88%;e.;10.12%;18. The yield on a one-year Treasury security is 5.84%, and;two-year Treasury security has a 7.88% yield. Suppose the securities do not;have a maturity risk premium, what is the market?s estimate of the one-year;Treasury rate one year from now?;a.;8.118%;b.;9.55%;c.;9.92%;d.;11.354%;e.;12.129%;19. Assume a scenario in which there is no;maturity risk premium (MRP = 0) and the real risk-free rate is expected to;remain constant, and the yield curve is likely to be normal for the next 10;years. Is inflation expected to increase, decrease, or stay the same over the;next 10 years?;a.;Stay;the same;b.;Decrease;c.;Increase;d.;Increase;at first and then decrease;e.;None;of above;20. Crockett Corporation's 5-year bonds;yield 6.65%, and 5-year T-bonds yield 4.75%.;The real risk-free rate is r* = 3.60%, the default risk premium for;Crockett's bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium;on Crockett's bonds is LP = 0.90% versus zero for T?bonds, and the maturity;risk premium for all bonds is found with the formula MRP = (t ? 1) ? 0.1%;where t = number of years to maturity.;What inflation premium (IP) is built into 5-year bond yields?;a. 0.68%;b. 0.75%;c. 0.83%;d. 0.91%;e. 1.00%;21. Assume that interest rates on 20-year;Treasury and corporate bonds are as follows;T-bond;= 7.72% AAA = 8.72% A = 9.64% BBB = 10.18%;The differences in these rates;were probably caused primarily by;a. Tax effects;b. Default risk differences;c. Maturity risk differences;d. Inflation differences;e. Real risk-free rate differences;22. If 0R1=5%;E(1R2)=4%, what is 0R2 according to;the Expectations Hypothesis?;a.;3%;b.;3.5%;c.;4%;d.;4.5%;e.;5%

Paper#51213 | Written in 18-Jul-2015

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