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##### Fin331 test 2

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Question;1. If;APR = 10%, what is the EAR (effective annual rate) for quarterly compounding?;a. 10.00%;b. 10.38%;c. 12.36%;d. 13.36%;e. 15.52%;2. 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.;4.0%;b.;4.5%;c.;5.0%;d.;5.5%;e.;6.0%;3. Which;of the following statements is CORRECT, assuming positive interest rates and;holding other things constant?;a. The present value of a 5-year, $250 annuity;due will be lower than the PV of a similar ordinary annuity.;b. A 30-year, $150,000 amortized mortgage will;have larger monthly payments than an otherwise similar 20-year mortgage.;c. A bank loan's nominal interest rate will;always be equal to or greater than its effective annual rate.;d. If an investment pays 10% interest;compounded quarterly, its effective annual rate will be greater than 10%.;e. Banks A and B offer the same nominal annual;rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher;future value if you leave your funds on deposit.;4. You;have a chance to buy an annuity that pays $550 at the beginning of each;year for 3 years. You could earn 5.5% on;your money in other investments with equal risk. What is the most you should pay for the;annuity?;a. $1,412.84;b. $1,487.20;c. $1,565.48;d. $1,643.75;e. $1,725.94;5. Your;aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning;of each year, beginning immediately. She;also wants to have $50,000 left to give you when she ceases to withdraw funds;from the account. For how many years can;she make the $45,000 withdrawals and still have $50,000 left in the end?;a. 15.05;b. 16.36;c. 17.22;d. 18.08;e. 18.;6. How much do you need to save each;year from two years from today and onward so that you can have $1,000 six years;from today at 10% interest rate?;a.;$150;b.;$164;c.;$173;d.;$183;e.;$190;7. Jennifer can make a 100,000 down payment to buy a;house. The house is $380,000 and she was offered 30-year mortgage and 15-year;mortgage at a market rate of 12%. How much more interest would Jennifer pay if;she took out a 30-year mortgage instead 15-year mortgage?;a.;$106,430;b. $413,957;c.;$431,959;d.;$450,790;e.;$490,250;8. How long will it take for you to pay off $1,500;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;months;b.;35;months;c.;10;years;d.;863;months;e.;You;may not be able to pay off the debt;9. 5-year;Treasury bonds yield 5.5%. The inflation;premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is;0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?;a. 2.59%;b. 2.88%;c. 3.20%;d. 3.52%;e. 3.87%;10. Suppose the interest rate on a 1-year T-bond is 5.0% and;that on a 2-year T-bond is 7.0%.;Assuming the pure expectations theory is correct, what is the market's;forecast for 1-year rates 1 year from now?;a. 7.36%;b. 7.75%;c. 8.16%;d. 8.59%;e. 9.04%;a. The yield on a 2 year corporate bond should;always exceed the yield on a 2 year Treasury bond.;b. The yield on a 3 year corporate bond should;always exceed the yield on a 2 year corporate bond.;c. The yield on a 2 year Treasury bond should;always exceed the yield on a 2 year Treasury bond.;d. If inflation is expected to increase, then;the yield on a 2 year bond should exceed that on a 3 year bond.;e. The real risk-free rate should increase if;people expect inflation to increase.;12. 5-year T-bonds yield 4.75%.;The real risk-free rate is r* = 3.60%, 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 using 5-year T-bonds?;a. 0.68%;b. 0.75%;c. 0.83%;d. 0.91%;e. 1.00%;13. Suppose the real risk-free rate is 3.50%, the average;future inflation rate is 2.50%, a maturity premium of 0.2% per year to maturity;applies, i.e., MRP = 0.20%(t), where t is the years to maturity. Suppose also that a liquidity premium of;0.50% and a default risk premium of 1.35% applies to A-rated corporate;bonds. What is the difference in the;yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond? Here we assume that the pure expectations;theory is NOT valid, and disregard any cross-product terms, i.e., if averaging;is required, use the arithmetic average.;a. 0.77%;b. 0.81%;c. 0.85%;d. 0.89%;e. 0.94%;14 What is the relationship between;PVIFA(r%, N) and PVIF(r%, N)?;a. PVIFA is greater than or equal to PVIF;b. PVIF is a sum of PVIFA from n=1 to n=N;c. PVIF is an inverse of PVIFA;d. PVIF is used for an annuity;e. None of the above;15. Ryngaert Inc. recently issued noncallable bonds that mature;in 15 years. They have a par value of $1,000 and an annual coupon of;5.7%. If the current market interest;rate is 7.0%, at what price should the bonds sell?;a. $817.12;b. $838.07;c. $859.56;d. $881.60;e. $903.64;16. Sadik Inc.'s bonds currently sell for $1,180 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. 6.63%;b. 6.98%;c. 7.35%;d. 7.74%;e. 8.12%;17. In calculating the current price of a bond paying;semiannual coupons, one needs to;a. Use double the number of payments.;b. Use half the annual coupon.;c. Use double the annual market rate as the;discount rate.;d. All of the above need to be done.;e. Only a and b are true.;18. Bonds sell at a premium 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.;19. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest;percentage increase in price?;a. An 8-year bond with a 9% coupon.;b. A 1-year bond with a 15% coupon.;c. A 3-year bond with a 10% coupon.;d. A 10-year zero coupon bond.;e. A 10-year bond with a 10% coupon.;20. A portfolio with a level of systematic risk less than that;of the market has a beta that is;a. equal to zero.;b. greater than zero but less than one.;c. less than the beta of the risk-free asset.;d. less than zero.;e. equal to infinity.;21. Cooley Company's stock has a beta of 1.40, the risk-free;rate is4.25%, and the market risk premium is5.50%. What is the firm's required rate of return?;a. 11.36%;b. 11.65%;c. 11.95%;d. 12.25%;e. 12.55%;22. 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 13.25%, 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. 9.58%;b. 10.09%;c. 10.62%;d. 11.18%;e. 11.77%;23. Stock A has a beta of 0.8 and Stock B has a beta of;1.2. 50% of Portfolio P is invested in;Stock A and 50% is invested in Stock;B. If the market risk premium (rM;? rRF) were to increase but the risk-free rate (rRF);remained constant, which of the following would occur?;a. The required return would increase for both;stocks but the increase would be greater for Stock B than for Stock A.;b. The required return would decrease by the same amount for both Stock A and;Stock B.;c. The required return would increase for;Stock A but decrease for Stock B.;d. The required return on Portfolio P would remain unchanged.;e. The required return would increase for;Stock B but decrease for Stock A.;24. Consider;the following information and then calculate the projected expected rate of;return for the Global Investment Fund, which holds 3 stocks.;Stock Investment Projected Expected;Return for Each Security;A $200,000 15%;B $300,000 -5%;C $500,000 10%;a. 5.9%;b. 6.5%;c. 7.8%;d. 8.7%;e. 9.5%;25. What is the coefficient of variation;for security b?;Probability;Ra(State=?);Rb(State=?);Boom;0.35;0.30;0.05;Average;0.40;0.10;0.05;Recession;0.25;--0.15;-0.05;a.;1.73;b.;1.89;c.;2.01;d.;2.35;e.;3.01

Paper#51356 | Written in 18-Jul-2015

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