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principles of finance
Questions and Answers of
Principles Of Finance
Present Value of an Annuity What's the present value of a $900 annuity payment over five years if interest rates are 9 percent? (LG4)
Present Value of an Annuity What's the present value of a $700 annuity payment over six years if interest rates are 10 percent? (LG4)
Present Value of a Perpetuity What's the present value, when inter- est rates are 7.5 percent, of a $50 payment made every year forever? (LG5)
Present Value of a Perpetuity What's the present value, when inter- est rates are 8.5 percent, of a $75 payment made every year forever? (LG5)
Present Value of an Annuity Due If the present value of an ordinary, 7-year annuity is $6,500 and interest rates are 8.5 percent, what's the present value of the same annuity due? (LG6)
Present Value of an Annuity Due If the present value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what's the present value of the same annuity due? (LG6)
Future Value of an Annuity Due If the future value of an ordinary, 7-year annuity is $6,500 and interest rates are 8.5 percent, what is the future value of the same annuity due? (LG6)
Future Value of an Annuity Due If the future value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what's the future value of the same annuity due? (LG6)
Effective Annual Rate A loan is offered with monthly payments and a 10 percent APR. What's the loan's effective annual rate (EAR)? (LG7)
Effective Annual Rate A loan is offered with monthly payments and a 13 percent APR. What's the loan's effective annual rate (EAR)? (LG7)
Future Value Given a 4 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500. (LG1)
Future Value Given a 5 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400. (LG1)
Future Value of Multiple Annuities Assume that you contribute $200 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $400 per month for another 30 years.
Future Value of Multiple Annuities Assume that you contribute $150 per month to a retirement plan for 15 years. Then you are able to increase the contribution to $350 per month for the next 25 years.
Present Value Given a 6 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500. (LG3)
Present Value Given a 7 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400. (LG3)
Present Value of Multiple Annuities A small business owner visits her bank to ask for a loan. The owner states that she can repay a loan at $1,000 per month for the next three years and then $2,000
Present Value of Multiple Annuities A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $1,500 per month for the next three years and then $500 per
Present Value You are looking to buy a car. You can afford $450 in monthly payments for four years. In addition to the loan, you can make a $1,000 down payment. If interest rates are 7 percent APR,
Present Value You are looking to buy a car. You can afford $650 in monthly payments for five years. In addition to the loan, you can make a $750 down payment. If interest rates are 8 percent APR,
Present Value of a Perpetuity A perpetuity pays $100 per year and inter- est rates are 7.5 percent. How much would its value change if interest rates increased to 9 percent? Did the value increase or
Present Value of a Perpetuity A perpetuity pays $50 per year and inter- est rates are 9 percent. How much would its value change if interest rates decreased to 7.5 percent? Did the value increase or
Future and Present Value of an Annuity Due If you start making $50 monthly contributions today and continue them for five years, what's their future value if the compounding rate is 10 percent APR?
Future and Present Value of an Annuity Due If you start making $75 monthly contributions today and continue them for four years, what is their future value if the compounding rate is 12 percent APR?
Compound Frequency Payday loans are very short-term loans that charge very high interest rates. You can borrow $225 today and repay $300 in two weeks. What is the compounded annual rate implied by
Compound Frequency Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $590 in two weeks. What is the compounded annual rate implied by
Annuity Interest Rate What's the interest rate of a 5-year, annual $5,000 annuity with present value of $20,000? (LG8)
Annuity Interest Rate What's the interest rate of a 7-year, annual $4,000 annuity with present value of $20,000? (LGS)
Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $1,000 per month contribution to grow to $75,000 in six years? (LG8)
Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $600 per month contribution to grow to $45,000 in six years? (LG8)
Add-On Interest Payments To borrow $500, you are offered an add-on interest loan at 8 percent. Two loan payments are to be made, one at six months and the other at the end of the year. Compute the
Add-On Interest Payments To borrow $800, you are offered an add-on interest loan at 7 percent. Three loan payments are to be made, one at four months, another at eight months, and the last one at the
Loan Payments You wish to buy a $25,000 car. The dealer offers you a 4-year loan with a 10 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What
Loan Payments You wish to buy a $10,000 dining room set. The furni- ture store offers you a 3-year loan with an 11 percent APR. What are the monthly payments? How would the payment differ if you paid
Number of Annuity Payments Joey realizes that he has charged too much on his credit card and has racked up $5,000 in debt. If he can pay $150 each month and the card charges 17 percent APR
Number of Annuity Payments Phoebe realizes that she has charged too much on her credit card and has racked up $6,000 in debt. If she can pay $200 each month and the card charges 18 percent APR
Future Value Given an 8 percent interest rate, compute the year 7 future value if deposits of $1,000 and $2,000 are made in years 1 and 3, respec- tively, and a withdrawal of $700 is made in year 4.
Future Value Given a 9 percent interest rate, compute the year 6 future value if deposits of $1,500 and $2,500 are made in years 2 and 3, respec- tively, and a withdrawal of $600 is made in year 5.
EAR of Add-On Interest Loan To borrow $2,000, you are offered an add- on interest loan at 10 percent with 12 monthly payments. First compute the 12 equal payments and then compute the EAR of the
EAR of Add-On Interest Loan To borrow $700, you are offered an add- on interest loan at 9 percent with 12 monthly payments. First compute the 12 equal payments and then compute the EAR of the loan.
Low Financing or Cash Back? A car company is offering a choice of deals. You can receive $500 cash back on the purchase or a 3 percent APR, 4-year loan. The price of the car is $15,000 and you could
Low Financing or Cash Back? A car company is offering a choice of deals. You can receive $1,000 cash back on the purchase, or a 2 percent APR, 5-year loan. The price of the car is $20,000 and you
Amortization Schedule Create the amortization schedule for a loan of $15,000, paid monthly over three years using a 9 percent APR. (LG9)
Amortization Schedule Create the amortization schedule for a loan of $5,000, paid monthly over two years using an 8 percent APR. (LG9)
Investing for Retirement Monica has decided that she wants to build enough retirement wealth that, if invested at 8 percent per year, will pro- vide her with $3,500 of monthly income for 25 years. To
Investing for Retirement Ross has decided that he wants to build enough retirement wealth that, if invested at 7 percent per year, will provide him with $3,000 of monthly income for 30 years. To
Loan Balance Rachel purchased a $15,000 car three years ago using an 8 percent, 4-year loan. She has decided that she would sell the car now, if she could get a price that would pay off the balance
Loan Balance Hank purchased a $20,000 car two years ago using a 9 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his
Teaser Rate Mortgage A mortgage broker is offering a $183,900 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4 percent APR
Teaser Rate Mortgage A mortgage broker is offering a $279,000 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4.5 percent
Spreadsheet Problem Consider a person who begins contributing to a retirement plan at age 25 and contributes for 40 years until retirement at age 65. For the first ten years, she contributes $3,000
What are the different types of financial institutions? Include a description of the main services offered by each. (LG3)
How would economic transactions between suppliers of funds (e.g., households) and users of funds (e.g., corporations) occur in a world without FIs? (LG3)
Why would a world limited to the direct transfer of funds from suppliers of funds to users of funds likely result in quite low levels of fund flows? (LG3)
How do Fls reduce monitoring costs associated with the flow of funds from fund suppliers to fund users? (LG3)
How do Fls alleviate the problem of liquidity risk faced by investors wish- ing to invest in securities of corporations? (LG3)
What are six factors that determine the nominal interest rate on a security? (LG4)
What should happen to a security's equilibrium interest rate as the secu- rity's liquidity risk increases? (LG4)
Discuss and compare the three explanations for the shape of the yield curve. (LG5)
Are the unbiased expectations and liquidity premium hypotheses explana- tions for the shape of the yield curve completely independent theories? Explain why or why not. (LG5)
What is a forward interest rate? (LG6)
If we observe a 1-year Treasury security rate that is higher than the 2-year Treasury security rate, what can we infer about the 1-year rate expected one year from now? (LG6)
What does a call provision allow issuers to do, and why would they do it? (LG1)
List the differences between the new TIPS and traditional Treasury bonds. (LG2)
Explain how mortgage-backed securities work. (LG2)
Provide the definitions of a discount bond and a premium bond. Give examples. (LG3)
Describe the differences in interest payments and bond price between a 5 percent coupon bond and a zero coupon bond. (LG4)
All else equal, which bond's price is more affected by a change in interest rates, a short-term bond or a longer-term bond? Why? (LG5)
All else equal, which bond's price is more affected by a change in interest rates, a bond with a large coupon or a small coupon? Why? (LG5)
Explain how a bond's interest rate can change over time even if interest rates in the economy do not change. (LG5)
Compare and contrast the advantages and disadvantages of the current yield computation versus yield to maturity calculations. (LG6)
What is the yield to call and why is it important to a bond investor? (LG6)
What is the purpose of computing the equivalent taxable yield of a munici- pal bond? (LG6)
Explain why high-income and wealthy people are more likely to buy a municipal bond than a corporate bond. (LG6)
Describe the difference between a bond issued as a high-yield bond and one that has become a "fallen angel." (LG7)
What is the difference in the trading volume between Treasury bonds and corporate bonds? Give examples and/or evidence. (LG8)
Interest Payments Determine the interest payment for the following three bonds: 3 percent coupon corporate bond (paid semiannually), 4.25 percent coupon Treasury note, and a corporate zero coupon
Interest Payments Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semiannually), 5.15 percent coupon Treasury note, and a corporate zero coupon
Time to Maturity A bond issued by Ford on May 15, 1997 is scheduled to mature on May 15, 2097. If today is November 16, 2012, what is this bond's time to maturity? (LG1)
Time to Maturity A bond issued by IBM on December 1, 1996, is sched- uled to mature on December 1, 2096. If today is December 2, 2013, what is this bond's time to maturity? (LG1)
Call Premium A 6 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if
Call Premium A 5.5 percent corporate coupon bond is callable in ten years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder
TIPS Interest and Par Value A 24 percent TIPS has an original reference CPI of 185.4. If the current CPI is 210.7, what is the current interest pay- ment and par value of the TIPS? (LG2)
TIPS Interest and Par Value A 31/8 percent TIPS has an original refer- ence CPI of 180.5. If the current CPI is 206.8, what is the current interest payment and par value of the TIPS? (LG2)
Bond Quotes Consider the following three bond quotes: a Treasury note quoted at 97:27, a corporate bond quoted at 103.25, and a municipal bond quoted at 101.90. If the Treasury and corporate bonds
Bond Quotes Consider the following three bond quotes: a Treasury bond quoted at 106:14, a corporate bond quoted at 96.55, and a municipal bond quoted at 100.95. If the Treasury and corporate bonds
Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 4.5 percent. (LG4)
Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 15 years if the market interest rate is 5.75 percent. (LG4)
Current Yield What's the current yield of a 4.5 percent coupon corporate bond quoted at a price of 102.08? (LG6)
Current Yield What's the current yield of a 5.2 percent coupon corporate bond quoted at a price of 96.78? (LG6)
Taxable Equivalent Yield What's the taxable equivalent yield on a municipal bond with a yield to maturity of 3.5 percent for an investor in the 33 percent marginal tax bracket? (LG6)
Taxable Equivalent Yield What's the taxable equivalent yield on a municipal bond with a yield to maturity of 2.9 percent for an investor in the 28 percent marginal tax bracket? (LG6)
Credit Risk and Yield Rank from highest credit risk to lowest risk the fol- lowing bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 5.55 percent, IBM
Credit Risk and Yield Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: Treasury bond with yield of 4.65
TIPS Capital Return Consider a 3.5 percent TIPS with an issue CPI refer- ence of 185.6. At the beginning of this year, the CPI was 193.5 and was at 199.6 at the end of the year. What was the capital
TIPS Capital Return Consider a 2.25 percent TIPS with an issue CPI ref- erence of 187.2. At the beginning of this year, the CPI was 197.1 and was at 203.8 at the end of the year. What was the capital
Compute Bond Price Compute the price of a 4.5 percent coupon bond with 15 years left to maturity and a market interest rate of 6.8 percent. (Assume interest payments are semiannual.) Is this a
Compute Bond Price Compute the price of a 5.6 percent coupon bond with ten years left to maturity and a market interest rate of 7.0 percent. (Assume interest payments are semiannual.) Is this a
Compute Bond Price Calculate the price of a 5.2 percent coupon bond with 18 years left to maturity and a market interest rate of 4.6 percent. (Assume interest payments are semiannual.) Is this a
Compute Bond Price Calculate the price of a 5.7 percent coupon bond with 22 years left to maturity and a market interest rate of 6.5 percent. (Assume interest payments are semiannual.) Is this a
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