IN120 EXAM 2 Study Guide (Chapters 5-7 & 13)

Conceptual Questions 1-15

Chapter 5

1. Compound rate on future value

2. Present value of future values amounts Chapter 6

3. Annual percentage rate (APR) vs effective annual rate - d

4. Annuity vs Annuity Due - PV and FV comparison

5. Perpetuity - what years does most of the PV come from

6. Amortization table - complete table and identify required amounts (remember you need to start by finding the interest rate)

Chapter 7

7. Types of bonds - definitions, descriptions, and features

8. Par, Premium, and Discount Bonds - relationship between yield and price

9. Bond Grading - Default Risk - the various ratings and meaning

10. Yield Curves - term structure of interest rates

Chapter 13

11. Limits of diversification benefit - 15 to 20 stocks

12. Calculating Expected Return-What is the expected return if the following were true?

Return Probability

20% .3

10%. .5

-2%. .2 13. Beta - meaning of value

14. Measures of risk - beta vs standard deviation

15. Types of risk - definitions

Calculation Problems 16-26

16. Chapter 5/6 - You deposit $300 per month in an account earning 8% interest (compounded monthly). You plan to retire in 40 years. How much will you have when you retire?

17. Chapter 5/6 - You borrow $5,000 from your credit card and will repay the loan in 36 monthly installments. If the bank charges 15% annual interest, what monthly payment is required?

18. Chapter 5/6 - You borrow $5,000 from your credit card and will repay the loan in monthly installments of $300. If the bank charges 15% annual interest, how long will it take to pay back the loan?

19. Chapter 5/6 - You are looking to buy a home and can only afford payments of $1,300 per month. You can qualify for a 30-year fixed at 4%. What loan amount are you eligible to receive?

20. Chapter 5/6 - What is the rate of return on an investment of $25,000 if the company expects to receive $3,000 per year for the next 20 years? (note: if you are not getting an answer (#NUM!) you may need to change your guess - for this problem anything .02 and over works)

21. Chapter 5/6 - What are you willing to pay for an investment offering the following cash flows, if your discount rate is 5%? Year 1 = 2000, Year 2 = -500, Year 3 = 3000.

22. Chapter 5/6 - How much do you need to invest today to receive $20,000 in 4 years if you earn 4% annually?

23. Chapter 5/6 - If you are looking to save $20,000 in 5 years, how much do you need to save monthly if you can earn 6% annually?

24. Chapter 13 - If the annual risk-free rate, Rrf, will be 4 percent in 2024 and the expected return on the market index, E(Rm), will be 10 percent, what is your portfolio's required rate of return according to CAPM? The portfolio consists of 2 stocks, A and B, with A having a beta of 1.2 and weight of .5 AND B having a BETA of .9 and a weight of .5. Use this information to find the portfolio beta to solve the problem.

25. Chapter 7 - A 10-year, $1,000 bonds was issued 5-years ago at a coupon rate of 5%. If these bonds sell at 95% of par value, what is its yield-to-maturity (YTM)?

26. Chapter 7 - Company plans to issue bonds with a 10-year maturity, $1,000 par, a 12 percent coupon rate, and semiannual interest payments. Bonds of the same risk are currently having a yield to maturity of 10 percent. What is the value of these bonds?