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Midterm Solutions 1

# Midterm Solutions 1 - 1 McGill University Faculty of...

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1 McGill University Faculty of Management Finance I (280-341) Mid-Term Examination - Part I Fall 2001 Instructor: Dr. Wajeeh Elali Date: Thursday, October 25, 2001 Student Name: Student ID: Version A ***Suggested Solutions*** INSTRUCTIONS: This is a CLOSED BOOK examination. You are allowed TRANSLATION dictionaries ONLY. You are permitted noiseless, non-programmable CALCULATORS. You may use the opposite side of the paper for any rough work. This examination is worth 15% of your final mark. This examination consists of 15 questions on a total of 8 pages, including cover page. Please ensure that you have a complete examination paper before starting. Indicate your name and ID on the computer sheet. For each multiple choice question, choose ONLY ONE answer. No part marks will be awarded for incorrect answers. Good Luck! Honor Code In recognition and spirit of the Honor Code, I certify that I have not and will not receive or give aid on the examination and that I will report, to the best of my ability, all honor Code violations observed by me. Signed_________________________________________________ THIS EXAMINATION PAPER MUST BE RETURNED

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2 1. You are reviewing an advertisement by a finance company offering loans at an annual percentage rate of 9%. If the interest is compounded weekly, what is the effective annualized interest rate on this loan? a. 9.00% b. 9.22% c. 9.35% d. 9.41% Answer: d Solution: EAR=(1+.09/52)^52-1=9.41% 2. Ignoring default, which of the following is NOT accurate: Prior to maturity, a. a callable bond can be terminated (called)by the issuer b. an income bond can be terminated (repaid) by the issuer c. a convertible bond can be terminated (converted) by the investor d. a put bond can be terminated (put) by the investor Answer: b 3. Consider a firm that is expected to generate a net cash flow of \$10,000 at the end of the first year. The cash flow will increase by 3% a year for seven years and then the firm can be sold for \$120,000. The relevant discount rate for the firm is 11%. What is the present value of the
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Midterm Solutions 1 - 1 McGill University Faculty of...

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