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FIN303
Examtype questions
For Midterm 2
Chapter 2
1. Suppose you have $2,000 and plan to purchase a 3year certificate of deposit (CD) that
pays 4% interest, compounded annually.
How much will you have when the CD
matures?
a.
$2,324.89
b.
$2,591.45
c.
$2,249.73
*
d.
$2,011.87
PV= 2,000; I=4%;N=3 PMT=0; FV=?
2. Suppose a U.S. government bond promises to pay $2,249.73 three years from now.
If the
going interest rate on 3year government bonds is 6%, how much is the bond worth
today?
a.
$2,011.87
b.
$2,591.45
c.
$2,324.89
d.
$1,888.92
*
PV=?; I=6%; N=3; PMT=0; FV=2,249.73
3.
What is the future value of a 5year ordinary annuity with annual payments of
$200, evaluated at a 15 percent interest rate?
a.
$
670.44
b.
$
842.91
c.
$1,169.56
d.
$1,348.48
*
Financial calculator solution:
Inputs:
N = 5; I = 15; PV = 0; PMT = 200.
Output:
FV =
$1,348.48.
4.
What is the present value of a 5year ordinary annuity with annual payments of
$200, evaluated at a 15 percent interest rate?
a.
$
670.43
*
b.
$
842.91
c.
$1,169.56
d.
$1,348.48
Financial calculator solution:
Inputs:
N = 5; I = 15; PMT = 200; FV = 0.
Output:
PV =
1
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5.
A real estate investment has the following expected cash flows:
Year
Cash Flows
1
$10,000
2
25,000
3
50,000
4
35,000
The discount rate is 8 percent. What is the investment’s present value?
a.
$103,799
b.
$ 96,110
*
c.
$ 95,353
d.
$120,000
PV = $10,000/1.08 + $25,000/(1.08)
2
+ $50,000/(1.08)
3
+ $35,000/(1.08)
4
= $9,259.26 + $21,433.47 + $39,691.61 + $25,726.04
= $96,110.38
≈
$96,110.
6.
If $100 is placed in an account that earns a nominal 4 percent, compounded
quarterly, what will it be worth in 5 years?
a.
$122.02
*
b.
$105.10
c.
$135.41
d.
$120.90
Financial calculator solution:
Inputs:
N = 20; I = 1; PV = 100; PMT = 0.
Output:
FV =
$122.02.
7.
In 1958 the average tuition for one year at an Ivy League school was $1,800.
Thirty
years
later,
in
1988,
the
average
cost
was
$13,700.
What was the growth rate in tuition over the 30year period?
a.
12%
b.
9%
c.
6%
d.
7%
*
Financial calculator solution:
Inputs:
N = 30; PV = 1800; PMT = 0; FV = 13700.
Output:
I =
7.0%.
8.
At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half
in 8.04 years.
How long to the nearest year would it take the purchasing power of
$1 to be cut in half if the inflation rate were only 4 percent?
a.
12 years
b.
15 years
c.
18 years
*
d.
20 years
2
Financial calculator solution:
Inputs:
I = 4; PV = 1; PMT = 0; FV = 0.50.
Output:
N = 17.67
≈
18 years.
9.
South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid
in 5 annual endofyear installments of $2,504.56.
What annual interest rate is the
company paying?
a.
7%
b.
8%
*
c.
9%
d.
10%
Financial calculator solution:
Inputs:
N = 5; PV = 10000; PMT = 2504.56; FV = 0.
Output:
I =
8%.
10.
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This note was uploaded on 06/01/2008 for the course MANAGEMENT Corp Fin 5 taught by Professor Jassim during the Spring '08 term at McGill.
 Spring '08
 Jassim

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