Final Exam Sample Key

Final Exam Sample Key - CHAPTER 10 THE BASICS OF CAPITAL...

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ARIZONA STATE UNIVERSITY FIN 300: Fundamentals of Finance Final Exam (Sample) NAME_______________________________________ Hint: Read every question twice and slowly. Identify what it is that the problem or question is asking. Part I: Multiple Choice Questions (35 points) 1. You are analyzing the value of an investment by calculating the present value of its expected cash flows. Which of the following would cause the investment to look better? a. The discount rate decreases. b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same. c. The discount rate increases. d. The riskiness of the project’s cash flows increases. 2. Which of the following bank accounts has the highest effective annual return? a. An account that pays 10% nominal interest with monthly compounding. b. An account that pays 10% nominal interest with daily compounding. c. An account that pays 10% nominal interest with annual compounding. d. An account that pays 9% nominal interest with daily compounding. 3. Which of the following statements regarding a 30-year, $100,000 mortgage with a nominal interest rate of 10%, compounded monthly, is NOT CORRECT? a. The monthly payments will decline over time. b. The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan. c. The total dollar amount of principal being paid off each month gets larger as the loan approaches maturity. d. The amount paid toward interest in the first payment would be lower if the nominal interest rate were 8%. 4. Suppose 1-year T-bills currently yield 5.00% and the future inflation rate is expected to be constant at 3.10% per year. What is the real risk-free rate of return, r*? a. 1.90% b. 2.00% c. 2.10% d. 2.20%
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5. In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1. Given this information, which of the following statements is correct? a. The yield on 2-year Treasury securities must exceed the yield on 5-year Treasury securities. b. The yield on 5-year Treasury securities must exceed the yield on 10-year corporate bonds. c. The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds. d. The yield curve must be upward sloping. 6. Which of the following statements is CORRECT? a. If companies have fewer good investment opportunities, interest rates are likely to increase. b. If individuals increase their savings rate, interest rates are likely to increase. c. If expected inflation increases, interest rates are likely to increase. d.
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Final Exam Sample Key - CHAPTER 10 THE BASICS OF CAPITAL...

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