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? 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? 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*?
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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?
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