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Name
___________________________
Section
_____
ID #
______________________
(Prof. Alagurajah’s sections F and G; Prof. King’s section D; Prof. Li’s section A; Prof. Tahani’s
sections C and E; Prof. Tissenbaum’s sections B and H)
AK/ADMS 3530 Midterm Exam
Fall 2007
October 21, 2007
Exam  Solutions
This exam consists of
30 multiple choice questions
and carries a total
of
100 points
. Choose the
response which best answers each question.
Circle your answers below, and fill in your
answers on the bubble sheet. Only the bubble sheet is used to determine your exam score
.
Please note the following points
:

Read the questions carefully and use your time efficiently

The 20 “
Numerical Questions
” are
worth 4 points each
.

The 10 “
Conceptual Questions
” are
worth 2 points each
.

Choose the answers that are
closest
to yours, because of possible rounding.

Keep at
least 2 decimal places for dollar amounts
in your calculations, and at
least 6
decimal places for interest rates
.

Interest rates are
annual
unless otherwise stated.

Bonds pay
semiannual coupons
unless otherwise stated and have a face value (or par
value) of
$1,000
.

You may use the back of the exam paper as your scrap paper.
Numerical Questions (4 points each)
1. (Q. 6 in B) You decide to sell your car and a friend has offered you $1,000 now and
four annual payments of $2,000, with the annual payments starting at the end of the
second year.
Your other option is to sell the car to a dealer today for $7,000.
Assuming your friend will not default on the payments and the market interest rate is
8%, should you sell your car to your friend?
A)
Yes; present value is $7,134
B)
Yes; present value is $7,624
C)
No; present value is $6,134
D) No; present value is $6,624
Solution A
The PV of the annuity payment of $2,000 for 4 years is:
PV(at t=1) = 2,000 x PVIFA(8%,4) = 6,624.25
PV(at t=0) = 6,624.25/ (1.08) = 6,133.56
Finally add the initial payment $1000 today to the PV annuity at t=0
6,133.56 + 1,000 = 7,133.56 =
$7,134
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This is more than the $7,000 you would get today from the dealer. Therefore you
would sell your car to you friend.
2. (Q. 7 in B) Your brother bet the Toronto Maple Leafs would win their 2007 home
opener and is now trying to pay off a gambling debt of $3,000. You have agreed to
pay off the debt for him today, and in return he has agreed to pay you $125 per
month over the next three years with payments beginning immediately. What is the
effective annual interest rate you are charging him?
Solution C
3,000 = 125 x PVIFA(i,36) x (1+i) because it is an annuity due
Solve for i using your financial calculator: i = 2.5416%
EAR = (1 + i
m
)
m
1 = (1.025416)
12
1 =
35.15%
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 Spring '09
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