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ADMS3530-Midterm-F07-Sol - Name Section ID(Prof Alagurajahs...

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Page 1 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 semi-annual 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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Page 2 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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