are171a-midterm-key-a-blue-green

are171a-midterm-key-a-blue-green - ARE 171A VIN-4 A” Fall...

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Unformatted text preview: ARE 171A VIN-4 A” Fall 2009 J ‘H (9034" (low [6W1 Wand NAME: This exam has two sections. Section A consists of 23 multiple choice questions worth 10 points each, for a total of 230 possible points. Section B is made up of 3 short problems, worth 40 points each, for a total of 120. Show your work in section B; partial credit is given for correct approach. Total points on this exam: 350 (35% of course grade). SECTION A. 10 points each 1. Suppose we observe that the yield curve for US Treasury securities is inverted. What would be a likely circumstance where this would occur? (3 Economic activity has been strong, but is expected to weaken. . Economic activity has been weak, but is expected to strengthen. . c. Investors are concerned that longer-term Treasuries have a chance of defaultrng. d. Investors are concerned that shorter-term Treasuries have a chance of defaulting. 2. Consider the 4 bonds below: i. Exxon Mobil corporate bond, AA rated, 20 years to maturity, non-callable ii. Exxon Mobil corporate bond, AA rated, 20 years to maturity, callable iii. US Treasury bond, 20 years to maturity iv. US Treasury bond, 10 years to maturity Assuming typical interest rate conditions, rank these bonds by their yield to maturity, from highest to lowest. . 1, ii, iii, iv @ii, i, iii, iv c. iv, iii, i, ii d. iv, i, ii, iii e. ii, i, iv, iii 3. Seth purchases a corporate bond with 10 years remaining till maturity. The bond has a par value of $1000 and a yield to maturity of 8%. If Seth’s purchase price is $920, what do you conclude? a. His current yield is > 8% b. His capital gain yield is negative. is bond’s coupon rate is < 8% . None of the above. 4. y might an investor prefer to purchase umoupon bonds instead of regular bonds? 0 receive a known payment on a single specific future date, to pay for a goarticular future expense. b. To stpone paying mcome taxes that would have been due on a regular nd’s interest payments. c. B a and b. d. Neither a nor b. 5. In which year below was the overall level of the Treasury yield curve the lowest? a. Oct. 2006 b. Oct. 2007 Oct. 2008 $0“. 2009 e. The level of the Treasury yield curve has remained approximately steady during 2006-2009. 6. Scott is considering whether to Operate his consulting business as an S-corporation, or as an individual proprietorsh2ip. What is an advantage of the individual proprietorship form of business organization over an S~ corporation a. Easier to transfer ownership of the firm. b. Protection from personal liability for c rate debts. . Income from the business can be reporte on Scott’s personal income tax form. Less paperwork is required. e. All of the above. 7. What is the difference between primary and secondary markets for securities? a. Primary markets refer to major securities exchanges such as the New York Stock Exchange, where securities of major corporations are traded. Secondary markets, such as the over-the~counter market, trade in securities of smaller companies. b. Primary markets are highly liquid, while secondary markets are typically illiquid. c. Primary markets are those for securities with maturities of less than one year, while secondary markets are . those for securities having longer maturities. 0' ' nary markets are those for newly issued securities, while secondary markets are for previously- i s s u e d securities. 8. If a - and has a duration of 6 years, what does this imply? 9 A 1% increase in interest rates will cause the bond’s price to decline by about 6%. u. The bond will mature in 6 years. c. Both a and b. d. Neither a nor b. 9. Carmela is planning to purchase a condominium soon, and is debating whether to finance the purchase with a 15- year or a 30-year mortgage. Which of the statements below is usually true? a. The 15-year mortgage will charge a lower interest rate. b. The 30-year mortgage will have a lower payment. Both a and b. . Neither a nor b. 10. Com y A’s assets have a current book value of $4 million dollars, and could be sold today for $3 million. The firm has iabilities of $2 million dollars. The firm has 1 million shares of stock outstanding, and their market price per share is $5. What do you conclude? a. The firm’s book value is $2 million. b. The firm’s market value is $5 million . The firm’s liquidation value is $1 million @All of the above. e. None of the above. 11. Under what circumstances would a corporation be likely to call an outstanding bond issue? @lnterest rates used to be higher, but now have fallen. b. Interest rates used to be lower, but now have risen. c. Interest rates have remained equal to the band’s coupon rate. d. The decision to call a bond does not depend on changes in the level of interest rates. 12. Derek deposited $4000 into an account paying 3% stated interest, compounded continuously. How much will his account be worth after 5 years? 1 $4637.10 c. $4679.43 3: 647.34 d. $4694.04 13. Martin and his associates are planning to organize a California business to drill exploratory oil and gas wells in the Bakersfield, CA area. What form of business organization would NOT be suitable for their firm? a. C—corporation b. S-corporation c. Limited partnership @Limited liability partnership e. General partnership (“regular” partnership) 14. Suppose the news media reports an unexpected improvement in the US job market (for instance, an unexpected sharp decline in the unemployment rate). How would investors typically react to this news? a. Stock investors will be excited and enthusiastic. b. Bondholders will be worried and concerned. Both a and b. . Neither a nor b. 15. Patricia, a California resident, is considering purchasing several bonds. She is in the 28% Federal tax bracket, and the 9.5% Ca. state tax bracket. Rank her afier—tax yield for these bonds, from highest to lowest. i. Treasury bond with before-tax YTM of 4% ii. Corporate bond with before-tax YTM of 5.0% iii Nevada municipal bond with before tax YTM of 3.2% iv. California municipal bond with before tax YTM of 2.95% ii, i, iv, iii iv, i, iii, ii iv, iii, i, ii . i, ii, iii, iv .None of the above. any? 16. What is the present value of a bond having par value =$1000, coupon rate = 8% paid semiannually, and 5 years remaining till maturity, if investors’ required rate of return is 10%? $922.79 . $944.61 c. $976.38 (1. $1081.11 e. None of the above. 17. . What is unusual about the US Treasury yield curve, in today’s market? The short-term rates are extremely low relative to historical norms. . The curve is inverted. c. Both a and b. d. Neither a nor b. 18. If inflation is expected to be 3% in year 1, 1% in year 2, and 2% in year 3, what approximate inflation premiums will investors require for l-year, 2-year and 3-year bonds, respectively? a. IP1=3%,IP2=1%,IP3=2% @IP1=3%,IP2=2%,IP3=2% c. IP1=2%,1P2=2%,IP3=2% d.IPl=3%,1P2=2%,IP3=3% 19. A firm issues shares of a preferred stock. Each share pays a fixed annual dividend of 32.50. What is the present value per sgazrg, if today’s required rate of return is 4%? $62.50 c. 3100 d. $110.38 e. None of the above. 20. A firm de sits $8000 annually, at the beginning of each year, for 10 years into a savings account. How much money will it ave at the end of the 10 year period, if the account earns a return of 7%? a. $105,448 b. $110,528 c. $111,265 d. $111,775 $118,265 21. If Max’s investment earned a 10% annual nominal rate of return, while prices of goods rose from 900 to 1000 during the same year, what was Max’s real rate of return? a. 1.10% b. 0.99% c. 0.00% Q.) -1.00% e. None of the above. 22. Donovan purchases a home, taking out a $400,000 mortgage loan with a 15-year term, paid monthly at the end of each 6&%%he mortgage interest rate is 6%. What is his monthly payment, to the nearest dollar? b. 33421 c. $3802 d. $4057 ' " e. None of the above. 23. What is an advantage of investing in a firm’s stock, as opposed to the same firm’s bonds? ® Stockholders share in the growth of the company, if the firm does well b. Stockholders have that claim on liquidated assets, if the firm goes bankrupt. c. The value of the stock is not affected by fluctuating interest rates, while bond values are. d. All of the above. SECTION B. 40 points each 1 . Mrs. Gilbertson would like to distribute $1,000,000 today (Nov. 2009) between her two daughters, Martha and Yvonne. She would like to divide this amount fairly, taking into account previous gifts she has given the 2 girls in the past. For this problem, assume the time value of money is k=6%, and assume annual compounding. a. (15) In the past, she paid Martha’s school tuition of $30,000 annually, on the dates Nov. 2000, Nov. 2001, Nov. 2002, Nov. 2003, Nov 2004, and Nov. 2005. (Martha completed both a bachelors and masters degree). Find the value of Martha’s past gifts, in today’s dollars. 02. 7.00% 200% 2066’ 2006 2007 3005’ 2036, 2W ‘ ’3/ l 0 30K 30K 30K 30K 30K 30K ‘ 3104/7 W1 3 N I . >EVIFA6%)A.50‘000 “MM/.04) : 244) 73 I \ ‘ slight v 6375‘ 5 out; 0“ ‘Mrl q : 26L/ )6? M E “‘3 [WWW x 30.000 (1-06» (“3(9) , [M prfifl/lFA 690,0 F ‘ e I b. (5) She also paid a downpayment of $80,000 on a home for Yvonne, on Nov. 2006. Find the value of ' this gift, in today’s dollars. 7,006 2001 200% 7,009 W go‘W 6 I 9528/ .__—/————- c. (20) Given your answers to a and b, how much of the $1,000,000 in additional gift money should each sister be given today? 1-0th (Ji-Ffs 5 liooolooo 6‘ -- 2 725.9 N (mm: M 9/42 ml ll ”WW/2 ’ (.79 HZWWO de‘uy’ ”MWW (97Q7Zé 1 ’ qr l/JVO’VVVLQ, $2193 WW’LLr-‘ch" , @ N : I§§§é 2. Find the present value of the two assets below. a. (20) A stock whose dividend is expected to grow at 20% annually for 3 years, then at 4% thereafter, if the most recent dividend paid was $2.00 and investors’ required rate of return is ke = 10%. 0'0 . D CZ“ l 1996 Di 10% ?1 2°?6 D5 ["470 DH 0 “4‘25 “W 7—0.2)? 2 0 $2,540 25% 3‘61; $.qu Z" :54 i 2.318 :. {Kg/Mt 15° : 3Hs’b/Ills 4. v .4 0 , 0 V ”“013” H; A V _, 92L : 1—5333 : 67.?0 2) \chk 010’ Li b. (20) An apartment building that is expected to generate rent payments to its owner of $5,000 per month, at the start of each month, for the next two years. At that time, the building will be sold for $800,000. Assume k = 12%, and use monthly discounting. mafl m " (”50°35 WW» - <mo 000 v a. (PVIFA \goooonm + ”—‘m 0 \ Woe-"f ' u A.“ LLBL ,ol 3. Hudson Construction plans to construct a warehouse. The firm takes out a mortgage for $400,000, to be paid back in semiannual payments over a 15-year period. The mortgage interest rate is 5.2% a. (10) What is the semiannual payment amount? w: MTWWH ) , 39%) q 000 ,. 1" 5° {Wt 3,6133% 00! fl l~".’" ’3 ”£331. 8' , 1mm '6“; 20.63% b. (20) Develop an amortization schedule for the first 2 payments, as shown below. (Okay to round to the nearest dollar.) Beginning Balance Payment Interest Principal Remaining Balance 1 Lloopoo law? M00 8%? eta/0'53 2 39(1063 WSW WW ($200 $1333 c(10). Assuming both payments above are made in the first year of ownership, which am0unts from table (b) can the firm deduct as an expense when it pays its income taxes for that year? (show the total $ value that is deductible for tax purposes). MRN/fi' C0 (LIMCM’QQ :7 lot/ooflo/é’f? :\M ...
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