ADMS3530_Final exam_solutions_Winter 2007

ADMS3530_Final exam_solutions_Winter 2007 - AK/ADMS 3530.03...

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AK/ADMS 3530.03 Finance Final Exam Winter 2007 Solutions Type A Exam Numerical questions (2 points each) 1. (Q. 5 in B) What is the present value of the following payment stream, discounted at 8 percent annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3? A) $5,022.11 B) $5,144.03 C) $5,423.87 D) $5,520.00 Answer A PV = ( 29 ( 29 ( 29 3 2 1.08 3000 1.08 2000 1.08 1000 + + 1
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= $925.93 + $1,714.68 + $2,381.50 = $5,022.11 2. (Q. 6 in B) What is the present value of a four-year annuity of $100 per year that begins two years from today if the discount rate is 9 percent? A) $297.22 B) $323.86 C) $356.85 D) $388.97 Answer A PV 1 = $100 1 .09 1 09(1.09 . ) 4 - = $100 [3.2397] PV 1 = $323.97 PV 0 = 323.97 1.09 = $297.22 3. (Q. 7 in B) $3,000 is deposited into an account paying 10 percent annually, to 2
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provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second withdrawal? A) $587.32 B) $1,096.67 C) $1,206.34 D) $1,326.97 Answer B 1,206.34 1.1 1096.67 = 4. (Q. 8 in B) Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check (to be paid at the end of each month) that will last for 25 years, during which time the fund will earn 8 percent interest with monthly compounding? A) $261,500 B) $323,800 C) $578,700 D) $690,000 3
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Answer B The monthly interest rate is 8% / 12 = 0.667% PV = $2,500 × [1/0.00667 – 1/(0.00667(1.00667 300 ))] = $2,500 [129.52] = $323,800. 5. (Q. 1 in B) An investor buys a ten-year, 7 percent coupon bond for $1,050, holds it for one year and then sells it for $1,040. What was the investor's rate of return over the 1-year holding period? Assume coupons are paid annually. A) 5.71 percent B) 6.00 percent C) 6.67 percent D) 7.00 percent Answer A Return on bond = (Interest coupon + Capital gain) / Purchase price of bond. 4
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In our example there was a capital loss of $10 given that the selling price of the bond ($1,040) was less than the purchase price of the bond ($1,050). Rate of return = ($70 - $10)/$1,050 = 5.71%. 6. (Q. 2 in B) A bond with 10 years until maturity, an 8 percent coupon rate, and an 8 percent original yield to maturity increased in price to $1,107.83 yesterday. What appears to have happened to interest rates? Coupons are paid annually. A) Rates increased by 2.00 percent. B) Rates decreased by 2.00 percent. C) Rates increased by 0.72 percent. D) Rates decreased by 1.50 percent. Answer D $ 1,107.83 = $80 10 10 ) (1 1000 ) (1 1 1 i i i i + + + - i = 6.5%, yield to maturity was 8.0% prior to the price change. Therefore the rates have decreased by 1.5%. 7. (Q. 3 in B) Which of the following statements is correct about a stock currently
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This note was uploaded on 04/11/2011 for the course ADMS 3530 taught by Professor Unknown during the Spring '09 term at York University.

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ADMS3530_Final exam_solutions_Winter 2007 - AK/ADMS 3530.03...

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