MGTB09H3-Midterm-winter2009_+incl+solutions - UNIVERSITY OF...

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1 UNIVERSITY OF TORONTO at Scarborough Management MGTB09 (Principles of Finance) Midterm – Monday February 9, 2009 from 5:00 to 7:00pm in Rooms AC223, HW214 Professors Esther Eiling and Syed Ahmed TAs: Jenny Lu & Tina Ma Students are allowed to bring a (financial) calculator and a crib sheet (8.5"x11"). The crib sheet should be single sided. Only hand written crib sheets are allowed. Photocopies are not allowed. - Total number of pages (including this page): 9 - Write down your answers on the space provided below each question - Always clearly show all steps in your calculations. - Always leave 2 decimals in the ($) numbers in your calculations (e.g. PMT = $10.89) and 5 decimals for interest rates (e.g. k = 0.07864). - Good luck! Student Name: Last First Student Number: / / / / / / / / / / Section: L01 L02 L03 L30 TH 9-11am TH 2-4pm FR 9-11am TU5-7pm Please circle your section
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2 Question 1 (18%) Bill just won the lottery. He can choose between two alternative prizes: 1. Receive $250,000 two years from now, or 2. Receive 10 payments of $100,000, one every five years, starting three years from now. The quoted rate based on quarterly compounding is 10%. a) Calculate the effective annual rate. b) Which prize should he choose? c) Suppose he could also choose for a third alternative: he would receive annual payments, starting one year from now, that continue forever. The first payment is $15,000 and this will grow at a constant rate per year. How much should the minimum annual growth rate be in order for Bill to prefer the third alternative over the first two? Question 2 (16%) How many years will it take for an investment to triple in value when the quoted rate is 10% and compounding is a) annually? b) monthly? c) Explain why your answer for b) is longer or shorter than your answer for a). Question 3 (16%) On January 1, 2008 Petfood Inc. issues 10-year bonds with a $1000 face value, an 8% coupon rate and semi-annual coupons. The bonds are issued at par. a) What is the yield to maturity? b) Jack Bauer purchases a Petfood bond on July 1, 2009 and he sells it on July 1, 2010.
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This note was uploaded on 05/31/2011 for the course MGT B02 taught by Professor Elaine during the Fall '10 term at University of Toronto- Toronto.

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MGTB09H3-Midterm-winter2009_+incl+solutions - UNIVERSITY OF...

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