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Midterm_MGTB09_Winter2010_incl_solutions

# Midterm_MGTB09_Winter2010_incl_solutions - UNIVERSITY OF...

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1 UNIVERSITY OF TORONTO Scarborough Management MGTB09 (Principles of Finance) Midterm – Monday February 22, 2010 from 5:00 to 7:00pm in MW110, 120, 140, 160, 170 Professor Esther Eiling TAs: Sophie Ding and Sebastien Siou 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): 11 - Write down your answers on the space provided below each question - Always clearly show all steps in your calculations. - Always leave at least 2 decimals in the (\$) numbers in your calculations (e.g. PMT = \$10.89) and 5 decimals for interest rates (e.g. k = 0.07864). - Only exams written in pen can be remarked. - Good luck! Student Name: Last First Student Number: / / / / / / / / / / Section: L01 L02 L30 TH 9-11am TH 1-3pm TU5-7pm Please circle your section

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2 Question 1 (20%) Ad Jansen just purchased a house at one of the canal streets in downtown Amsterdam. He takes on a €500,000 mortgage at ABN-Amro bank. The quoted rate is 5%, based on quarterly compounding. Ad makes monthly payments to the bank. ABN-Amro is willing to give Ad a so-called “interest-only” mortgage. This means that Ad will only pay for the interest and he will not be making any payments towards the principal of the mortgage. While this means he will not be reducing his principle outstanding, Ad expects the price of his house to increase such that at some time in the future he can sell the house and pay off his entire mortgage at once. a) Calculate Ad’s monthly mortgage payment. Three years later, the housing market has collapsed and Ad realizes he will not be able to repay his entire mortgage if he would sell his house. Therefore, he decides to change the type of his mortgage and start paying towards his principal outstanding as well as for interest. ABN-Amro offers him an interest rate of 4.5%, based on semi-annual compounding. b) Calculate the new effective monthly interest rate. c) If Ad is able to pay ABN-Amro a total amount of €2,500 per month, how long will it take him to pay off his entire mortgage? Question 2 (20%) On January 1, 2008 Toyota issues new bonds with 10 years to maturity, semi-annual coupons of \$50 each and a face value of \$1,000. Coupons are paid on June 30 and on December 31 of each year. a)
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Midterm_MGTB09_Winter2010_incl_solutions - UNIVERSITY OF...

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