FIN303_Examtypeq2

# FIN303_Examtypeq2 - FIN303 Exam-type questions For Midterm...

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FIN303 Exam-type questions For Midterm 2 Chapter 2 1. Suppose you have \$2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest, compounded annually. How much will you have when the CD matures? a. \$2,324.89 b. \$2,591.45 c. \$2,249.73 * d. \$2,011.87 PV= -2,000; I=4%;N=3 PMT=0; FV=? 2. Suppose a U.S. government bond promises to pay \$2,249.73 three years from now. If the going interest rate on 3-year government bonds is 6%, how much is the bond worth today? PV=?; I=6%; N=3; PMT=0; FV=2,249.73 3. What is the future value of a 5-year ordinary annuity with annual payments of \$200, evaluated at a 15 percent interest rate? Financial calculator solution: Inputs: N = 5; I = 15; PV = 0; PMT = -200. Output: FV = \$1,348.48. 4. What is the present value of a 5-year ordinary annuity with annual payments of \$200, evaluated at a 15 percent interest rate? Financial calculator solution: Inputs: N = 5; I = 15; PMT = -200; FV = 0. Output: PV = 1

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\$670.43. 5. A real estate investment has the following expected cash flows: Year Cash Flows 1 \$10,000 2 25,000 3 50,000 4 35,000 The discount rate is 8 percent. What is the investment’s present value? a. \$103,799 b. \$ 96,110 * c. \$ 95,353 d. \$120,000 PV = \$10,000/1.08 + \$25,000/(1.08) 2 + \$50,000/(1.08) 3 + \$35,000/(1.08) 4 = \$9,259.26 + \$21,433.47 + \$39,691.61 + \$25,726.04 = \$96,110.38 \$96,110. 6. If \$100 is placed in an account that earns a nominal 4 percent, compounded quarterly, what will it be worth in 5 years? Financial calculator solution: Inputs: N = 20; I = 1; PV = -100; PMT = 0. Output: FV = \$122.02. 7. In 1958 the average tuition for one year at an Ivy League school was \$1,800. Thirty years later, in 1988, the average cost was \$13,700. What was the growth rate in tuition over the 30-year period? Financial calculator solution: Inputs: N = 30; PV = -1800; PMT = 0; FV = 13700. Output: I = 7.0%. 8. At an inflation rate of 9 percent, the purchasing power of \$1 would be cut in half in 8.04 years. How long to the nearest year would it take the purchasing power of \$1 to be cut in half if the inflation rate were only 4 percent? 2
Financial calculator solution: Inputs: I = 4; PV = -1; PMT = 0; FV = 0.50. Output: N = -17.67 18 years. 9. South Penn Trucking is financing a new truck with a loan of \$10,000 to be repaid in 5 annual end-of-year installments of \$2,504.56. What annual interest rate is the company paying? a. 7% b. 8% * c. 9% d. 10% Financial calculator solution: Inputs: N = 5; PV = 10000; PMT = -2504.56; FV = 0. Output: I = 8%. 10. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan in which interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? Bank A: 8%, monthly. EAR A = 1 m k 1 m Nom - + = 1 12 08 . 0 1 12 - + = 8.30%. Bank B: 9%, interest due at end of year EAR B = 9%. 9.00% - 8.30% = 0.70%.

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