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FIN 331 2010 Spring Test 2 B updated 5-14-2010

# FIN 331 2010 Spring Test 2 B updated 5-14-2010 - Towson...

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Towson University Department of Finance Fin331 Dr. M. Rhee 2010 Spring NAME: ID#: 1. If APR = 10%, what is the EAR (effective annual rate) for quarterly compounding? a. 10.00% b. 10.38% c. 12.36% d. 13.36% e. 15.52% Answer: b APR = Nominal rate 10.00% Periods/yr 4 EFF% =(1+(r NOM /N)) N − 1 = 10.38% 2. If the current one year CD rate is 3% and the best estimate of one year CD which will be available one year from today is 5%, what is the current two year CD rate with 1% liquidity premium? (1 + 0 R 2 – 0.01) 2 = (1.03) 1 × (1.05) 1 0 R 2 = {(1.03) × (1.05)} 1/2 + 0.01 – 1 = 4.9952% ≈ 5.00% 3. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant? 4. You have a chance to buy an annuity that pays \$550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

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I/Y 5.50% PV -\$500,000 PMT \$45,000 FV \$50,000 N 15.05 BEGIN Mode N 3 I/YR 5.5% PMT \$550 FV \$0.00 PV -\$1,565.48 Therefore, to receive \$550 at the beginning of each year for 3 years at 5.5%, the fair value you should pay is \$1,565.48 5. Your aunt has \$500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw \$45,000 at the beginning of each year, beginning immediately. She also wants to have \$50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the \$45,000 withdrawals and still have \$50,000 left in the end? a. 15.05 b. 16.36 c. 17.22 d. 18.08 e. 18.99 Answer: a BEGIN Mode
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