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?

This
** preview**
has intentionally

**sections.**

*blurred***to view the full version.**

*Sign up*
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

This is the end of the preview.
Sign up
to
access the rest of the document.