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? a. 4.0% b. 4.5% c. 5.0% d. 5.5% e. 6.0% Answer: C (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? a. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. b. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. c. A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate. d. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%. e. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. Answer: d 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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5.50% PV -$500,000 PMT $45,000 FV $50,000 N 15.05 a. $1,412.84 b. $1,487.20 c. $1,565.48 d. $1,643.75 e. $1,725.94 Answer: c 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 6. How much do you need to save each year from two years from today and onward so that you can have $1,000 six years from today at 10% interest rate? a. $150 b. $164 c. $173 d. $183 e. $190 Answer: b N=5, I/Y=10, FV=1,000 => PMT = -163.80 7. Jennifer can make a 100,000 down payment to buy a house. The house is $380,000 and she was offered 30- year mortgage and 15-year mortgage at a market rate of 12%. How much more interest would Jennifer pay
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FIN 331 2010 Spring Test 2 B updated 5-14-2010 - Towson...

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