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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 5year, $250 annuity due will be lower than the PV of a similar ordinary
annuity.
b.
A 30year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar
20year 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 15year mortgage at a market rate of 12%. How much more interest would Jennifer pay
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 Spring '10
 fi515

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