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Unformatted text preview: FINA 363 Review Questions for The Final Exam A Quick Review of Pre-Exam 1 Materials 1. What is the present value of $10 ; 000 in 10 years time if the appropriate discount rate is 10% ? 2. You can choose one of the following prizes. If the interest rate is 5% (annual compounding), which is the most valuable prize? (a) A lump sum payment of $10 ; 000 today. (b) A lump sum payment of $12 ; 500 at the end of 5 years. (c) $500 at the end of each year forever. (d) $1 ; 300 at end of each year for 10 years. (e) $2 ; 400 at end of each year for 5 years. 3. Your local auto dealer has o/ered 48 month 5% APR &nancing on a new Ford Explorer costing $33 ; 000 . What will be your monthly payment? 4. You are taking out a $7 ; 000 loan to be paid out over 7 years in seven equal annual payments. Each payment will be made at the end of each year. Suppose that the interest rate of this loan is 7 percent. What is the outstanding amount of the loan principal right after the &rst annual payment? 1 5. You are planning to buy a luxurious car. The retail price of the car is $64 ; 000 . Fox Auto is making you the following o/er: You pay $10 ; 000 down and then $2 ; 000 a month for next 30 months. The APR is 12 percent (compounded monthly). This o/er is equivalent to a $ o/ the retail price (when paid in cash today). 6. Which of the following statements is incorrect ? (a) If the yield to maturity (YTM) of a bond is higher than its coupon rate, the bond is selling at a premium . (b) When the real interest is close to zero, the nominal interest rate is close to expected in&ation. (c) All else equal, US Government bonds have lower yields than BaaBBB rated corporate bonds since US Government bonds do not contain the default risk premium . (d) All else equal, more liquid bonds have lower yields than less liquid bonds. (e) The YTM is the discount rate at which the present value of the bond equals the market price of the bond....
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