ADMS3530-Midterm-F06-Sol

ADMS3530-Midterm-F06-Sol - Name _ Section _ ID # _ (Prof....

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Page 1 Name ___________________________ Section _____ ID # ______________________ (Prof. King’s section A; Prof. Kohen’s sections D and G; Prof. Tahani’s sections C, E and F; Prof. Wong’s sections B and H) AK/ADMS 3530 Midterm Exam Fall 2006 October 15, 2006 Exam - Solutions This exam consists of 30 multiple choice questions and carries a total of 100 points . Choose the response which best answers each question. Circle your answers below, and fill in your answers on the bubble sheet. Only the bubble sheet is used to determine your exam score . Please note the following points : - Read the questions carefully and use your time efficiently - The 20 “ Numerical Questions ” are worth 4 points each . - The 10 “ Conceptual Questions ” are worth 2 points each . - Choose the answers that are closest to yours, because of possible rounding. - Keep at least 4 decimal places for dollar amounts in your calculations, and at least 6 decimal places for interest rates . - Interest rates are annual unless otherwise stated. - Bonds pay semi-annual coupons unless otherwise stated and have a face value (or par value) of $1,000 . - You may use the back of the exam paper as your scrap paper. Numerical Questions (4 points each) 1. (Q. 3 in B) If $200,000 is borrowed for a home mortgage, to be repaid monthly at a 6% APR semi-annually compounded over 25 years, how much interest is paid over the life of the mortgage loan? A) $183,884 B) $223,763 C) $310,850 D) $383,884 Solution A First, Compute monthly mortgage payment, using your calculator: i m = (1.03) 2/12 – 1 = 0.00493862 or .493862% PMT = 200,000 / PVIFA(0.493862%,300) = 1279.61 Total interest paid = Total payments made less mortgage loan = (1279.61 x 300) – 200,000 = 383,883.89 – 200,000 = 183,883.89
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2. (Q. 4 in B) A perpetuity of $7,000 per year beginning today offers an 8% annual interest rate. What is its present value? A) $80,500 B) $87,500 C) $94,500 D) $101,500 Solution C It is the PV of a perpetuity due PV = C x (1+r)/r = 7,000 x 1.08/0.08 = 94,500 3. (Q. 1 in B) Consider the following cash flows: $1000 today, $500 at the end of one year, Y at the end of two years and 4000 at the end of year 3. If in three years from today, they will have a future value of $6,547.82, and the annual interest rate is 6%, what is the value of Y? A) $708.00 B) $750.00 C) $795.00 D) $1,047.00 Solution B You can use either FV formula and bring all cash flows to t=3 or PV formula and bring all cash flows to t=0. Using the first method, we have: 1000 x (1.06) 3 + 500 x (1.06) 2 + Y x (1 + r) 1 + 4000 = 6547.82 1191.02 + 561.80 + Y x (1.06) + 4000 = 6547.82 Y x (1.06) = 6547.82 -4000 -1191.02 – 561.80 Y x (1.06) = 795 Y = 795 / (1.06) = $750 4. (Q. 2 in B) You decide to deposit $100 at the end of each month for the first year, $200 at the end of each month during the second year, and $300 at the end of each month for the third year. The interest rate is 12% compounded monthly, and deposits will begin in one month from today. How much money can you accumulate in three years? A)
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ADMS3530-Midterm-F06-Sol - Name _ Section _ ID # _ (Prof....

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