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ADMS3530_Midterm_Exam_2011_Fall_TypeA_Solutions - Name...

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Name Section ID # Prof. Sam Alagurajah Section A Fridays,11.30 AM – 2.30 PM Prof. Adeel Mahmood Section B Tuesdays, 7.00 PM – 10.00 PM Prof. Dale Domian Section C Wednesdays, 7.00 PM – 10.00 PM Prof. Irvin Pestano Section D Thursdays, 4.00 PM – 7.00 PM Prof. Lois King Section E Wednesdays, 11.30 AM – 2.30 PM Prof. Muz Parkhani Section F Mondays, 7.00 PM – 10.00 PM Prof. Lois King Section G Internet Prof. Irvin Pestano Section H Mondays, 4.00 PM – 7.00 PM ADMS 3530.03 Finance Midterm Exam Fall 2011 October 28, 2011 Type A Exam This exam consists of 40 multiple choice questions and is worth a total of 40 marks . Choose the response which best answers each question. Circle your answer below , and fill in your answers on the bubble sheet . Only the bubble sheet is used to determine your exam score . Please do not forget to write your name and ID # both at the top of this cover page and on the bubble sheet. Also, please write the type of your exam (A or B) on the bubble sheet. Please note the following : 1) Read the questions carefully and use your time efficiently . 2) Choose the answers that are closest to yours because of possible rounding. 3) Keep at least 4 decimal places in your calculations and final answers and at least 6 decimal places for the interest rate. 4) Each question is worth one (1) mark. 5) Unless otherwise stated, interest rates are expressed on an annual basis, and bonds pay semi-annual coupons and have a face value (or par value) of $1,000 . 6) You may use the back of the exam paper as your scrap paper. 1
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Numerical Questions 1. You deposit $1000 in a savings account today, and expect it will grow to $1500 at the end of five years. Interest is compounded annually. What is the annual interest rate? A) 8.4472% B) 9.6224% C) 10% D) 10.6682% E) 50% Solution A FV = PV x (1+r) t solving for r, r = (FV/PV) 1/t – 1 = (1500/1000) 1/5 – 1 = .084472 2. Consider a perpetuity with an annual cash flow of $1000 beginning one year from today, and an annuity due with a cash flow of $1000 per year for t years. What is the smallest integer value of t (i.e., we want the minimum number of years) for which the annuity due has a greater present value than the perpetuity? The interest rate is 8%. Solution D The present value of the perpetuity is PV = C/r = 1000/.08 = $12,500.00 Because the annuity due has one extra cash flow, at time zero, it will be worth more than the perpetuity for large values of t. Following the approach of equation (4.10), the PV of this annuity due is $1000 plus the PV of an ordinary annuity of t-1 payments. Therefore if we find the length of time for an ordinary annuity to be worth exactly $11,500, add one more year and the annuity due will be worth exactly $12,500. I/Y = 8, PMT = 1000, PV = -11,500, FV = 0, CPT N = 32.82 This N is for t-1, so t is 33.82 and the smallest integer number of years is 34.
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ADMS3530_Midterm_Exam_2011_Fall_TypeA_Solutions - Name...

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