SAMPLE - 3530-Midterm Exam-Questions

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Finance

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Full Name Section Student ID # AP/ADMS 3530 3.00 Finance SAMPLE Mi d term E x a m Exam Version: X Solution P l e a se note t h e fol l o w ing points : 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 at least 2 in your final answers and at least 6 decimal places for interest rates. 4) Unless otherwise stated , interest rates are annual , and bonds pay semi-annual coupons and have a face value (or par value) of $1,000 . 5) You may use the back of the exam paper as your scrap paper (no scrap paper is permitted). 6) Instructors and invigilators will not answer questions during the exam. 1

NUMERICAL QUESTIONS 1. You are 29 years old. You plan to save for your retirement between now and age 65 (when you retire). You would like your savings to finance a retirement income of $81,300 per year (at the end of the year) from age 65 to age 93. You will earn 4.30% each year on your savings. How much do you need to invest at the end of every year between age 29 and age 65 to finance your retirement plan? A) $15,845.61 B) $21,403.45 C) $3,899.74 D) $22,430.12 E) $21,077.78 2. A savings plan makes annual deposits of $4,820 each at the end of the first 4 years, followed by 5 end-of-the-year deposits of $5,730 each. The annual rate of return is 6.40%. What is the amount that will have been saved when the final deposit is made? A) $53,770.62 B) $61,484.39 C) $73,325.19 D) $65,611.42 E) $123,258.82 3. An account provides $29,800 at the end of each year for 12 years, starting one year from now. The annual return on the account is 4.80%. How much should you invest today to finance this account? A) $279,952 B) $52,306 C) $620,833 D) $267,130 E) $650,633 4. A trust fund will provide $928,000 in scholarships each year forever, with the first payment to be made 2 years from today. The trust fund is expected to earn a 5.30% rate of return annually. How much should be set aside today to finance this fund? A) $15,791,208 B) $17,509,434 C) $16,628,142 D) $14,996,399 E) $13,856,785 2

5. Consider the following savings plan that has a present value of $14,100 at an interest rate of 4.50%: $X at the end of year 1, $2,800 at the end of Year 2, $3,800 at the end of Year 3, and $4,000 at the end of Year 4. Compute X. A) $5,070 B) $4,852 C) $3,500 D) $4,436 E) $6,084 6. Taylor S. borrows $3,880 from you today and promises to pay you $6,630 in 6 years. What is the interest rate you are charging her on this loan? A) 10.27% B) 9.75% C) 11.81% D) 8.49% E) 9.34% 7. A payday loan company charges customers a 1.79% monthly rate. What is the EAR on such a loan? A) 23.73% B) 21.48% C) 20.67% E) 19.87% D) 22.46% 8. You want to buy a condo in Toronto that costs $860,100 and have accumulated a 15.00% down payment. The remainder is financed with a 25-year mortgage over a 2- year term which you've negotiated with a local financial institution. As you are a high- risk borrower the best rate you can get is an APR of 6.70% compounded semi-annually with month-end payments. How much would you owe on the mortgage after your 24th mortgage payment? A) $713,925 B) $1,376,122 C) $706,528 D) $712,669 E) $642,298 3

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9. All else being equal, which of the following terms would be preferred by a borrower: a 5.70% APR with weekly compounding or a 5.77% APR with quarterly compounding? We assume that there are 52 weeks in a year. A) The loan with weekly compounding. B) The loan with quarterly compounding. C) The time period must be known in order to select the preferred option. D) The amount borrowed must be known in order to select the preferred option. E) The weekly compounding is always better than the quarterly compounding. 10. You decide to take out a 7-year, $9,900 car loan that calls for quarterly payments made at the end of each period, and at an APR of 6.70%, compounded quarterly. What is your quarterly payment? A) $605.94 B) $445.84 C) $510.69 D) $714.89 E) $595.74 11. You are to receive $4,300, $6,100 and $7,900 at the end of each of the next 3 years. If the market interest rate is 4.20%, how much would this payment stream be worth today? A) $17,430 B) $16,728 C) $16,175 D) $18,300 E) $17,158 12. What is the present value of a six-payment annuity of $7,500 per year that begins 9 years from today if the annual discount rate is 8.80%? A) $17,238 B) $15,843 C) $33,846 D) $31,108 E) $24,509 13. You are planning for retirement and have calculated that you want to have saved $971,000 by the time you retire in 25 years. You have $26,500 now and you also know that you will receive $75,000 from your share of the family cottage in 7 years. Assume an annual return of 9.70% on your funds. How much will you need to save at the end of each of the next 25 years to reach your retirement goal? A) $6,678 B) $3,253 C) $34,780 D) $5,950 4

E) $2,957 14. How much would an investor expect to pay for a $1,000 par value bond with an 3.20% coupon (paid annually) that matures in 7 years, if the interest rate is 5.40%? A) $847.03 B) $890.63 C) $1,136.04 D) $1,159.74 E) $874.52 15. Suppose Guelph municipality bonds have a par value of $1,000, pay a 7.50% coupon rate, paid semi-annually, with 5 years to maturity. What is the current yield on the bonds, assuming that the yield to maturity on the bonds is 8.70%? A) 7.88% B) 7.50% C) 8.70% D) 3.94% E) 3.75% 16. If you purchase a 10-year $1,000 par value zero-coupon bond for $880 now, how much could it be sold for 2 years later if interest rates have remained stable? A) $892 B) $880 C) $903 D) $993 E) $821 17. Oakdale Group has some 7.30% coupon bonds on the market that are selling at $970, have $1,000 par value, pay interest semi-annually, and mature in 9 years. Oakdale would like to issue $1 million in new bonds with the same maturity. What coupon rate should be applied to the new bonds if Oakdale wants to sell them at par? A) 7.77% B) 7.30% C) 3.88% D) 3.65% E) 7.06% 18. A 20-year maturity $1,000 par 9% coupon bond paying coupons semi-annually is callable in 5 years at a call price of $1,120. The bond currently sells at a yield to maturity of 7.70%, what is the yield to call? A) 6.17% B) 5.92% C) 4.93% D) 9.34% 5

E) 7.78% 19. Consider a bond paying a coupon rate of 7.20% per year semi-annually when the market interest rate is 6.10%. The bond has 10 years until maturity and a par value of $1,000. What would be the price of the bond 6 months from now if the market interest rate stays unchanged? A) $1,081.45 B) $1,075.33 C) $1,068.04 D) $1,078.43 E) $970.94 20. Gina purchased a bond today for $890. The bond matures in seven years, pays semi-annual interest, and has a 7.50% coupon rate and a face value of $1,000. If Gina holds the bond to maturity, what real rate of return will she earn if inflation remains constant at 3%? A) 3.25% B) 4.85% C) 6.50% D) 7.50% E) 9.70% CONCEPTUAL QUESTIONS 21. A convertible bond gives its owner the option to exchange the bond for a predetermined number of: A) common shares. B) options. C) warrants. D) preferred shares. E) treasury bonds. 22. If the interest rate decreases, which the following statements is FALSE? A) The present value of a constant growth annuity will increase. B) The present value of an annuity due will increase. C) The present value of a stream of uneven cash flows will increase. D) The present value of a perpetuity will increase. E) The monthly payment on an existing mortgage will increase. 6

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23. A financial manager facing a capital budgeting decision must decide whether to: A) issue stock or debt securities B) buy new machinery or repair the old C) use the money market or capital market D) use primary markets or secondary markets E) buy back debt or stock 24. Conflicts of interest between the firm’s owners and its managers are called: A) Capital structure problems B) Proxy fights C) Board fights D) Agency problems E) Liquidity issues 25. Which of the following is/are a true statement? I. The real rate of interest can be positive or negative. II. On a monthly compounded loan, the EAR is greater than the APR. III. The weekly rate is equal to EAR divided by 52 A) I only B) II only C) III only D) I and II E) II and III. 7