Finance 3130
Spring 2013
Exam 1B
Sample Test
True/False
Indicate whether the statement is true [A] or false [B].
____
1. Depreciation is a noncash figure to the firm which may be used to reduce taxable income.
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2. Suppose that I M Rich plans to invest a $1,000 an can earn an effective annual rate of 5% on Security A,
while Security B will provide an effective annual rate of 12%. Under such circumstances, within 11 years'
time, the compounded value of Security B will be more than twice the compounded value of Security A.
(Ignore risk, and assume that compounding occurs daily.)
____
3. The future value of an investment made today increases as either the interest rate or the number of periods of
compounding per year increases, because of the power of adding interest on top of interest.
____
4. Your Uncle Buck has decided to give you an annual allowance. However, since he has been paying your
supplemental business tuition, he has decided to test what you’ve learned for your high priced education. .
He has given you the choice of receiving (A) $500 at the end of each year for 5 years or (B) receiving $500 at
the beginning of each year for 5 years.
You both agree that you can make 5% return on these funds.
Given your knowledge of finance you select B, which is the best possible choice, making Uncle Buck pleased
with the quality of a UNI business school education.
____
5. The longer it takes for a bond the mature the greater will be the change in its price with a given change in
interest rates, in other words, a bond that matures in 30 years will be more price sensitive to a change in
interst rates, than a bond that is set to mature tomorrow.
____
6. When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding
principal in the early years, and the principal repayment's percentage declines in the loan's later years.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
____
7. If UNI tuition, room and board and general fees goes up 8% a year, due to the Panther Village, Redecker and
UNI Dome exapnsions, how long will it take to double the annual cost of an education at UNI? [For purposes
of this question you may assume that current cost is about $15,000 a year]
a. 7 years
b. 9 years
c. 10 years
d. 15 years
e. 2 years
8. Important characteristics that distinguish a US Government bond from bonds issued by municipalities and
corporations is [are]?
a. U.S. Government Bond Interest is Exempt from Federal Income Taxes
b. U.S. Government Bonds are default free
c. U.S Government Bonds provide annual interest rather than semi-annual interest to bond
holders
d. U.S. Government Bonds have no interest rate risk which means their value stays the same
regardless of the level of interest rates
e. U.S. Government Bonds are non-callable which means the Federal Government can not
call the bonds in should interest rates decline
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____
____
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9. Countertop Solutions R Us has issued an annual corporate bond that pays coupon interest of $80 per year,
with a par value of the bond is $1,000 and 12 years left to maturity that is currently being sold in the open
market.
If you were to buy this bond at a yield to maturity of 9%, you would be buying this bond at:
a. its par value of $1,000
b. a premium or value above its par value of $1,000
c. a discount or value below its par value of $1,000
d. a rate of interest greater than the compnay’s dividend yield
e. a rate of interest less than the company’s dividend yield
10. The UNO Credit Union has a 5-year certificate deposit [CD] that pays 2.5% interest payable annually. If you
invest $1,500 in this CD, how much will you have when it matures in 5 years?
a. $1,781.53
b. $1,697.11
c. $1,964.14
d. $2,062.34
e. $2,165.46
11. Suppose you are going to invest in a zero coupon U.S. government bond that promises to pay $1,000 ten
years from now, but pays no coupon income. . If the going interest rate on this 10-year government bond is
3.5%, how much should you be willing to pay for the bond today?
a. $765.13
b. $803.39
c. $684.56
d. $885.74
e. $708.92
12. Upon graduation from UNI you take a job up in Nashville, Tennessee making $35,000 a year. You decide
to puchase a $100,000 home, by putting down $20,000 and financing the other $80,000 at 3.25% in a 30 year
mortgage. So, you have negotiated a 30 year fixed rate 3.25% mortgage on an $80,000 loan. Under this
arrangement what will be your monthly payment? ]
a. $528.43
b. $512.65
c. $453.01
d. $348.17
e. $292.24
13. You want to go to Spain for the running of the bulls 5 years from now. In 5 years with a few marathons
under your belt you should be able to outrun the bulls and learn how to play tennis. You plan is to save for
this vacation by putting $2,500 into an investment account at the end of each year for 5 years. After taking
this class you decide to deposit the funds in a mutual fund which you expect to return 11.5% per year. Under
these conditions, how much will you have just after you make the 5th deposit, 5 years from now? [assuming
that you pay no tax on the gain in your account]
a. $18,368.66
b. $19,287.09
c. $15,725.07
d. $21,264.02
e. $22,327.22
14. You want to save for a downpayment on a new home after graduating from UNI. Your plan is to save
$4,200 per year, beginning immediately. You will make 3 deposits in an investment account that pays 6.1%
interest. Under these assumptions, how much will you have 3 years from today?
a. $13,956.42
b. $14,200.67
c. $15,386.95
d. $16,156.30
e. $16,964.11
____ 15. You are going to buy a 15 year, US Treausry bond with semi annual interest payments. The coupon rate on
this bond is 9.5% and its face amount or par value is $1,000. If the current yield to maturity on the bond is
11% what is its price ?
a. $891.00
b. $913.27
c. $936.10
d. $959.51
e. $983.49
____ 16. Ten years ago, Levin Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate
in Levin's earnings per share (EPS) over the 10-year period?
a. 15.17%
b. 15.97%
c. 16.77%
d. 17.61%
e. 18.49%
____ 17. At a rate of 6.25%, what is the present value of the following cash flow stream? $0 at Time 0; $75 at the end
of Year 1; $225 at the end of Year 2; $0 at the end of Year 3; and $300 at the end of Year 4?
a. $411.57
b. $433.23
c. $456.03
d. $480.03
e. $505.30
Finance 3130
Spring 2013
Answer Section
Exam 1B
Sample Test
TRUE/FALSE
1. ANS: T
PTS: 1
2. ANS: T
Work out the numbers with a calculator:
PV
1000
Rate on A
5%
Rate on B
12%
Years
11
3.
4.
5.
6.
PTS:
ANS:
ANS:
ANS:
ANS:
1
T
T
T
F
DIF:
PTS:
PTS:
PTS:
PTS:
Medium
1
1
1
1
DIF: Easy
TOP: (3.2) Balance sheet
FVA =
$1,710.34
2*FVA =
$3,420.68
FVB =
$3,478.55
FVB > 2*FVA, so TRUE
TOP:
DIF:
DIF:
DIF:
DIF:
(2.2) Comparative compounding
Medium
TOP: (2.3) PV of a sum
Medium
TOP: (2.15) Effective and nominal rates
Easy
TOP: (5.3) Bond prices and interest rates
Medium
TOP: (2.17) Amortization
MULTIPLE CHOICE
7. ANS: B
<========I/YR = 8================
_______________________________$30,000_____
|
0
-$15,000
|
N
I/YR = 8
PV = -15000
FV = 30000
N = 9.00
Rule of 70:
70/8 = 8.75 or approximately 9 years
PTS: 1
DIF: Easy
OBJ: TYPE: Conceptual
TOP: (3.2) Current liabilities
8. ANS: B
Only b is true
For a, only tax exempt issues are federally tax exempt
For c, U.S. Government bonds provide semi-annual interest
For d, U.S. Government bonds carry interest rate risk, if interest rates go up the price of the bonds will decline
and vice versa.
For e, in high interest rate environments the U.S. Government has issued callable bonds - such as the period
from 1978 to 1982.
PTS:
TOP:
9. ANS:
TOP:
10. ANS:
N
I/YR
PV
PMT
FV
1
DIF: Easy
(1.7) Money markets
C
PTS: 1
(1.4) Financial transactions
B
OBJ: TYPE: Conceptual
DIF: Easy
OBJ: TYPE: Conceptual
5
2.5%
$1,500
$0
$1,697.11
PTS: 1
DIF: Easy
TOP: (2.2) FV of a lump sum
11. ANS: E
N
10
I/YR
3.5%
PMT
$0
FV
$1,000.00
PV
$708.92
OBJ: TYPE: Problems
PTS: 1
DIF: Easy
TOP: (2.3) PV of a lump sum
12. ANS: D
I/YR
3.25%/12
=.27083
PV
-$80000
PMT
?
FV
N
30 years x 12
payments per
year = 360
OBJ: TYPE: Problems
PMT = 348.17
PTS: 1
DIF: Easy
TOP: (2.5) Number of periods
13. ANS: C
N
5
I/YR
11.5%
PV
$0.00
PMT
-$2,500
FV
$15,725.07
OBJ: TYPE: Problems
PTS: 1
DIF: Easy
TOP: (2.7) FV of an ordinary annuity
14. ANS: B
N
3
I/YR
6.1%
PV
$0.00
PMT
$4,200
OBJ: TYPE: Problems
FV
$14,200.67
Put the calculator in the Begin mode
PTS: 1
DIF: Easy
TOP: (2.8) FV of an annuity due
15. ANS: A
Par value
$1,000
Coupon rate
9.5%
Periods/year
2
Yrs to maturity
15
N = periods
30
Annual rate
11.0%
Periodic rate
5.50%
PMT/period
$47.50
FV
$1,000
PV
$891.00
OBJ: TYPE: Problems
PTS: 1
DIF: Easy
OBJ: TYPE: Problems
TOP: (5.6) Bond valuation: semiannual coupons
16. ANS: B
N
10
PV
$0.50
PMT
$0
FV
$2.20
I/YR
15.97%
PTS: 1
DIF: Easy
TOP: (2.4) Growth rate
17. ANS: E
I/YR = 6.25%
0
CFs:
$0
PV of CFs:
$0
PV =
PV =
$505.30
$505.30
OBJ: TYPE: Problems
1
$75
$71
2
$225
$199
3
$0
$0
4
$300
$235
Find the individual PVs and sum them. Automate the
process using Excel or a calculator, by inputting the
data into the cash flow register and pressing the NPV key.
PTS: 1
DIF: Easy
OBJ: TYPE: Problems
TOP: (2.12) PV of an uneven cash flow stream