Midterm I Practice

Student: ___________________________________________________________________________ 1. Which one of the following terms is defined as the management of a firm's long-term investments? A. working capital management B. financial allocation C. agency cost analysis D. capital !dgeting ". capital str!ct!re

#. Which of the following $!estions are addressed y financial managers? %. &ow sho!ld a prod!ct e marketed? %%. 'ho!ld c!stomers e given () or *+ days to pay for their credit p!rchases? %%%. 'ho!ld the firm orrow more money? %,. 'ho!ld the firm ac$!ire new e$!ipment? A. % and %, only B. %% and %%% only C. %- %%- and %%% only D. %%- %%%- and %, only ". %- %%- %%%- and %,

(. Which one of the following statements concerning a sole proprietorship is correct? A. .he life of a sole proprietorship is potentially !nlimited. B. A sole proprietor can generally raise large s!ms of capital $!ite easily. C. .ransferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. D. A sole proprietorship is ta/ed the same as a C corporation. ". %t is easy to create a sole proprietorship.

*. Which one of the following !siness types is est s!ited to raising large amo!nts of capital? A. sole proprietorship B. limited lia ility company C. corporation D. general partnership ". limited partnership

+. Which one of the following grants an individ!al the right to vote on ehalf of a shareholder? A. pro/y B. y-laws C. indent!re agreement D. stock option ". stock a!dit

0. Why are so many !sinesses str!ct!red as sole proprietorships when the corporate form of !siness offers more advantages?

1. &ow might agency pro lems arise in partnerships?

2. 3o! are investing 41)) today in a savings acco!nt at yo!r local ank. Which one of the following terms refers to the val!e of this investment one year from now? A. f!t!re val!e B. present val!e C. principal amo!nts D. disco!nted val!e ". invested principal

5. .erry is calc!lating the present val!e of a on!s he will receive ne/t year. .he process he is !sing is called6 A. growth analysis. B. disco!nting. C. acc!m!lating. D. compo!nding. ". red!cing.

1). .his afternoon- yo! deposited 41-))) into a retirement savings acco!nt. .he acco!nt will compo!nd interest at 0 percent ann!ally. 3o! will not withdraw any principal or interest !ntil yo! retire in forty years. Which one of the following statements is correct? A. .he interest yo! earn si/ years from now will e$!al the interest yo! earn ten years from now. B. .he interest amo!nt yo! earn will do! le in val!e every year. C. .he total amo!nt of interest yo! will earn will e$!al 41-))) .)0 *). D. .he present val!e of this investment is e$!al to 41-))). ". .he f!t!re val!e of this amo!nt is e$!al to 41-))) 71 8 *)9.)0.

11. .ravis invested 45-#+) in an acco!nt that pays 0 percent simple interest. &ow m!ch more co!ld he have earned over a 1-year period if the interest had compo!nded ann!ally? A. 41*1.*1 B. 411(.+2 C. 42)#.10 D. 42((.(( ". 42+2.)5

1#. 3o! :!st received a 4+-))) gift from yo!r grandmother. 3o! have decided to save this money so that yo! can gift it to yo!r grandchildren +) years from now. &ow m!ch additional money will yo! have to gift to yo!r grandchildren if yo! can earn an average of 2.+ percent instead of :!st 2 percent on yo!r savings? A. 4*1-(12.)5 B. 4+#-*0*.15 C. 4++-#11.10 D. 4+2-211.55 ". 40)-5#(.+#

1(. A year ago- yo! deposited 4()-))) into a retirement savings acco!nt at a fi/ed rate of +.+ percent. .odayyo! co!ld earn a fi/ed rate of 0.+ percent on a similar type acco!nt. &owever- yo!r rate is fi/ed and cannot e ad:!sted. &ow m!ch less co!ld yo! have deposited last year if yo! co!ld have earned a fi/ed rate of 0.+ percent and still have the same amo!nt as yo! c!rrently will when yo! retire (2 years from today? A. 4#-112.*# less B. 4(-(((.(( less C. 4+-*11.)5 less D. 41-#1*.1# less ". 45-#(*.51 less

1*. ;orty years ago- yo!r mother invested 4+-))). .oday- that investment is worth 4*()-)0+.11. What is the average ann!al rate of ret!rn she earned on this investment? A. 11.02 percent B. 11.11 percent C. 11.12 percent D. 11.51 percent ". 1#.)# percent

1+. 3o! want to deposit s!fficient money today into a savings acco!nt so that yo! will have 41-))) in the acco!nt three years from today. "/plain why yo! co!ld deposit less money today if yo! co!ld earn (.+ percent interest rather than ( percent interest.

10. At an interest rate of 1) percent and !sing the <!le of 1#- how long will it take to do! le the val!e of a l!mp s!m invested today? &ow long will it take after that !ntil the acco!nt grows to fo!r times the initial investment? =iven the power of compo!nding- sho!ldn't it take less time for the money to do! le the second time?

11. 3o! have :!st received notification that yo! have won the 41.* million first pri>e in the Centennial ?ottery. &owever- the pri>e will e awarded on yo!r 1))th irthday- 1) years from now. .he appropriate disco!nt rate is 2 percent. What is the present val!e of yo!r winnings? A. 4*-#22.10 B. 40-*)*.#) C. 41+-()5.51 D. 4#(-(((.(( ". 4#+-))).))

12. 3o! e/pect to receive 45-))) at grad!ation in # years. 3o! plan on investing this money at 1) percent !ntil yo! have 40)-))). &ow many years will it e !ntil this occ!rs? A. 12.12 years B. 15.50 years C. #1.5) years D. #(.)2 years ". #+.)) years

15. An ordinary ann!ity is est defined y which one of the following? A. increasing payments paid for a definitive period of time B. increasing payments paid forever C. e$!al payments paid at reg!lar intervals over a stated time period D. e$!al payments paid at reg!lar intervals of time on an ongoing asis ". !ne$!al payments that occ!r at set intervals for a limited period of time

#). What is the interest rate charged per period m!ltiplied y the n!m er of periods per year called? A. effective ann!al rate B. ann!al percentage rate C. periodic interest rate D. compo!nd interest rate ". daily interest rate

#1. 3o! are considering two pro:ects with the following cash flows6

Which of the following statements are tr!e concerning these two pro:ects? %. Both pro:ects have the same f!t!re val!e at the end of year *- given a positive rate of ret!rn. %%. Both pro:ects have the same f!t!re val!e given a >ero rate of ret!rn. %%%. @ro:ect A has a higher present val!e than @ro:ect 3- given a positive disco!nt rate. %,. @ro:ect 3 has a higher present val!e than @ro:ect A- given a positive disco!nt rate. A. %% only B. % and %%% only C. %% and %%% only D. %% and %, only ". %- %%- and %, only

##. .he entire repayment of which one of the following loans is comp!ted simply y comp!ting a single f!t!re val!e? A. interest-only loan B. alloon loan C. amorti>ed loan D. p!re disco!nt loan ". !llet loan

#(. 3o! are the eneficiary of a life ins!rance policy. .he ins!rance company informs yo! that yo! have two options for receiving the ins!rance proceeds. 3o! can receive a l!mp s!m of 4#))-))) today or receive payments of 41-*)) a month for #) years. 3o! can earn 0 percent on yo!r money. Which option sho!ld yo! take and why? A. 3o! sho!ld accept the payments eca!se they are worth 4#)5-*1* to yo! today. B. 3o! sho!ld accept the payments eca!se they are worth 4#*1-2)) to yo! today. C. 3o! sho!ld accept the payments eca!se they are worth 4((0-))) to yo! today. D. 3o! sho!ld accept the 4#))-))) eca!se the payments are only worth 4125-(11 to yo! today. ". 3o! sho!ld accept the 4#))-))) eca!se the payments are only worth 415+-*1( to yo! today.

#*. 3o! need some money today and the only friend yo! have that has any is yo!r miserly friend. &e agrees to loan yo! the money yo! need- if yo! make payments of 4#+ a month for the ne/t si/ months. %n keeping with his rep!tation- he re$!ires that the first payment e paid today. &e also charges yo! 1.+ percent interest per month. &ow m!ch money are yo! orrowing? A. 41(*.)5 B. 41(2.## C. 41(5.+) D. 41*#.02 ". 41**.+1

#+. .heresa adds 41-))) to her savings acco!nt on the first day of each year. Barc!s adds 41-))) to his savings acco!nt on the last day of each year. .hey oth earn 0.+ percent ann!al interest. What is the difference in their savings acco!nt alances at the end of (+ years? A. 42-)0# B. 42-11( C. 42-1#1 D. 42-#11 ". 42-#15

#0. 3o! estimate that yo! will owe 4*#-2)) in st!dent loans y the time yo! grad!ate. .he interest rate is *.#+ percent. %f yo! want to have this de t paid in f!ll within si/ years- how m!ch m!st yo! pay each month? A. 4011.)5 B. 401*.+) C. 411*.#2 D. 41(0.)+ ". 41*#.+)

#1. 3o! have een investing 4#+) a month for the last 1( years. .oday- yo!r investment acco!nt is worth 41(-#0#. What is yo!r average rate of ret!rn on yo!r investments? A. 2.5* percent B. 5.#( percent C. 5.(0 percent D. 5.*1 percent ". 5.12 percent

#2. 3o! are considering two savings options. Both options offer a 1.* percent rate of ret!rn. .he first option is to save 45))- 4#-1))- and 4(-))) at the end of each year for the ne/t three years- respectively. .he other option is to save one l!mp s!m amo!nt today. %f yo! want to have the same alance in yo!r savings acco!nt at the end of the three years- regardless of the savings method yo! select- how m!ch do yo! need to save today if yo! select the l!mp s!m option? A. 4*-*1) B. 4*-+() C. 4*-0)) D. 4+-)2) ". 4+-#0)

#5. Biley e/pects to receive the following payments6 3ear 1 C 40)-)))D 3ear # C 4(+-)))D 3ear ( C 41#-))). All of this money will e saved for her retirement. %f she can earn an average of 1).+ percent on her investments- how m!ch will she have in her acco!nt #+ years after making her first deposit? A. 451#-(1( B. 4525-*+1 C. 41-))0-(11 D. 41-1*1-+)5 ". 41-#(1-110

(). 3o!r credit card company charges yo! 1.0+ percent interest per month. What is the ann!al percentage rate on yo!r acco!nt? A. 12.5+ percent B. 15.2) percent C. #).5) percent D. #1.#+ percent ". #1.1) percent

(1. What is the effective ann!al rate if a ank charges yo! 5.+) percent compo!nded $!arterly? A. 5.0# percent B. 5.02 percent C. 5.1# percent D. 5.2* percent ". 5.51 percent

(#. 3o! have 4+-0)) that yo! want to !se to open a savings acco!nt. .here are five anks located in yo!r area. .he rates paid y anks A thro!gh "- respectively- are given elow. Which ank sho!ld yo! select if yo!r goal is to ma/imi>e yo!r interest income? A. (.#0 percent- compo!nded ann!ally B. (.#) percent- compo!nded monthly C. (.#+ percent- compo!nded semi-ann!ally D. (.1) percent- compo!nded contin!o!sly ". (.1+ percent- compo!nded $!arterly

((. Bary :!st p!rchased a ond which pays 40) a year in interest. What is this 40) called? A. co!pon B. face val!e C. disco!nt D. call premi!m ". yield

(*. .he c!rrent yield is defined as the ann!al interest on a ond divided y which one of the following? A. co!pon B. face val!e C. market price D. call price ". dirty price

(+. Which of the following defines a note? %. sec!red %%. !nsec!red %%%. mat!rity less than 1) years %,. mat!rity in e/cess of 1) years A. %%% only B. % and %%% only C. % and %, only D. %% and %%% only ". %% and %, only

(0. A ond that can e paid off early at the iss!er's discretion is referred to as eing which one of the following? A. >ero co!pon B. calla le C. senior D. collaterali>ed ". !nsec!red

(1. A ond is $!oted at a price of 4525. .his price is referred to as which one of the following? A. call price B. face val!e C. clean price D. dirty price ". wholesale price

(2. %nterest rates that incl!de an inflation premi!m are referred to as6 A. ann!al percentage rates. B. stripped rates. C. effective ann!al rates. D. real rates. ". nominal rates.

(5. An 2 percent corporate ond that pays interest semi-ann!ally was iss!ed last year. Which two of the following most likely apply to this ond today if the c!rrent yield-to-mat!rity is 1 percent? %. a str!ct!re as an interest-only loan %%. a c!rrent yield that e$!als the co!pon rate %%%. a yield-to-mat!rity e$!al to the co!pon rate %,. a market price that differs from the face val!e A. % and %%% only B. % and %, only C. %% and %%% only D. %% and %, only ". %%% and %, only

*). Which one of the following onds is the least sensitive to interest rate risk? A. (-yearD * percent co!pon B. (-yearD 0 percent co!pon C. +-yearD 0 percent co!pon D. 1-yearD 0 percent co!pon ". 1-yearD * percent co!pon

*1. B!nicipal onds6 A. are totally risk-free. B. generally have higher co!pon rates than corporate onds. C. pay interest that is federally ta/-free. D. are rarely calla le. ". are free of defa!lt-risk.

*#. A E.'. .reas!ry ond that is $!oted at 1))611 is selling6 A. for 11 percent more than par val!e. B. at an 11 percent disco!nt. C. for 1)).11 percent of face val!e. D. at par and pays an 11 percent co!pon. ". for 1)) and 11F(#nds percent of face val!e.

*(. A 0-year- 41-))) face val!e ond iss!ed y .aylor .ools pays interest semiann!ally on ;e r!ary 1 and A!g!st 1. Ass!me today is Gcto er 1. What will the difference- if any- e etween this ond's clean and dirty prices today? A. no difference B. one month's interest C. two month's interest D. fo!r month's interest ". five month's interest

**. .he onds iss!ed y 'tainless .! s ear a 0 percent co!pon- paya le semiann!ally. .he onds mat!re in 11 years and have a 41-))) face val!e. C!rrently- the onds sell for 4525. What is the yield to mat!rity? A. +.21 percent B. +.5# percent C. 0.)2 percent D. 0.1* percent ". 0.#) percent

*+. =lo al Comm!nications has a 1 percent- semiann!al co!pon ond o!tstanding with a c!rrent market price of 41-)#(.*0. .he ond has a par val!e of 41-))) and a yield to mat!rity of 0.1# percent. &ow many years is it !ntil this ond mat!res? A. 1#.#0 years B. 1#.+( years C. 12.*5 years D. #*.(1 years ". #+.)+ years

*0. .he >ero co!pon onds of DH? Bovers have a market price of 4(15.#*- a face val!e of 41-)))- and a yield to mat!rity of 5.11 percent. &ow many years is it !ntil these onds mat!re? A. 11.5# years B. 1#.#2 years C. 1#.1( years D. 1(.)1 years ". 1(.*1 years

*1. Blackwell onds have a face val!e of 41-))) and are c!rrently $!oted at 52.*. .he onds have a + percent co!pon rate. What is the c!rrent yield on these onds? A. *.01 percent B. *.12 percent C. +.)2 percent D. +.(( percent ". +.+* percent

*2. A corporate ond is $!oted at a price of 1)(.10 and carries a 0.+) percent co!pon. .he ond pays interest semiann!ally. What is the c!rrent yield on one of these onds? A. 0.#* percent B. 0.() percent C. 0.(0 percent D. 0.0# percent ". 0.00 percent

*5. .he yield to mat!rity on a ond is c!rrently 2.*0 percent. .he real rate of ret!rn is (.## percent. What is the rate of inflation? A. +.)2 percent B. +.0* percent C. 0.#* percent D. 0.+( percent ". 0.11 percent

+). Iaiser %nd!stries has onds on the market making ann!al payments- with 1* years to mat!rity- and selling for 41-(2#.)1. At this price- the onds yield 1.+ percent. What is the co!pon rate? A. 2.)) percent B. 2.+) percent C. 5.)) percent D. 1).+) percent ". 1#.)) percent

+1. 3o! want to have 41.)* million in real dollars in an acco!nt when yo! retire in *0 years. .he nominal ret!rn on yo!r investment is 2 percent and the inflation rate is (.+ percent. What is the real amo!nt yo! m!st deposit each year to achieve yo!r goal? A. 40-001.01 B. 40-212.*5 C. 41-*((.)# D. 41-+1+.)5 ". 41-1**.1#

Bidterm % @ractice Iey

1. Which one of the following terms is defined as the management of a firm's long-term investments? A. working capital management B. financial allocation C. agency cost analysis D. capital !dgeting ". capital str!ct!re <efer to section 1.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: #$# %oss $ C&a'ter (# )# Section: #*# +o'ic: Ca'ital udgeting

#. Which of the following $!estions are addressed y financial managers? %. &ow sho!ld a prod!ct e marketed? %%. 'ho!ld c!stomers e given () or *+ days to pay for their credit p!rchases? %%%. 'ho!ld the firm orrow more money? %,. 'ho!ld the firm ac$!ire new e$!ipment? A. % and %, only B. %% and %%% only C. %- %%- and %%% only D. %%- %%%- and %, only ". %- %%- %%%- and %, <efer to section 1.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: #$# %oss $ C&a'ter (# )#( Section: #*# +o'ic: ,inancial management

(. Which one of the following statements concerning a sole proprietorship is correct? A. .he life of a sole proprietorship is potentially !nlimited. B. A sole proprietor can generally raise large s!ms of capital $!ite easily. C. .ransferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. D. A sole proprietorship is ta/ed the same as a C corporation. E. %t is easy to create a sole proprietorship. <efer to section 1.#

AACSB: N/A Bloom's: Com're&ension Difficulty: Basic Learning O !ecti"e: #$%oss $ C&a'ter (# ).# Section: #*. +o'ic: Sole 'ro'rietors&i'

*. Which one of the following !siness types is est s!ited to raising large amo!nts of capital? A. sole proprietorship B. limited lia ility company C. corporation D. general partnership ". limited partnership <efer to section 1.#

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: #$%oss $ C&a'ter (# )-Section: #*. +o'ic: Cor'oration

+. Which one of the following grants an individ!al the right to vote on ehalf of a shareholder? A. pro/y B. y-laws C. indent!re agreement D. stock option ". stock a!dit <efer to section 1.*

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: #$/ %oss $ C&a'ter (# )0# Section: #*/ +o'ic: 1ro2y

0. Why are so many !sinesses str!ct!red as sole proprietorships when the corporate form of !siness offers more advantages? A significant advantage of the sole proprietorship is that it is ine/pensive and easy to form. %f the sole proprietor has limited capital to start with- it may not e desira le to spend part of that capital forming a corporation. Alsolimited lia ility for !siness de ts may not e a significant advantage if the proprietor has most of his or her personal assets tied !p in the !siness already. ;inally- for a typical small firm- having an !nlimited life for the !siness has no real advantage since the heart and so!l of the !siness is the person who fo!nded it- there y effectively limiting the life of the !siness to that of its fo!nder. ;eed ack6 <efer to section 1.#

AACSB: %eflecti"e t&in3ing Bloom's: 4"aluation Difficulty: 5ntermediate Learning O !ecti"e: #$%oss $ C&a'ter (# )66 Section: #*. +o'ic: Sole 'ro'rietors&i'

1. &ow might agency pro lems arise in partnerships? Agency conflicts typically arise when there is a separation etween the ownership and the management of a !siness. %n a general partnership- especially if the partnership is small- there is less of a chance of an agency conflict if all the partners are involved with the !siness on a reg!lar asis. &owever- in a limited partnershipthe opport!nity e/ists for an agency pro lem to arise etween the general and the limited partners. ;eed ack6 <efer to section 1.*

AACSB: 4t&ics Bloom's: A''lication Difficulty: 5ntermediate Learning O !ecti"e: #$/ %oss $ C&a'ter (# )7# Section: #*/ +o'ic: Agency conflict

2. 3o! are investing 41)) today in a savings acco!nt at yo!r local ank. Which one of the following terms refers to the val!e of this investment one year from now? A. f!t!re val!e B. present val!e C. principal amo!nts D. disco!nted val!e ". invested principal <efer to section +.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 0$# %oss $ C&a'ter (0 )# Section: 0*# +o'ic: ,uture "alue

5. .erry is calc!lating the present val!e of a on!s he will receive ne/t year. .he process he is !sing is called6 A. growth analysis. B. disco!nting. C. acc!m!lating. D. compo!nding. ". red!cing. <efer to section +.#

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 0$. %oss $ C&a'ter (0 )7 Section: 0*. +o'ic: Discounting

1). .his afternoon- yo! deposited 41-))) into a retirement savings acco!nt. .he acco!nt will compo!nd interest at 0 percent ann!ally. 3o! will not withdraw any principal or interest !ntil yo! retire in forty years. Which one of the following statements is correct? A. .he interest yo! earn si/ years from now will e$!al the interest yo! earn ten years from now. B. .he interest amo!nt yo! earn will do! le in val!e every year. C. .he total amo!nt of interest yo! will earn will e$!al 41-))) .)0 *). D. .he present val!e of this investment is e$!al to 41-))). ". .he f!t!re val!e of this amo!nt is e$!al to 41-))) 71 8 *)9.)0. <efer to sections +.1 and +.#

AACSB: N/A Bloom's: Com're&ension Difficulty: 5ntermediate Learning O !ecti"e: 0$# and 0$. %oss $ C&a'ter (0 )#Section: 0*# and 0*. +o'ic: 1resent and future "alues

11. .ravis invested 45-#+) in an acco!nt that pays 0 percent simple interest. &ow m!ch more co!ld he have earned over a 1-year period if the interest had compo!nded ann!ally? A. 41*1.*1 B. 411(.+2 C. 42)#.10 D. 42((.(( ". 42+2.)5 'imple interest C 45-#+) 8 745-#+) .)0 19 C 41(-1(+ Compo!nd interest C 45-#+) 71 8 .)091 C 41(-5)2.+2 Difference C 41(-5)2.+2 - 41(-1(+ C 411(.+2

AACSB: Analytic Bloom's: A''lication Difficulty: 5ntermediate Learning O !ecti"e: 0$# %oss $ C&a'ter (0 )./ Section: 0*# +o'ic: Sim'le "ersus com'ound interest

1#. 3o! :!st received a 4+-))) gift from yo!r grandmother. 3o! have decided to save this money so that yo! can gift it to yo!r grandchildren +) years from now. &ow m!ch additional money will yo! have to gift to yo!r grandchildren if yo! can earn an average of 2.+ percent instead of :!st 2 percent on yo!r savings? A. 4*1-(12.)5 B. 4+#-*0*.15 C. 4++-#11.10 D. 4+2-211.55 E. 40)-5#(.+# ;!t!re val!e C 4+-))) 71 8 .)2+9+) C 4#5+-*(1.+2 ;!t!re val!e C 4+-))) 71 8 .)29+) C 4#(*-+)2.)0 Difference C 4#5+-*(1.+2 - 4#(*-+)2.)0 C 40)-5#(.+#

AACSB: Analytic Bloom's: Analysis Difficulty: 5ntermediate Learning O !ecti"e: 0$# %oss $ C&a'ter (0 )-# Section: 0*# +o'ic: ,uture "alue

1(. A year ago- yo! deposited 4()-))) into a retirement savings acco!nt at a fi/ed rate of +.+ percent. .odayyo! co!ld earn a fi/ed rate of 0.+ percent on a similar type acco!nt. &owever- yo!r rate is fi/ed and cannot e ad:!sted. &ow m!ch less co!ld yo! have deposited last year if yo! co!ld have earned a fi/ed rate of 0.+ percent and still have the same amo!nt as yo! c!rrently will when yo! retire (2 years from today? A. 4#-112.*# less B. 4(-(((.(( less C. 4+-*11.)5 less D. 41-#1*.1# less E. 45-#(*.51 less ;!t!re val!e C 4()-))) 71 8 .)++9(281 C 4#*#-)2*.01 @resent val!e C 4#*#-)2*.01 J1F71 8 .)0+9(281K C 4#)-10+.)( Difference C 4()-))) - 4#)-10+.)( C 45-#(*.51

AACSB: Analytic Bloom's: Analysis Difficulty: 5ntermediate Learning O !ecti"e: 0$# and 0$. %oss $ C&a'ter (0 )-8 Section: 0*# and 0*. +o'ic: 1resent and future "alues

1*. ;orty years ago- yo!r mother invested 4+-))). .oday- that investment is worth 4*()-)0+.11. What is the average ann!al rate of ret!rn she earned on this investment? A. 11.02 percent B. 11.11 percent C. 11.12 percent D. 11.51 percent ". 1#.)# percent 4*()-)0+.11 C 4+-))) 71 8 r9*)D r C 11.12 percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 0$%oss $ C&a'ter (0 )// Section: 0*+o'ic: 5nterest rate

1+. 3o! want to deposit s!fficient money today into a savings acco!nt so that yo! will have 41-))) in the acco!nt three years from today. "/plain why yo! co!ld deposit less money today if yo! co!ld earn (.+ percent interest rather than ( percent interest. 't!dent answers will vary !t sho!ld present the idea that when yo! can earn more interest- yo! need less of yo!r own money to reach the same f!t!re dollar amo!nt. .hey can also ase their answer on the present val!e form!la. ;eed ack6 <efer to section +.#

AACSB: %eflecti"e t&in3ing Bloom's: Analysis Difficulty: Basic Learning O !ecti"e: 0$. %oss $ C&a'ter (0 )0# Section: 0*. +o'ic: 1resent "alue

10. At an interest rate of 1) percent and !sing the <!le of 1#- how long will it take to do! le the val!e of a l!mp s!m invested today? &ow long will it take after that !ntil the acco!nt grows to fo!r times the initial investment? =iven the power of compo!nding- sho!ldn't it take less time for the money to do! le the second time? %t will take 1.# years to do! le the initial investment- then another 1.# years to do! le it again. .hat is- it takes 1*.* years for the val!e to reach fo!r times the initial investment. Compo!nding doesn't affect the amo!nt of time it takes for an investment to do! le in val!e. &owever- yo! sho!ld note that d!ring the first 1.# years- the interest earned is e$!al to 1)) percent of the initial investment. D!ring the second 1.# years- the interest earned is e$!al to #)) percent of the initial investment. .hat is the power of compo!nding. ;eed ack6 <efer to section +.(

AACSB: %eflecti"e t&in3ing Bloom's: Analysis Difficulty: 5ntermediate Learning O !ecti"e: 0$/ %oss $ C&a'ter (0 )00 Section: 0*+o'ic: %ule of 7.

11. 3o! have :!st received notification that yo! have won the 41.* million first pri>e in the Centennial ?ottery. &owever- the pri>e will e awarded on yo!r 1))th irthday- 1) years from now. .he appropriate disco!nt rate is 2 percent. What is the present val!e of yo!r winnings? A. 4*-#22.10 B. 40-*)*.#) C. 41+-()5.51 D. 4#(-(((.(( ". 4#+-))).)) @, C 41-*))-))) J1F71.)291)K C 40-*)*.#)

AACSB: Analytic Bloom's: A''lication Difficulty: Basic 4OC ): 0$## Learning O !ecti"e: 0$. %oss $ C&a'ter (0 )6# Section: 0*. +o'ic: 1resent "alue

12. 3o! e/pect to receive 45-))) at grad!ation in # years. 3o! plan on investing this money at 1) percent !ntil yo! have 40)-))). &ow many years will it e !ntil this occ!rs? A. 12.12 years B. 15.50 years C. #1.5) years D. #(.)2 years ". #+.)) years 40)-))) C 45-))) 71 8 .1)9tD t C 15.5) years .otal time C # 8 15.5) C #1.5) years

AACSB: Analytic Bloom's: A''lication Difficulty: 5ntermediate 4OC ): 0$.( Learning O !ecti"e: 0$/ %oss $ C&a'ter (0 )69 Section: 0*+o'ic: +ime 'eriod

15. An ordinary ann!ity is est defined y which one of the following? A. increasing payments paid for a definitive period of time B. increasing payments paid forever C. e$!al payments paid at reg!lar intervals over a stated time period D. e$!al payments paid at reg!lar intervals of time on an ongoing asis ". !ne$!al payments that occ!r at set intervals for a limited period of time <efer to section 0.#

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 6$. %oss $ C&a'ter (6 )# Section: 6*. +o'ic: Annuity

#). What is the interest rate charged per period m!ltiplied y the n!m er of periods per year called? A. effective ann!al rate B. ann!al percentage rate C. periodic interest rate D. compo!nd interest rate ". daily interest rate <efer to section 0.(

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 6$/ %oss $ C&a'ter (6 )6 Section: 6*+o'ic: Annual 'ercentage rate

#1. 3o! are considering two pro:ects with the following cash flows6

Which of the following statements are tr!e concerning these two pro:ects? %. Both pro:ects have the same f!t!re val!e at the end of year *- given a positive rate of ret!rn. %%. Both pro:ects have the same f!t!re val!e given a >ero rate of ret!rn. %%%. @ro:ect A has a higher present val!e than @ro:ect 3- given a positive disco!nt rate. %,. @ro:ect 3 has a higher present val!e than @ro:ect A- given a positive disco!nt rate. A. %% only B. % and %%% only C. %% and %%% only D. %% and %, only ". %- %%- and %, only <efer to section 0.1

AACSB: N/A Bloom's: Com're&ension Difficulty: Basic Learning O !ecti"e: 6$# %oss $ C&a'ter (6 )#Section: 6*# +o'ic: 1resent and future "alues

##. .he entire repayment of which one of the following loans is comp!ted simply y comp!ting a single f!t!re val!e? A. interest-only loan B. alloon loan C. amorti>ed loan D. p!re disco!nt loan ". !llet loan <efer to section 0.*

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 6$%oss $ C&a'ter (6 ).# Section: 6*/ +o'ic: 1ure discount loan

#(. 3o! are the eneficiary of a life ins!rance policy. .he ins!rance company informs yo! that yo! have two options for receiving the ins!rance proceeds. 3o! can receive a l!mp s!m of 4#))-))) today or receive payments of 41-*)) a month for #) years. 3o! can earn 0 percent on yo!r money. Which option sho!ld yo! take and why? A. 3o! sho!ld accept the payments eca!se they are worth 4#)5-*1* to yo! today. B. 3o! sho!ld accept the payments eca!se they are worth 4#*1-2)) to yo! today. C. 3o! sho!ld accept the payments eca!se they are worth 4((0-))) to yo! today. D. 3o! sho!ld accept the 4#))-))) eca!se the payments are only worth 4125-(11 to yo! today. E. 3o! sho!ld accept the 4#))-))) eca!se the payments are only worth 415+-*1( to yo! today.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 6$. %oss $ C&a'ter (6 ).9 Section: 6*. +o'ic: Annuity 'resent "alue

#*. 3o! need some money today and the only friend yo! have that has any is yo!r miserly friend. &e agrees to loan yo! the money yo! need- if yo! make payments of 4#+ a month for the ne/t si/ months. %n keeping with his rep!tation- he re$!ires that the first payment e paid today. &e also charges yo! 1.+ percent interest per month. &ow m!ch money are yo! orrowing? A. 41(*.)5 B. 41(2.## C. 41(5.+) D. 41*#.02 E. 41**.+1

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 6$. %oss $ C&a'ter (6 )-# Section: 6*. +o'ic: Loan 'resent "alue

#+. .heresa adds 41-))) to her savings acco!nt on the first day of each year. Barc!s adds 41-))) to his savings acco!nt on the last day of each year. .hey oth earn 0.+ percent ann!al interest. What is the difference in their savings acco!nt alances at the end of (+ years? A. 42-)0# B. 42-11( C. 42-1#1 D. 42-#11 ". 42-#15

Difference C 41(#-)50.5+ - 41#*-)(*.05 C 42-)0# Lote6 Difference C 41#*-)(*.05 ).)0+ C 42-)0#

AACSB: Analytic Bloom's: Analysis Difficulty: 5ntermediate Learning O !ecti"e: 6$. %oss $ C&a'ter (6 )-8 Section: 6*. +o'ic: Annuity com'arison

#0. 3o! estimate that yo! will owe 4*#-2)) in st!dent loans y the time yo! grad!ate. .he interest rate is *.#+ percent. %f yo! want to have this de t paid in f!ll within si/ years- how m!ch m!st yo! pay each month? A. 4011.)5 B. 401*.+) C. 411*.#2 D. 41(0.)+ ". 41*#.+)

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 6$. %oss $ C&a'ter (6 )/0 Section: 6*. +o'ic: Loan 'ayment

#1. 3o! have een investing 4#+) a month for the last 1( years. .oday- yo!r investment acco!nt is worth 41(-#0#. What is yo!r average rate of ret!rn on yo!r investments? A. 2.5* percent B. 5.#( percent C. 5.(0 percent D. 5.*1 percent ". 5.12 percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 6$. %oss $ C&a'ter (6 )6( Section: 6*. +o'ic: 5nterest rate

#2. 3o! are considering two savings options. Both options offer a 1.* percent rate of ret!rn. .he first option is to save 45))- 4#-1))- and 4(-))) at the end of each year for the ne/t three years- respectively. .he other option is to save one l!mp s!m amo!nt today. %f yo! want to have the same alance in yo!r savings acco!nt at the end of the three years- regardless of the savings method yo! select- how m!ch do yo! need to save today if yo! select the l!mp s!m option? A. 4*-*1) B. 4*-+() C. 4*-0)) D. 4+-)2) ". 4+-#0)

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 6$# %oss $ C&a'ter (6 )68 Section: 6*# +o'ic: 1resent "alue

#5. Biley e/pects to receive the following payments6 3ear 1 C 40)-)))D 3ear # C 4(+-)))D 3ear ( C 41#-))). All of this money will e saved for her retirement. %f she can earn an average of 1).+ percent on her investments- how m!ch will she have in her acco!nt #+ years after making her first deposit? A. 451#-(1( B. 4525-*+1 C. 41-))0-(11 D. 41-1*1-+)5 E. 41-#(1-110

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 6$# %oss $ C&a'ter (6 )78 Section: 6*# +o'ic: ,uture "alue

(). 3o!r credit card company charges yo! 1.0+ percent interest per month. What is the ann!al percentage rate on yo!r acco!nt? A. 12.5+ percent B. 15.2) percent C. #).5) percent D. #1.#+ percent ". #1.1) percent A@< C ).)10+ 1# C 15.2) percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 6$/ %oss $ C&a'ter (6 )99 Section: 6*+o'ic: Annual 'ercentage rate

(1. What is the effective ann!al rate if a ank charges yo! 5.+) percent compo!nded $!arterly? A. 5.0# percent B. 5.02 percent C. 5.1# percent D. 5.2* percent ". 5.51 percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 6$/ %oss $ C&a'ter (6 )8# Section: 6*+o'ic: 4ffecti"e annual rate

(#. 3o! have 4+-0)) that yo! want to !se to open a savings acco!nt. .here are five anks located in yo!r area. .he rates paid y anks A thro!gh "- respectively- are given elow. Which ank sho!ld yo! select if yo!r goal is to ma/imi>e yo!r interest income? A. (.#0 percent- compo!nded ann!ally B. (.#) percent- compo!nded monthly C. (.#+ percent- compo!nded semi-ann!ally D. (.1) percent- compo!nded contin!o!sly ". (.1+ percent- compo!nded $!arterly "A<A C (.#0 percent

Bank C offers the highest effective ann!al rate at (.#10 percent.

AACSB: Analytic Bloom's: Analysis Difficulty: 5ntermediate Learning O !ecti"e: 6$/ %oss $ C&a'ter (6 )80 Section: 6*+o'ic: 4ffecti"e annual rate

((. Bary :!st p!rchased a ond which pays 40) a year in interest. What is this 40) called? A. co!pon B. face val!e C. disco!nt D. call premi!m ". yield <efer to section 1.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 7$# %oss $ C&a'ter (7 )# Section: 7*# +o'ic: Cou'on

(*. .he c!rrent yield is defined as the ann!al interest on a ond divided y which one of the following? A. co!pon B. face val!e C. market price D. call price ". dirty price <efer to section 1.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 7$# %oss $ C&a'ter (7 )6 Section: 7*# +o'ic: Current yield

(+. Which of the following defines a note? %. sec!red %%. !nsec!red %%%. mat!rity less than 1) years %,. mat!rity in e/cess of 1) years A. %%% only B. % and %%% only C. % and %, only D. %% and %%% only ". %% and %, only

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 7$# %oss $ C&a'ter (7 )## Section: 7*. +o'ic: Note

(0. A ond that can e paid off early at the iss!er's discretion is referred to as eing which one of the following? A. >ero co!pon B. calla le C. senior D. collaterali>ed ". !nsec!red <efer to section 1.#

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 7$# %oss $ C&a'ter (7 )#Section: 7*. +o'ic: Call 'ro"ision

(1. A ond is $!oted at a price of 4525. .his price is referred to as which one of the following? A. call price B. face val!e C. clean price D. dirty price ". wholesale price <efer to section 1.+

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 7$. %oss $ C&a'ter (7 ).. Section: 7*0 +o'ic: Clean 'rice

(2. %nterest rates that incl!de an inflation premi!m are referred to as6 A. ann!al percentage rates. B. stripped rates. C. effective ann!al rates. D. real rates. E. nominal rates. <efer to section 1.0

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 7$/ %oss $ C&a'ter (7 ).0 Section: 7*6 +o'ic: Nominal rate

(5. An 2 percent corporate ond that pays interest semi-ann!ally was iss!ed last year. Which two of the following most likely apply to this ond today if the c!rrent yield-to-mat!rity is 1 percent? %. a str!ct!re as an interest-only loan %%. a c!rrent yield that e$!als the co!pon rate %%%. a yield-to-mat!rity e$!al to the co!pon rate %,. a market price that differs from the face val!e A. % and %%% only B. % and %, only C. %% and %%% only D. %% and %, only ". %%% and %, only <efer to section 1.1

AACSB: N/A Bloom's: Com're&ension Difficulty: Basic Learning O !ecti"e: 7$. %oss $ C&a'ter (7 )-/ Section: 7*# +o'ic: Bond features

*). Which one of the following onds is the least sensitive to interest rate risk? A. (-yearD * percent co!pon B. (-yearD 0 percent co!pon C. +-yearD 0 percent co!pon D. 1-yearD 0 percent co!pon ". 1-yearD * percent co!pon <efer to section 1.1

AACSB: N/A Bloom's: Com're&ension Difficulty: Basic Learning O !ecti"e: 7$. %oss $ C&a'ter (7 )// Section: 7*# +o'ic: 5nterest rate sensiti"ity

*1. B!nicipal onds6 A. are totally risk-free. B. generally have higher co!pon rates than corporate onds. C. pay interest that is federally ta/-free. D. are rarely calla le. ". are free of defa!lt-risk. <efer to section 1.*

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 7$# %oss $ C&a'ter (7 )08 Section: 7*/ +o'ic: :unici'al onds

*#. A E.'. .reas!ry ond that is $!oted at 1))611 is selling6 A. for 11 percent more than par val!e. B. at an 11 percent disco!nt. C. for 1)).11 percent of face val!e. D. at par and pays an 11 percent co!pon. E. for 1)) and 11F(#nds percent of face val!e. <efer to section 1.+

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning O !ecti"e: 7$# %oss $ C&a'ter (7 )7( Section: 7*0 +o'ic: +reasury ond ;uote

*(. A 0-year- 41-))) face val!e ond iss!ed y .aylor .ools pays interest semiann!ally on ;e r!ary 1 and A!g!st 1. Ass!me today is Gcto er 1. What will the difference- if any- e etween this ond's clean and dirty prices today? A. no difference B. one month's interest C. two month's interest D. fo!r month's interest ". five month's interest <efer to section 1.+

AACSB: N/A Bloom's: Com're&ension Difficulty: Basic Learning O !ecti"e: 7$. %oss $ C&a'ter (7 )7. Section: 7*0 +o'ic: Clean and dirty 'rices

**. .he onds iss!ed y 'tainless .! s ear a 0 percent co!pon- paya le semiann!ally. .he onds mat!re in 11 years and have a 41-))) face val!e. C!rrently- the onds sell for 4525. What is the yield to mat!rity? A. +.21 percent B. +.5# percent C. 0.)2 percent D. 0.1* percent ". 0.#) percent

.his cannot e solved directly- so it's easiest to :!st !se the calc!lator method to get an answer. 3o! can then !se the calc!lator answer as the rate in the form!la :!st to verify that yo!r answer is correct.

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 7$. %oss $ C&a'ter (7 )9( Section: 7*# +o'ic: <ield to maturity

*+. =lo al Comm!nications has a 1 percent- semiann!al co!pon ond o!tstanding with a c!rrent market price of 41-)#(.*0. .he ond has a par val!e of 41-))) and a yield to mat!rity of 0.1# percent. &ow many years is it !ntil this ond mat!res? A. 1#.#0 years B. 1#.+( years C. 12.*5 years D. #*.(1 years ". #+.)+ years

%t's easiest to solve this pro lem !sing financial calc!lator. 3o! can then !se the calc!lator answer as the time period in the form!la :!st to verify that yo!r answer is correct.

.he n!m er of si/-month periods is #+.)+#. .he n!m er of years is 1#.+( years.

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning O !ecti"e: 7$. %oss $ C&a'ter (7 )97 Section: 7*# +o'ic: +ime to maturity

*0. .he >ero co!pon onds of DH? Bovers have a market price of 4(15.#*- a face val!e of 41-)))- and a yield to mat!rity of 5.11 percent. &ow many years is it !ntil these onds mat!re? A. 11.5# years B. 1#.#2 years C. 1#.1( years D. 1(.)1 years ". 1(.*1 years

AACSB: Analytic Bloom's: A''lication Difficulty: 5ntermediate Learning O !ecti"e: 7$# %oss $ C&a'ter (7 )8( Section: 7*# and 7*/ +o'ic: +ime to maturity

*1. Blackwell onds have a face val!e of 41-))) and are c!rrently $!oted at 52.*. .he onds have a + percent co!pon rate. What is the c!rrent yield on these onds? A. *.01 percent B. *.12 percent C. +.)2 percent D. +.(( percent ". +.+* percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 7$. %oss $ C&a'ter (7 )8Section: 7*# +o'ic: Current yield

*2. A corporate ond is $!oted at a price of 1)(.10 and carries a 0.+) percent co!pon. .he ond pays interest semiann!ally. What is the c!rrent yield on one of these onds? A. 0.#* percent B. 0.() percent C. 0.(0 percent D. 0.0# percent ". 0.00 percent C!rrent yield C 7).)0+ 41-)))9F71.)(10 41-)))9 C 0.() percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 7$# %oss $ C&a'ter (7 )#(( Section: 7*# +o'ic: Current yield

*5. .he yield to mat!rity on a ond is c!rrently 2.*0 percent. .he real rate of ret!rn is (.## percent. What is the rate of inflation? A. +.)2 percent B. +.0* percent C. 0.#* percent D. 0.+( percent ". 0.11 percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning O !ecti"e: 7$/ %oss $ C&a'ter (7 )#(7 Section: 7*6 +o'ic: ,is&er effect

+). Iaiser %nd!stries has onds on the market making ann!al payments- with 1* years to mat!rity- and selling for 41-(2#.)1. At this price- the onds yield 1.+ percent. What is the co!pon rate? A. 2.)) percent B. 2.+) percent C. 5.)) percent D. 1).+) percent E. 1#.)) percent

Co!pon rate C 41#)F41-))) C 1# percent

AACSB: Analytic Bloom's: A''lication Difficulty: Basic 4OC ): 7$0 Learning O !ecti"e: 7$. %oss $ C&a'ter (7 )##7 Section: 7*# +o'ic: Cou'on rate

+1. 3o! want to have 41.)* million in real dollars in an acco!nt when yo! retire in *0 years. .he nominal ret!rn on yo!r investment is 2 percent and the inflation rate is (.+ percent. What is the real amo!nt yo! m!st deposit each year to achieve yo!r goal? A. 40-001.01 B. 40-212.*5 C. 41-*((.)# D. 41-+1+.)5 ". 41-1**.1# 71 8 ).)29 C 71 8 r9 71 8 ).)(+9D r C *.(*12#0 percent

AACSB: Analytic Bloom's: Analysis Difficulty: 5ntermediate 4OC ): 7$.9 Learning O !ecti"e: 7$/ %oss $ C&a'ter (7 )#.9 Section: 7*6 +o'ic: %eal cas& flows