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Date Posted: 14:58:13 07/19/01 Thu
Author: Charles Hodges
Subject: Sample Exam 2 questions

I have tried to find some sample Exam 2 questions. Since we did not do a second exam the last time I taught 3300, I have no pure exams. Instead I looked through old quizzes and found some questions that covered the chapter 7-10 material. I will post additional questions as I get the chance, if I can find relevant questions.

Note, if someone will attempt to post answers to these questions, then I will correct their answers.


1. You have a $150,000 30-year mortgage with an interest rate of 7.20% p.a., compounded monthly. Payments are made monthly. What is the remaining balance on the mortgage after 10 years?
a. $115,452.79
b. $128,248.63
c. $128,636.05
d. $129,317.74
e. $133,870.97

2. You have just taken out a 10-year, $24,000 loan to purchase a new car. This loan is to be repaid in 120 equal end-of-month installments. If each of the monthly installments is $300, what is the effective annual interest rate on this car loan?
a. 6.5431%
b. 7.8942%
c. 8.6892%
d. 8.8869%
e. 9.0438%

3. The NPV (t=0) of the following cash flow stream is Zero (0), when discounted at a nominal annual rate of 10% (quarterly compounding). The value of the missing (i.e., t=3) cash flow is closest to

Year 1 2 3 4 5 6
Cash Flow -30 -30 ??? +20 +40 +50

a. -24
b. -18
c. -12
d. 0
e. +12

4. The last dividend just paid by Quantum Inc. was $2.00. Quantum's growth rate is expected to be a constant 15 percent for 3 years, after which dividends are expected to grow at a rate of 10 percent forever. Quantum's required rate of return on equity (ks) is 14 percent. What is the current price of Quantum's common stock?
a. $62.57
b. $57.13
c. $54.88
d. $53.04
e. $48.14
f.
5. Which of the following is the best description of the overall goal of the financial manager in a corporation where shares are publicly traded?

a. Maximize earnings per share
b. Maximize operating income
c. Maximize operating cash flows
d. Maximize the value of outstanding shares
e. Maximize the number of outstanding shares

11. The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?

a. 10% b. 12% c. 14% d. 17% e. 21%


13. Waters Corporation has a stock price of $20 a share. The stock's year-end dividend is expected to be $2 a share (D0 = $2.00). The stock's required rate of return is 15 percent and the stock's dividend is expected to grow at the same constant rate forever. What is the expected price of the stock seven years from now?

a. $28 b. $53 c. $27 d. $23 e. $39


1. Which of the following statements is most correct?

a. The present value of an annuity due will exceed the present value of an ordinary annuity (assuming all
else equal).
b. The future value of an annuity due will exceed the future value of an ordinary annuity (assuming all else
equal).
c. The nominal interest rate will always be greater than or equal to the effective annual interest rate.
d. Statements a and b are correct.
e. All of the statements above are correct.


2. Frank Lewis has a 30-year, $100,000 mortgage with a nominal interest rate of 10 percent and monthly compounding. Which of the following statements regarding his mortgage is most correct?

a. The monthly payments will decline over time.
b. The proportion of the monthly payment which represents interest will be lower for the last payment than
for the first payment on the loan.
c. The total dollar amount of principal being paid off each month gets larger as the loan approaches maturity.
d. Statements a and c are correct.
e. Statements b and c are correct.


3. Your uncle has agreed to deposit $3,000 in your brokerage account at the beginning of each of the next five years (t = 0, t = 1, t = 2, t = 3 and t = 4). You estimate that you can earn 9 percent a year on your investments. How much will you have in your account four years from now (at t = 4)? (Assume that no money is withdrawn from the account until t = 4.)

a. $13,719.39
b. $17,954.13
c. $19,570.00
d. $21,430.45
e. $22,436.12


4. An investment pays you 9 percent interest compounded semiannually. A second investment of equal risk, pays interest compounded quarterly. What nominal rate of interest would you have to receive on the second investment in order to make you indifferent between the two investments?
a. 8.71%
b. 8.90%
c. 9.00%
d. 9.20%
e. 9.31%

5. A homeowner just obtained a $90,000 mortgage. The mortgage is for 30 years (360 months) and has a fixed nominal annual rate of 9 percent, with monthly payments. What percentage of the total payments made the first two years will go toward repayment of interest?
a. 89.30%
b. 91.70%
c. 92.59%
d. 93.65%
e. 94.76%

6. You have been offered an investment that pays $500 at the end of every 6 months for the next 3 years. The nominal interest rate is 12 percent; however, interest is compounded quarterly. What is the present value of the investment?
a. $2,458.66
b. $2,444.67
c. $2,451.73
d. $2,463.33
e. $2,437.56

1. As the interest rate decreases (and approaches zero), the future value of a series of cash flows (for example, $10,000 per year for 15 years):
a) Approaches the sum of the cash flows
b) Approaches the present value of the same cash flows
c) Approaches zero
d) Both a) and b) are correct
e) None of the above answers are correct


2. For positive interest rates, an increase in the discount rate _____________ the absolute value of the present value of an annuity and _______________ the absolute value of the future value of the same annuity.
a) increases; increases.
b) decreases; decreases.
c) increases; decreases.
d) decreases; increases.
e) We do not have enough information to answer the question.

3. If you purchased a $10,000 certificate of deposit (CD) today with a nominal annual interest rate of 12%, with monthly compounding, what would be the CD worth when it matures in 6 years?
a) $20,471
b) $21,159
c) $20,191
d) $20,208
e) none of the above is within $5 of the correct answer

4. A Microgates Industries bond has a 10 percent coupon rate and a $1,000 face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12 percent yield, what is the bond's value and what is the effective annual yield on the bond?

a) $ 849.54 and 12.72 %
b) $ 829.45 and 12.36 %
c) $ 849.54 and 12.72 %
d) $ 829.45 and 12 %
e) $ 849.54 and 12.36 %

5. You recently purchased a 20-year investment which pays you $300 at t=1, $400 at t=2, $500 at t=3, $600 at t=4, and some fixed cash flow, X, at the end of each of the remaining 16 years. The investment cost you $6,737.21. Alternative investments of equal risk have a required return of 6 percent. What is the annual cash flow received at the end of each of the final 16 years, that is, what is X?

a) $600
b) $625
c) $650
d) $675
e) $700

6. BrainDrain software has 14 percent coupon bonds on the market with seven years to maturity. The bonds make semiannual payments and currently sell for $1050. What is the current yield and yield to maturity on BrainDrain's bonds?

a) Current Yield = 13.33 % and YTM = 12.89 %
b) Current Yield = 12.89 % and YTM = 13.33 %
c) Current Yield = 12.29 % and YTM = 11.33 %
d) Current Yield = 11.33 % and YTM = 12.29 %
e) Current Yield = 12.33 % and YTM = 12.59 %

7. Bonnie Deep has just purchased a Rolls Royce and borrowed $88,477 towards the purchase. The amount is to be repaid over a period of 11 years in payments of $1,010 each month. What is the Annual Percentage Rate (APR) of the loan?

a) 0.67%
b) 5.13%
c) 6.62%
d) 8.00%
e) 24.69%

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