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Date Posted: 15:09:34 07/24/01 Tue
Author: Charles Hodges
Subject: Re: Sample Exam 2 questions
In reply to: Son Phan 's message, "Re: Sample Exam 2 questions" on 12:01:04 07/21/01 Sat

I've erased all questions that had the correct answer.
>>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?
>>
>> d. $23
>>
I show 28.14, 15%=2/20+ growth rate, growth rate = 5%

Then PV=20,N=7,I=g=7,PMT=0, cpt FV




>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%

PMT=724.16
If make 24 payments, you paid 17379.85 in total.
You owe 90,000 when you take the loan,
After solving for PMT, Let N=24 (meaning you have made 24 payments)and solve for FV=88712.56. This is how much you still owe. Thus you paid principal of 90000-88712.56=1287.43.
We know that Payment = Principal + Interest, thus 17379.85 = 1287.43 + Interest, or Interest = 16092.41. The percent of interest is 16092.41/17379.85 or 92.59%, answer C

>>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 %
>>
You are not responsible for Current Yield, thus any answer that correctly solved for YTM would be correct.

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