Question 1

1. Which of the following comes closest to the value at the end of year 6 of investing $600

today (year 0) and then investing another $600 at the end of year 5 if the interest rate is

3%?

a. $ 1,487

b. $ 1,334

c. $ 1,542

d. $ 1,383

e. $ 1,434

3 points Question 2

1. What amount comes closest to the value in 20 years of investing $100 today if the interest

rate is 3%?

a. $ 321

b. $ 219

c. $ 181

d. $ 265

e. $ 387

3 points Question 3

1. Jose is 25 years old today and has a retirement plan that permits him to place monthly

amounts of $150 into a retirement vehicle, beginning one month from now, for 30

consecutive years. When Jose reaches retirement at age 55, he expects to live for 40 more

years. What is the most he can spend, per month, throughout all of his retirement years?

Assume that his retirement benefits begin one month after his 55th birthday and an

interest rate of 3%?

a. $ 1,137

b. $ 313

c. $ 435

d. $ 602

e. $ 829 5 points Question 4

1. At an interest rate of 3%, what comes closest to the amount of time it takes for a deposit

of $7,500 to reach $15,000?

a. 23.45 years

b. 14.21 years

c. 17.67 years

d. 11.90 years

e. 10.24 years

3 points Question 5

1. If $400 grows to $4,000 in 7 years, approximately what interest rate is earned?

a. 33%

b. 23%

c. 26%

d. 39%

e. 29%

3 points Question 6

1. Limerick currently pays a dividend of $1.50 per share. Which comes closest to

Limerick’s price per share if we assume that their dividend grows by 8% for two

consecutive years, and then grows by 3% each year (starting in year 3) thereafter forever?

Use a required rate of return of 10%

a. $ 33.28

b. $ 24.19

c. $ 27.98

d. $ 41.23

e. $ 54.49

5 points Question 7

1. As an employee in the Lottery Commission, your job is to design a new prize. Your idea

is to create two grand prize choices: (1) receiving $50,000 at the end of each year

beginning in one year for 20 consecutive years, or (2) receiving $500,000 today followed

by a one-time payment at the end of 20 years. Using an interest rate of 3%, which of the

following comes closest to the amount prize (2) needs to pay at the end of year 20 in

order that both prizes to have the same present value?

a. $ 440,463

b. $ 326,649

c. $ 114,932

d. $ 393,342

e. $ 235,712

5 points Question 8

1. Jensen Corporations’ bonds were issued two years ago and have 8 more years till

maturity. The bonds were issued at $1,000 par, but the latest market price has fallen to

$975 and the bonds have a yield to maturity of 11.5%. Based on this information, what

coupon rate is attached to the bond?

a. 12%

b. 15%

c. 14%

d. 13%

e. 11%

5 points Question 9

1. Which of the following comes closest to the present value of receiving $500 in 9 months

if the interest rate is 3%?

a. $475

b. $479

c. $489

d. $482

e. $486 3 points Question 10

1. Which of the following comes closest to the value of investing $5,000 today for 5 years

at the rate of 3% compounded monthly?

a. $ 7,088

b. $ 6,105

c. $ 6,417

d. $ 5,808

e. $ 6,744

3 points Question 11

1. You are trying to price two bonds that have the same maturity and par value but different

coupon rates. Both bonds mature in 8 years and at maturity both bonds return the par

value of $1,000. One bond has a coupon rate of 3% and a yield to maturity of 3%. The

other bond has a coupon rate of 5% and a yield to maturity of 3%. What is the absolute

value of the difference between the prices of these two bonds?

a. $ 0

b. $ 67.33

c. $ 119.43

d. $ 62.10

e. $ 140.39

5 points Question 12

1. Farmer DJ knows that feeding a grain supplement to his cows will produce more milk

according to the schedule given below. {Note: the number on the top is the total pounds

of supplement used and the number on the bottom is the total pounds of milk produced.

For example, one pound of supplement produces 5 pounds of milk, two pounds of

supplement produces 8 pounds of milk, and so on.} Total Pounds Of Supplement

Used: …..1…..2…..3…..4…..5 Total Pounds of Milk Produced ………..5…..8….10….11…11.5

Ignoring all other issues, how many pounds of supplement should Farmer DJ feed his

cows if the price of milk is $0.20 per pound and the price of grain supplement is $1.05

per pound? a. 0

b. 3

c. 4

d. 2

e. 1

5 points Question 13

1. The U.S. Treasury Bill will pay to the holder the amount of $10,000 at the end of six

months. Which of the following is closest to today’s price of the Treasury Bill if the

interest rate is 3%?

a. $ 9,759

b. $ 9,713

c. $ 9,853

d. $ 9,806

e. $ 9,667

3 points Question 14

1. What amount comes closest to the future value, at the end of year 20, of a 15 year annuity

of $550 that makes its first payment at the end of year 6? Use an interest rate of 3%.

a. $ 11,868

b. $ 12,802

c. $ 11,013

d. $ 10,229

e. $ 13,821

3 points Question 15

1. Felix and Freddie are married with annual taxable income of $230,000. They pay income

tax according to the following schedule: Over—–But Not Over—–Tax Rate

$0…………$43,850…………..15% $43,850…..$105,950………….???

$105,950….$361,450…………31% If the total personal income tax they pay is $58,074, which of the following comes closest to the tax rate for income between $43,850 and

105,950 (the middle tax rate)?

a. 225

b. 23%

c. 21%

d. 24%

e. 25%

5 points Question 16

1. Suppose that Firm ABC has a bond trading with 8 years remaining till maturity and with

a coupon rate of 5%. The bond will return its face value of $1,000 at maturity. Suppose

that the bond’s yield to maturity, originally at 5%, just increased to 6%. In this case, what

would happen to the bond’s price?

a. The bond’s price would be equal to its par value

b. The bond’s price would fall below its par value

c. The bond’s price would rise above its par value

d. The bond’s price would fall by 1%

e. The bond’s price would rise by 1%

4 points Question 17

1. In the story of New England Wire and Cable, the company was in an unusual situation of

being worth more dead than alive. What economic principle was violated when Larry

Garfield tried to get control of the firm, break it up, sell the assets, and make a profit?

a. Non-positive marginal utility of wealth

b. Externalities

c. The law of one price

d. Diminishing marginal return

e. Diminishing marginal utility of wealth

4 points Question 18 1. A couple borrows $200,000 for a mortgage that requires fixed monthly payments over 30

consecutive years. The first monthly payment is due in one month. If the interest rate on

the mortgage is 3%, which of the following comes closest to the monthly payment?

a. $ 843

b. $ 1,074

c. $ 1,199

d. $ 1,331

e. $ 955

3 points Question 19

1. When would the calculation of the effective annual interest rate be most useful?

a. When comparing two investments with different par values

b. When comparing two investments that compound differently within a year

c. When comparing two investments that end at different points in time

d. When comparing two investments that have different inherent risk

e. When comparing two investments with different annuity amounts

4 points Question 20

1. Jack and Diane are lottery winners. They hold the ticket to the Grand Prize in the “Set for

Life” Prize that makes 20 consecutive annual payments of $50,000 starting immediately.

There is one hitch: the eleventh payment (to be received at the end of year 10) is not

$50,000 but only $20,000 (that is, this payment is $30,000 LESS than the other 20).

Which of the following comes closest to the present value of the prize if interest rates are

3%?

1. $ 686,430

2. $ 591,154

3. $ 551,529

4. $ 635,849

5. $ 743,867

5 points Question 21 1. Which constituent of the corporation has a contract that offers a residual claim?

a. The creditors (also known as bondholders)

b. The managers

c. The shareholders (also known as stockholders)

d. The customer

e. The government

4 points Question 22

1. A market for the trading of assets is established by individuals buying and selling shares

from inventory. These individuals stay in business by earning a commission equal to the

difference between the price the buyer of the shares pays and the price the seller of the

shares receives. What do we call this type of market?

a. An asymmetrical market

b. A dealer market

c. A liquid market

d. An inefficient market

e. A real asset market

4 points Question 23

1. An inheritance offers the amount of $100 in one year but then grows that amount by a

constant rate of 3% forever. Which of the following comes closest to the present value of

the inheritance if the bond’s required rate of return is 10%?

a. $ 2,000

b. $ 1,667

c. $ 2,500

d. $ 3,333

e. $ 1,429

5 points Question 24 1. Which comes closest to the present value of a 25 year annuity of $100 that begins

immediately if the interest rate is 3%?

a. $ 1,247

b. $ 1,794

c. $ 1,625

d. $ 1,480

e. $ 1,355

3 points Question 25

1. The parents of a newborn baby would like to put money away today to cover all of the

child’s expected total 4-years of college tuition. The first tuition payment is due exactly

18 years from today, and the next three payments are due at the end of years 19, 20 and

21. Suppose that the parents estimate that the cost of tuition will be $86,000 per year for

the first three years, but that the fourth year’s tuition will be $96,000. Which comes

closest to the amount of money that needs to be set aside today if the interest rate is 3%?

a. $ 198,781

b. $ 154,633

c. $ 136,639

d. $ 164,649

e. $ 113,608