A) Version A B) Version B (C) Version C (D) Version D (E) Version E

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Name: ________________________________

Student Number: _______________________

Commerce 2FA3

Instructor: K. Brewer

Duration of Examination: 2 Hours

THIS EXAMINATION PAPER INCLUDES 12 PAGES AND 35

QUESTIONS. YOU ARE RESPONSIBLE FOR ENSURING THAT YOUR

COPY OF THE PAPER IS COMPLETE. BRING ANY DISCREPANCY TO

THE ATTENTION OF YOUR INVIGILATOR.

Special Instructions:

a)

Use of Casio FX-991 calculator only is allowed for this exam.

b)

Each multiple-choice question has only one right answer.

Indicate your answer on the OMR scan sheet as specified in the

instructions on page 2. Correct answers will be worth 1 mark

and wrong or missing answers will be worth zero. There is no

correction factor.

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1) I want this exam to be marked with the grading scheme for

A) Version A

B) Version B

C) Version C

D) Version D

E) Version E

2) The process of planning and managing a firm's long-term investments is called:

A) Working capital management.

B) Financial depreciation.

C) Agency cost analysis.

D) Capital budgeting.

E) Capital structure.

3) Which of the following is an advantage of ownership of a corporation compared to that of a sole proprietorship?

A) The owners of the corporation have unlimited liability for the firm's debts.

B) It is the simplest to start.

C) The corporation has an unlimited life.

D) Dividends received by the corporation's shareholders are tax-exempt.

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4) Which of the following is considered a benefit of the corporate form of organization?

I. Ease of the transfer of ownership II. Limited life

III. Double taxation

A) I only

B) II only

C) I and II only

D) I and III only

E) I, II, and III

5) Purchasing a 5-year bond from a large corporation that is not the initial issuer of the bond is best characterized as what type of transaction?

A) A primary market transaction in the money market

B) A primary market transaction in the capital market

C) A secondary market transaction in the money market

D) A secondary market transaction in the capital market

E) An over the counter transaction in an auction market

6) What is the future value of $25,000 received today if it is invested at 6.5% compounded annually for six years?

A) $17,031.75

B) $17,133.35

C) $34,750.00

D) $36,478.56

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7) You have $500 in an account which pays 5% compound interest. How much additional dollars of interest would you earn over four years if you moved the money to an account earning 6%?

A) $20.00

B) $23.49

C) $25.88

D) $21.87

E) $20.30

8) When does the double taxation problem faced by corporations exist?

A) Whenever a corporation earns a profit, pays taxes on that profit, and then pays interest to its bondholders.

B) Whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its stockholders who pay personal taxes.

C) Whenever a corporation earns a profit and pays taxes on that profit.

D) Whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its tax-exempt shareholders.

E) Whenever stockholders are paid a dividend and are taxed on that dividend income.

9) An account was opened with an investment of $1,000 ten years ago. The ending balance in the account is $1,500. If interest was compounded annually, what rate was earned on the account?

A) 2.9%

B) 3.8%

C) 4.1%

D) 5.0%

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10) You will receive a $100,000 inheritance in 20 years. You can invest money today at 6% APR, compounded annually. What is the present value of your inheritance?

A) $29,767.15

B) $30,655.68

C) $31,180.47

D) $45,454.55

E) $100,000.00

11) Ted has just turned 25. All County Insurance, Inc. offers to pay Ted $1 million on his 65th birthday in return for a one-time payment of $75,000 today. What annual rate of return has All Country offered on this investment?

A) 2.4%

B) 5.5%

C) 6.1%

D) 6.7%

E) 7.2%

12) Which of the following CANNOT be calculated?

A) The present value of a perpetuity.

B) The interest rate on a perpetuity given the present value and payment amount.

C) The present value of an annuity due.

D) The future value of an annuity due.

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13) Which of the following is a true statement?

A) When comparing investments it is best not to rely solely on quoted rates.

B) Compounding will typically not lead to differences between quoted and effective rates.

C) The APR on a loan requiring monthly payments is the annual interest rate you actually pay.

D) An APR is the interest rate per period divided by the number of periods per year.

E) With monthly compounding, the APR will be larger than the effective annual rate.

14) Which of the following interest rates is the highest?

A) 11.00% effective annual rate

B) 10.75% APR with semi-annual compounding

C) 10.50% APR with monthly compounding

D) 10.25% APR with continuous compounding

E) e) cannot be determined from the information given

15) You financed a purchase of $5,000 at an APR of 8% with semi-annual compounding. You have made monthly payments of $300 for the past 16 months. How much do you still owe?

A) $501.59

B) $507.79

C) $513.08

D) $845.08

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16) You are planning to save your Christmas bonuses from work and are comparing savings accounts: Account A compounds semiannually while account B compounds monthly. If both accounts have the same effective annual rate of interest and you place only the bonuses in the account, you should choose ___________.

A) account A because it has a higher APR

B) account B because it has a higher APR

C) account B because it is compounded more often

D) account A because you will pay less in taxes

E) either since you would be indifferent between the two

17) When you were born, your dear old Aunt Minnie promised to deposit $1,000 into a savings account bearing a 5% compounded annual rate on each birthday, beginning with your first. You have just turned 22 and want the dough. However, it turns out that dear old (forgetful) Aunt Minnie made no deposits on your fifth and eleventh birthdays. How much is in the account right now?

A) $34,503

B) $35,518

C) $36,505

D) $37,484

E) $38,505

18) Your brother-in-law borrowed $2,000 from you four years ago and then disappeared. Yesterday he returned and expressed a desire to pay back the loan, including the interest accrued. Assuming that you had agreed to charge him 10%, and assuming that he wishes to make five equal annual payments beginning in one year, how much would your brother-in-law have to pay you annually in order to pay off the debt? (Assume that the loan continues to accrue interest at 10% per year. )

A) $527.59

B) $585.64

C) $702.23

D) $772.45

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19) A loan where the borrower receives money today and repays a single lump sum at some time in the future is called a(n) ___________ loan.

A) amortized

B) continuous

C) balloon

D) pure discount

E) interest-only

20) You work for a furniture store. You normally sell a living room set for $2,500 and finance the full purchase price for 30 monthly payments at 24% APR. You are planning to run a zero-interest financing sale during which you will finance the set over 30 months at 0% interest. How much do you need to charge for the bedroom set during the sale in order to earn your usual combined return on the sale and the financing?

A) $3,382

B) $3,349

C) $3,316

D) $3,261

E) $2,500

21) Frank wishes to save money to provide for his retirement, 30 years from now. Beginning one month from now, he will deposit a fixed amount every month into a retirement savings account. The account will earn 12% APR compounded monthly. After making his final deposit, he will withdraw $100,000 at the end of each year for 25 years. The account will continue to earn 12% APR compounded monthly. How much will he have to deposit each month to afford these withdrawals?

A) $214.21

B) $224.41

C) $245.29

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22) What is the present value of $1,000 payments received at the beginning of each year for the next 10 years? Assume an interest rate of 5.49% APR with monthly compounding.

A) $7,490.75

B) $7,541.24

C) $7,803.27

D) $7,912.50

E) $7,955.26

23) To settle a debt of $575, a friend of yours has offered to pay you $50 at the end of each month for the next year. What effective annual rate of interest do these terms imply?

A) 4.35%

B) 4.44%

C) 7.95%

D) 8.24%

E) 21.3%

24) You have just won a lottery. You and your heirs will receive $25,000 per year forever, with the first payment due one year from now. What is the present value of your winnings at an 8% annual discount rate?

A) $312,500

B) $200,000

C) $182,500

D) $289,352

E) $337,500

25) A bond is selling at a price that gives a YTM of 7%. If the bond has a coupon rate of 8% the bond will be selling at

A) par

B) a discount

C) a premium

D) it would depend on the risk level of the issuer

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26) The stated interest payment, in dollars, made on a bond each period is called the bond's:

A) Coupon.

B) Face value.

C) Maturity.

D) Yield to maturity.

E) Coupon rate.

27) Six months ago you purchased a bond for $975. It has just paid a coupon of $50. If the current price of that bond is $950, what was your return on this purchase on an effective annual basis?

A) -2.1%

B) 2.5%

C) 2.6%

D) 5.0%

E) 5.2%

28) A bond with a $1,000 face value, 5 years to maturity, and a 12% coupon rate is trading at $1,111. What is it's YTM?

A) less than 8%

B) between 8% and 10%

C) between 10% and 12%

D) exactly 12%

E) over 12%

29) A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a ________________ bond.

A) callable

B) real return

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30) Which bond would most likely possess the highest degree of interest rate risk?

A) 8% coupon rate, 10 years to maturity

B) 8% coupon rate, 20 years to maturity

C) 10% coupon rate, 10 years to maturity

D) 10% coupon rate, 20 years to maturity

E) 12% coupon rate, 20 years to maturity

31) Duration is a useful measure of interest rate risk because it incorporates I. a bond's maturity

II. a bond's default risk III. a bond's coupon rate

A) I only

B) II only

C) I and II only

D) I and III only

E) I, II, and III

32) You have a portfolio of 3 pure discount bonds, with a face value of $1,000 each. The bonds are priced to yield 8% on an effective annual basis. If the bonds have times to maturity of 2, 5, and 8 years, what is the duration of this portfolio?

A) 4.54 Years

B) 5.00 Years

C) 5.33 Years

D) 8.00 Years

E) It would depend on the risk level of the bonds.

33) Which of the following is not stated in a bond's indenture?

A) Total value of the issue

B) Face value

C) Maturity

D) Yield to maturity

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34) Many economists view a 3% annual inflation rate as "acceptable". Assuming a 3% annual increase in the price of automobiles, how much will a new Suburban cost you five years from now, if today's price is $38,000?

A) $32,779

B) $36,110

C) $40,575

D) $42,813

E) $44,052

35) An investment had a nominal effective annual rate of return of 12% over the last year. If the CPI increased from 104.5 to 107.1 over that time, what is your effective annual real rate of return?

A) 2.49%

B) 7.10%

C) 9.28%

D) 9.40%

E) 9.51%

Figure

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References

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