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BUS 3060 Q3

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

1. 

     You are faced with the choice of a three year investment yielding 10% in simple interest versus the same investment yielding 10% compound interest.  You should:
a.
choose the simple interest option because it provides a lower return than the compound option.
d.
choose the simple interest option only if compounding occurs more than once a year.
b.
choose the compound interest option because it provides a higher return than the simple interest option.
e.
avoid the investment that pays compound interest because your tax bill will be higher resulting in a lower return than with simple interest.
c.
choose the compound interest option only if the compounding is for monthly periods.
 

2. 

     How much would you have to invest today at 12% compounded semiannually to have $25,000 to buy a new car in 4 years?
a.
$13,492.13
d.
$15,685.31
b.
$13,678.79
e.
$16,665.73
c.
$14,789.36
 

3. 

     You will receive a $100,000 inheritance in 8 years.  You could invest that money today at 10% compounded semiannually.  What is the present value of your inheritance?
a.
$41,397.93
d.
$67,683.94
b.
$45,811.15
e.
$100,000.00
c.
$46,650.74
 

4. 

     You are going to receive $100 three years from today.  If the appropriate discount rate is 10% compounded semiannually, what is the value of the $100 today?
a.
$62.06
d.
$78.40
b.
$69.36
e.
$85.43
c.
$74.62
 

5. 

     You are going to receive $1,000 at the end of each year for three years.  If the annual discount rate is 8%, what is the present value of this income stream?
a.
$793.83
d.
$2,713.75
b.
$2,577.10
e.
$2,775.67
c.
$2,602.29
 

6. 

     Which of the following would not be listed on the face of a bond?
a.
The coupon interest rate.
d.
The coupon payment to be made.
b.
The maturity date.
e.
The name of the issuer.
c.
The current market interest rate.
 

7. 

     A bond sold five years ago for $900.  The bond is worth $950 in today’s market.  Assuming no changes in risk, which of the following is true?
a.
The face value of the bond must be $900.
d.
Interest rates must be higher now than they were five years ago.
b.
The bond must be within one year of maturity.
e.
The coupon payment of the bond must have increased.
c.
Interest rates must be lower now than they were five years ago.
 

8. 

     A bond originally sold at par for $1,000.  The coupon rate on the bond is 10%, while the current market rate is 9%.  Assuming no change in risk, this bond would sell at a __________, in order to compensate ____________________________________________________.
a.
premium; the investor for the above market coupon rate.
d.
discount; the seller for the above market coupon rate.
b.
discount; the investor for the above market coupon rate.
e.
discount; the issuer for the higher cost of borrowing
c.
premium; the seller for the above market coupon rate.
 

9. 

     Which bond would most likely possess the lowest degree of interest rate risk?
a.
10% coupon rate, 10 years to maturity
d.
8% coupon rate, 20 years to maturity
b.
8% coupon rate, 10 years to maturity
e.
10% coupon rate, 30 years to maturity
c.
12% coupon rate, 5 years to maturity
 

10. 

     A bond’s _______________ is found by dividing the bond’s coupon payment by its closing price.
a.
yield to maturity
d.
cost of capital
b.
investors’ required rate of return
e.
current yield
c.
coupon rate
 

11. 

     Your broker offers you the opportunity to purchase a bond with coupon payments of $90 per year and a face value of $1,000.  If the yield to maturity on similar bonds is 10%, this bond should:
a.
sell for the same price as similar bonds regardless of maturity
d.
sell for either a premium or a discount but you can’t tell which
b.
sell at a premium
e.
sell for $1,000
c.
sell at a discount
 

12. 

     J’s Journal issued 12% bonds with a $1,000 face value.  What is the annual coupon payment?
a.
$60
d.
$600
b.
$120
e.
$1,200
c.
$300
 

13. 

     What is the market value of a bond with 20 years left to maturity, a coupon payment of $50 every 6 months, and a $1,000 face value if the yield to maturity is 8%?
a.
$634.86
d.
$1,197.93
b.
$642.26
e.
$1,215.62
c.
$1,135.90
 

14. 

     What would you expect to pay for a stock that just paid a $5 dividend if the expected dividend growth rate is 4% and you require a 16% return on your investment?
a.
$33.33
d.
$77.14
b.
$43.33
e.
$84.30
c.
$51.43
 

15. 

     If Russian Motors closed at $32, and the current dividend is $1.41, what % yield would be reported in the Wall Street Journal?
a.
4.4%
d.
12.2%
b.
6.5%
e.
13.1%
c.
9.1%
 

Essay
 

16. 

     Bobby Bowden forms a company to make movable shelters to keep cattle out of the rain.  Bowden’s CowDens, Inc. issues bonds with a face value of $1,000, a coupon rate of 7%, and that will mature in 10 years.  The current market yield is 10%.  If the bonds pay interest semiannually, what is the value of the bonds?  (Please show all calculations.)
 
 
     Tracy McGrady wants to invest $1,500,000 from his Orlando Magic contract.  He has found an investment that will pay 12%.  He is not sure of the compounding periods, however.  He has asked you to calculate how much he would have after five years if the compounding is done:  (Please show all calculations.)
 

17. 

     Compute Annually:
 

18. 

     Compute Semiannually:
 

19. 

     Compute Quarterly:
 

20. 

     Compute Monthly:
 



 
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