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:
