Towson University
Department of Finance
Fin331
Dr. M. Rhee
2010 Spring
NAME:
ID#:
1. If the interest is compounded quarterly with 8% APR, which of the following statements is CORRECT?
a. The periodic rate of interest is 2% and the effective rate of interest is 4%.
b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
e. The periodic rate of interest is 8% and the effective rate of interest is also 8%.
Answer: d
2. What is the coefficient of variation for security a? Probability
Ra(State=?)
Rb(State=?)
Boom
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a. Households reduce their consumption and increase their savings.
b. A new technology like the Internet has just been introduced, and it increases investment opportunities.
c. There is a decrease in expected inflation.
d. The economy falls into a recession.
e. The Federal Reserve decides to try to stimulate the economy. Answer: b
If the new technology were so efficient that it takes an underdeveloped economy from a subsistence level, where savings are necessarily low and rates high, to a level where people can afford to save, this might cause interest rates to decline. However, it would take time for this to occur.
10. You are comparing saving $100 every month for a year vis-à-vis $1,200 at the beginning of the year. How much extra will you have at the end of the year by saving $ 1,200 at the beginning of the year instead of saving $100 each month at the end of each month. Use 6% interest rate.
a. $35.51
b. $38.44
c. $60.90
d. $63.90
e. $76.71
Answer: b
11. The real risk-free rate is 3.05%, inflation is expected to be 2.75% this year, and the maturity risk premium is zero. IBM stock has a risk premium of 0.9%. What is the equilibrium rate of return on a 1-year Treasury bond?
a. 5.51%
b. 5.80%
c. 6.09%
d. 6.39%
e. 6.71% Answer: b
Note: you need to find the yield on 1-year Treasury bond not IBM’s stock
Real risk-free rate, r* 3.05%
Inflation this year 2.75%
1-year bond
1. If you are borrowing money and paying interest, would you prefer an interest rate that compounds annually, quarterly, or daily? Why? (2-4 sentences. 1.0 points)
3. Would you rather have a savings account that offered simple interest, or an account that offered compound interest? Why?
Beverly and Kyle Nelson currently insure their cars with separate companies paying $450 and $375 a year. If they insure both cars with the same company, they would save 10 percent on the annual premiums. What would be the future value of the annual savings over ten years based on an annual interest rate of 6 percent?
1. If you are borrowing money and paying interest, would you prefer an interest rate that compounds annually, quarterly, or daily? Why? (2-4 sentences. 1.0 points)
16. If the nominal interest rate on an account is 1% and the inflation rate is 2%, the real interest rate is:
b. What is the present value of this annuity if the opportunity cost rate is 10% annually? 10% compounded semiannually?
10. An investment of $1,000 today will grow to $1,100 in one year. What is the continuously compounded rate of return?
Therefore the annual interest rate is 8% and the effective annual rate compounded quarterly is 8.24%
Interest earned now can be found from getting the difference between the principal and amount.
a. How much would the payment be if rate of interest is 5% and you only financed the truck for 48 months?
It calculates the periodic payment for a loan with a fixed interest rate and a fixed term
c. Should the nominal cost of Debt or the effective annual rate be used? Since the bond pays a coupon semi-annually, and earns 4.75% in six months, it is possible to determine the effective annual rate (EAR), which we have successfully calculated above. EAR = 6.6% Nevertheless, nominal rates are typically used for the cost of debt, because total costs of issuance and sale of securities decrease the net proceeds from the sale. These costs are naturally small on public debt issues.
Give the interest rate is 1 and a half times that of prime lending rate,
After the calculations you end up coming out with a rate of 14.87%. The third and final part of question three asks what rate you will need if the interest is compounded semiannually. All you have to do is double the amount of terms and you will come out with a lower number of 7.177%. Since the interest is compounded semiannually that means that you will need to times that number by two and you come out with your final number of 14.35%.
o 20% immediately, 20% at the end of the first year, remaining 60% at a 2% per month