FINC 3304 [QUIZ] Chapter 4 TIME VALUE OF MONEY

CHAPTER 4  TIME VALUE OF MONEY

1. The value of an investment after one or more time periods is called the:

A. true value.

B. future value.

C. present value.

D. discounted value.

E. complex value.

2. The process of adding the interest earned on an investment to the original investment in order to earn more interest is called:

A. discounting.

B. compounding.

C. duplicating.

D. multiplying.

E. indexing.

3. The current value of future cash flows discounted at the appropriate discount rate is called the:

A. simple value.

B. future value.

C. present value.

D. complex value.

E. principal value.

4. Which one of the following will increase the future value of a lump sum invested today?

A. decreasing the amount of the lump sum

B. increasing the rate of interest

C. paying simple interest rather than compound interest

D. paying interest only at the end of the investment period

E. shortening the investment time period

5. Given an interest rate of zero percent, the future value of a lump sum invested today will always:

A. remain constant, regardless of the investment time period.

B. decrease if the investment time period is shortened.

C. decrease if the investment time period is lengthened.

D. be equal to $0.

E. be greater than the initial investment amount.

6. You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

A. 6 years

B. 8 years

C. 9 years

D. 10 years

E. 12 years

PV= -10, FV = 20, i = 6%, Find N=??

7. What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?

A. $5,629.53

B. $7,644.15

C. $8,419.11

D. $8,536.85

E. $8,564.35

Enter      8       7        -4,900        0

              N       I/Y        PV      PMT        FV

                                                             8,419.11

8. Taylor has just received an insurance settlement of $58,400. She wants to save this money until her oldest daughter goes to college. Taylor can earn an average of 8.5 percent, compounded annually, on this money. How much will she have saved for her daughter's college education if her daughter enters

college 14 years from now?

A. $104,587.01

B. $105,223.03

C. $182,990.77

D. $187,302.09

E. $210,459.16

Enter 14 8.5 -58,400

N I/Y PV PMT FV

Solve for 182,990.77

9. Twenty years ago, you deposited $1,000 into an account. Fifteen years ago, you added an additional $3,000 to your account. You earned 6 percent, compounded annually, for the first 5 years and 10 percent, compounded annually, for the last 15 years. How much money do you have in your account today?

A. $4,925.34

B. $5,634.48

C. $13,880.59

D. $18,121.84

E. $19,369.43

Enter      5       6      -1,000      0

               N     I/Y       PV     PMT      FV

                                                       1,338.2256

$1,338.2256 + $3,000 = $4,338.2256

Enter    15     10      -4,338.2256         0

            N       I/Y         PV               PMT      FV

                                                                    18,121.84

10. You have just won the lottery and received $10,000. You deposited your winnings into an account that pays 7.5 percent interest compounded annually. How long will you have to wait until your winnings are worth$15,000?

A. 5.46 years

B. 5.61 years

C. 5.83 years

D. 16.19 years

E. 16.46 years

Enter            7.5      -10,000       0       15,000

            N      I/Y         PV      PMT       FV

         5.61

11. When you were born, your parents opened an investment account in your name and deposited $2,000 into the account. The account has earned an average annual rate of return of 8 percent. Today, the account is valued at $21,735.34. How old are you?

A. 25 years

B. 31 years

C. 44 years

D. 50 years

E. 61 years

12. Thirteen years from now, you will be inheriting $30,000. What is this inheritance worth to you today if you can earn 4 percent interest compounded annually?

A. $18,017.22

B. $20,741.87

C. $23,190.98

D. $26,359.88

E. $28,846.15

13. You and your brother are planning a large anniversary party 5 years from today for your grandparents' 50th wedding anniversary. You have estimated that you will need $9,000 for this party. You can earn 4 percent compounded annually on your savings. How much would you and your brother have to deposit today in one lump sum to pay for the entire party?

A. $7,383.13

B. $7,397.34

C. $8,151.26

D. $8,175.24

E. $8,853.19

14. How long will it take to double your savings at 5 percent compounded semi-annually?

A. 7.10 years

B. 14.04 years

C. 14.21 years

D. 28.10 years

E. 28.32 years

15. Your firm has been told that it needs $100,000 today to fund a $150,000 expansion project 8 years from now. What rate of interest was used in the present value computation?

A. 5.20 percent

B. 6.83 percent

C. 7.94 percent

D. 9.08 percent

E. 10.40 percent

16. Today, Jonathan is investing $34,000 at 5 percent, compounded semi-annually, for 7 years. How much additional income could Jonathan earn if he had invested this amount at 6 percent, compounded semi-annually?

A. $1,400.39

B. $3,282.02

C. $3,386.94

D. $9,553.06

E. $9,863.51

Enter   7×2       5/2      -34,000        0

            N         I/Y           PV         PMT      FV

                                                                48,041.11

Enter   7×2      6/2       -34,000         0

            N         I/Y            PV         PMT        FV

                                                                    51,428.05

Difference = $51,428.05 − $48,041.11 = $3,386.94

17. You want to have $15,000 for a down payment on a house 5 years from now. If you can earn 13 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal?

A. $7,858.11

B. $8,141.40

C. $9,803.58

D. $12,464.28

E. $14,213.25

18. You need $20,000 in cash to buy a car 5 years from today. You expect to earn 6.5 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose?

A. $12,468.07

B. $12,502.14

C. $14,597.62

D. $17,044.32

E. $17,129.01

19. Amanda only has $600 today but needs $1,300 to buy a new laptop. How long will Amanda have to wait to buy the laptop if she earns 8 percent compounded annually on her money?

A. 9.74 years

B. 9.86 years

C. 9.93 years

D. 10.05 years

E. 10.11 years

20. Your friend claims to have invested $3,000 eleven years ago and has seen that investment grow to $25,000 today. For this to be true, what rate of return did your friend have to earn?

A. 12.45 percent

B. 15.24 percent

C. 19.86 percent

D. 21.26 percent

E. 25.14 percent

Enter     11                    -3,000       0         25,000

              N       I/Y          PV      PMT       FV

                   21.25811

REVIEW QUIZ FOR CHAPTER 4

TIME VALUE OF MONEY

1. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent per year. How long will you have to wait until your account is worth $50,000?

a. 9.47 years b. 11.28 years c. 14.67 years d. 17.51 years

2. Your savings account is currently worth $1,200. The account pays 4.5 percent interest compounded annually. How much will your account be worth 6 years from now?

a. $1,524.00 b. $1,562.71 c. $1,611.18 d. $1,627.19

3. Felix wants to have $28,000 four years from now to buy a new car. He wants to make one deposit today to fund this expenditure. How much does he have to deposit if he will earn 5.5 percent per year on his investment?

a. $22,602.07 b. $24,414.14 c. $25,003.09 d. $26,540.28

4. Fifteen years ago, your parents opened an investment account with an initial deposit of $5,000. Today, that account is worth $39,533.32. What average annual rate of return did they earn on their investment?

a. 14.47 percent b. 14.59 percent c. 14.78 percent d. 15.03 percent

5. Marcia invested $500 with the Simpleton Bank 3 years ago. The bank pays 3.5 percent simple

interest on its savings accounts. What is the total amount of interest Marcia has earned on her account over the past 3 years?

a. $17.50 b $27.00 c. $37.50 d. $52.50

6. You are 20 years old today. You want to retire at age 50 and have $4 million at that time. Assume you can earn an average annual rate of return of 9.25 percent. Your hope is that you will win the lottery today and be able to fund your retirement dream with one lump sum deposit today. How much would you have to win, after taxes, to make an investment today sufficient to fund your dream?

a. $180,414.07 b. $281,459.96 c. $879,004.11 d. $1,307,468.24

7. You purchased a new sports car 40 years ago at a cost of $3,900. Today, you sold that car for $97,500. What annual rate of return did you earn on this vehicle?

a. 7.62 percent b. 7.99 percent c. 8.04 percent d. 8.38 percent

8. Which one of the following statements is correct, all else held constant?

a. There is an inverse relationship between the present value and the future value.

b. The future value decreases as the time period increases.

c. The interest rate is inversely related to the present value.

d. The present value decreases as the time period decreases.

9. Steve invested $2,500 this morning with The Branch Bank at 7 percent interest, compounded annually. After making this investment, he discovered that he could have invested his money with Tyler Bank and earned 7 percent interest, compounded quarterly. How much additional interest could Steve have earned over the next 5 years if he had invested with the Tyler Bank instead of with The Branch Bank?

a. $30.57 b. $48.11 c. $52.60 d. $57.20

10. Your goal is to earn an annual salary of $100,000 five years from now. You expect to increase your salary by 6.5 percent annually. How much do you need to earn this year if you are going to reach your goal?

a. $72,988.08 b. $84,311.16 c. $87,878.88 d. $84,363.13

1. d $50,000 = $7,200 × (1 + .117)t

6.94444 = 1.117t

ln6.94444= t × ln1.117

1.93794 = .11065t

t = 17.51

Enter 11.7 -7,200 50,000

N I/Y PV PMT FV

Solve for 17.51

2. b FV = $1,200 × (1 + .045)6

FV = $1,562.71

Enter 6 4.5 -1,200

N I/Y PV PMT FV

Solve for 1,562.71

3. a PV = $28,000 / (1 + .055)4

PV = $22,602.07

Enter 4 5.5 28,000

N I/Y PV PMT FV

Solve for -22,602.07

4. c Enter 15 -5,000 39,533.32

N I/Y PV PMT FV

Solve for 14.78

5. d $500 × .035 × 3 = $52.50

6. b $4,000,000 = PV × (1 + .0925)(50 − 20)

$4,000,000 = PV × 14.21161289

PV = $281,459.96

Enter (50 − 20) 9.25 4,000,000

N I/Y PV PMT FV

Solve for -281,459.96

7. d Enter 40 -3,900 97,500

N I/Y PV PMT FV

Solve for 8.379839

8. c There is an inverse relationship between the interest rate and the present value.

9. a The Branch Bank:

FV = $2,500 × (1 + .07)5

FV = $3,506.38

Enter 5 7 -2,500

N I/Y PV PMT FV

Solve for 3,506.38

Tyler Bank:

FV = $2,500 × [1 + (.07 / 4)]5 × 4

FV = $3,536.95

Enter 5 × 4 7 / 4 -2,500

N I/Y PV PMT FV

Solve for 3,536.95

Difference = $3,536.95 − $3,506.38 = $30.57

Steve could have earned an additional $30.57 in interest.

10. a PV = $100,000 / (1 + .065)5

PV = $72,988.08

Enter 5 6.5 100,000

N I/Y PV PMT FV

Solve for -72,988.08

FINC 3304 [QUIZ] Chapter 5

1. The future value of a series of cash flows over time can be computed by:

A. computing the future value of the middle cash flow and multiplying that amount by the number of cash flows.

B. summing the amount of each of the individual cash flows and multiplying the summation by (1 + r)t, where t equals the total number of cash flows.

C. summing the future values of each of the individual cash flows.

D. discounting each of the individual cash flows and summing the results.

E. multiplying each individual cash flow by (1 + rt) and summing the results.

2. Sue borrowed $5,000 from her bank 3 years ago. The loan term is 5 years. Each year, Sue must repay the bank $1,000 plus the annual interest. Which type of loan does Sue have?

A. amortized

B. blended discount

C. interest-only

D. pure discount

E. complex

3. You are computing the future value with annual payments of $650 each for four years. The interest rate is 4 percent. The future value of each one of these four payments at the end of year 4 is:

A. $624.00, $652.00, $676.00, and $703.24.

B. $731.16, $676.00, $652.00, and $650.00.

C. $731.16, $703.04, $676.00, and $650.00.

D. $760.41, $731.16, $703.04, and $624.00.

E. $760.41, $731.16, $703.04, and $676.00.

FV Pmt 1 = $650 × (1.04)3 = $731.16

FV Pmt 2 = $650 × (1.04)2 = $703.04

FV Pmt 3 = $650 × (1.04)1 = $676.00

FV Pmt 4 = $650 × (1.04)0 = $650.00

4. Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money?

A. $2.21 million

B. $2.30 million

C. $2.39 million

D. $2.49 million

E. $2.58 million

5. CNP, Inc. is considering a project that will produce cash inflows of $12,000 in year one, $27,600 in year two, and $48,100 in year three. What is the present value of these cash inflows if the company assigns the project a discount rate of 10.5 percent?

A. $58,372.13

B. $64,999.91

C. $69,113.58

D. $71,824.90

E. $76,370.51

6. The Time Clock Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $61,000 a year for seven years. Project 2 will produce cash flows of $45,000 a year for fourteen years. The company requires an 11 percent rate of return. Which project should the company select and why?

A. Project 1; because the annual cash flows are greater during the early years of the project

B. Project 1; because the present value of its cash inflows exceeds those of project 2 by approximately $111,710

C. Project 2; because the total cash inflows are $203,000 greater than those of project 1

D. Project 2; because the present value of the cash inflows exceeds those of project 1 by approximately $26,740

E. It does not matter as both projects have almost identical values as of today

YOU NEED TO FIND THE NPV FOR EACH PROJECT USING THE CASH FLOW IN THE FINANCIAL CALCULATOR, THEN TAKE THE

DIFFERENCE.

Difference = $314,183.94 − $287,443.97 = $26,739.97

7. Dustin is considering an investment that will pay $3,000 a year for 10 years, starting

1 year from today. How much should Dustin pay for this investment if he wishes to earn a 9 percent rate of return?

A. $17,985.74

B. $18,349.81

C. $19,252.97

D. $20,415.57

E. $21,213.24

CF0 = 0; C01 = 3000; F01 = 10; I = 9; CPT NPV = $19,252.97

8. How much money does Melinda need to deposit into her investment account today if she wishes to withdraw $8,000 a year for twenty years? She expects to earn an average rate of return of 8.5 percent.

A. $72,994.13

B. $73,541.32

C. $74,141.76

D. $75,706.69

E. $76,828.79

CF0 = 0; C01 = 8000; F01 = 20; I = 8.5; CPT NPV = $75,706.69

9. Steven can afford car payments of $250 a month for 60 months. The bank will lend him this money at 6.2 percent interest. How much can Steven borrow?

A. $12,568.63

B. $12,869.39

C. $13,672.38

D. $14,104.91

E. $14,770.27

Calculator: N = 60; I/Y = 6.2/12; FV = -0; CPT PV = $12,869.39

10. The Thailand Co. is considering the purchase of some new equipment. The quote consists of a quarterly payment of $4,740 for 10 years at 6.5 percent interest. What is the purchase price of the equipment?

A. $34,075.06

B. $43,425.08

C. $67,049.80

D. $105,129.30

E. $138,617.88

Enter     10×4      .5/4      -4,740                         0

                N          I/Y         PV        PMT         FV

Solve for                                      138,617.88

11. The condominium at the beach that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment?

A. $2,291.89

B. $2,809.10

C. $3,287.46

D. $3,412.67

E. $4,145.68

249500 x 20%= 49900

Amount financed = 249500-49900 = 199,600

Enter  10×12      6.75/12    199,600                  0

             N               I/Y           PV       PMT     FV

                                                        -2,291.89

12. Shannon wants to have $10,000 in an investment account three years from now. The account will pay 0.4 percent interest per month. If Shannon saves money every month, starting one month from now, how much will she have to save each month?

A. $233.22

B. $241.64

C. $258.81

D. $267.01

E. $276.16

Enter  3×12     .4        0                    10,000

             N         I/Y    PV      PMT       FV

                                           -258.81

YOU ENTER 0.4 FOR INTEREST BECAUE THE QUESTION SAYS 0.4 percent interest per month

13. High Risk Operations, Inc. owes your firm $52,800. This amount is delinquent so you have offered to arrange a payment plan in the hopes that you might at least collect a portion, if not all, of this money. Your offer will consist of weekly payments for two years at an interest rate of 4 percent. What is the amount of each payment?

A. $241.29

B. $528.47

C. $736.28

D. $884.10

E. $1,036.22

Enter        2×52      4/52      52,800                   0

                    N         I/Y          PV       PMT     FV

                                                         -528.47

14. Around Town Movers recently purchased a new truck costing $97,000. The firm financed this purchase at 8.25 percent interest with monthly payments of $2,379.45. How many years will it take the firm to pay off this debt?

A. 3.0 years

B. 3.5 years

C. 4.0 years

D. 4.5 years

E. 5.0 years

Enter             8.25/12      97,000      -2,379.45      0

             N        I/Y             PV              PMT      FV

            48

48 months / 12 = 4 years

15. You just received a credit offer in an email. The company is offering you $6,000 at 12.8 percent interest. The monthly payment is only $110. If you accept this offer, how long will it take you to pay off the loan?

A. 81.00 months

B. 82.17 months

C. 90.70 months

D. 95.00 months

E. 96.30 months

Enter                  12.8/12     6,000        -110       0

                   N       I/Y           PV          PMT    FV

               82.17

16. What is the future value of weekly payments of $25 for six years at 10 percent?

A. $10,673.90

B. $10,694.43

C. $15,180.51

D. $16,958.39

E. $17,266.38

Enter     6×52     10/52     0       -25

               N           I/Y      PV     PMT      FV

                                                              10,673.90

17. The Clark Co. is borrowing $150,000 for six years at an interest of 9 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for year 5 of this loan?

A. $25,000

B. $29,500

C. $31,750

D. $34,000

E. $36,250

                Beginning      Total             Interest        Principal        Ending

Year         Balance         Payment       Paid             Paid                Balance

 1             $150,000       $38,500         $13,500        $25,000          $125,000

 2              125,000        36,250            11,250         25,000             100,000

 3              100,000        34,000             9,000          25,000             75,000

 4              75,000          31,750             6,750          25,000             50,000

 5              50,000          29,500             4,500          25,000             25,000

18. You borrow $22,785 to purchase a car, including the sales tax. The loan terms are 48 months at 7.1 percent interest. In whole dollars, what is total amount of interest you will pay on this loan?

A. $1,618

B. $1,899

C. $3,455

D. $5,377

E. $6,560

Enter      48     7.1/12      22,785                    0

               N         I/Y          PV        PMT      FV

Solve for                                      -546.67

Total interest paid = ($546.67 × 48) − $22,7859( AMOUNT BORROWED) = $3,455 (rounded)

19. Statue Builders, Inc. has an outstanding loan that calls for equal annual payments of $7,500 over the life of the loan. The original loan amount was $45,000 at an interest of 7 percent. How much of the second payment is interest?

A. $2,845.50

B. $3,150.00

C. $4,350.00

D. $4,654.50

E. $5,021.50

               Beginning           Total               Interest               Principal                Ending

 Year        Balance             Payment            Paid                      Paid                   Balance

 1           $45,000.00        $7,500.00          $3,150.00            $4,350.00           $40,650.00

 2           $40,650.00        $7,500.00          $2,845.50            $4,654.50           $35,995.50

Review Quiz for Chapter 5

1. You want to buy another vehicle and know you can afford $330 a month for 4 years. The interest rate is 7.75 percent, compounded monthly. How much money can you afford to borrow??

a. $12,600.00 b. $13,582.63 c. $16,429.37 d. $18,500.00

2. You just found your dream car. The car will cost you $29,700. The dealer will lend you the entire amount at 5.9 percent interest, compounded monthly, for 60 months. What is the amount of the monthly payment?

a. $426.78 b. $503.19 c. $572.80 d. $604.68

3. The Corner Bank is offering you a credit card with an APR of 12.9 percent. The bank compounds the interest rate on a monthly basis. What is the effective annual rate?

a. 13.69 percent b. 13.87 percent c. 14.03 percent d. 14.14 percent

4. A preferred stock is currently valued at $62.80 a share and pays an annual dividend of $7. The par value is $100 per share. What is the rate of return on this security?

a. 8.97 percent b. 10.58 percent c. 11.15 percent d. 11.33 percent

5. Over the past 30 years your parents saved money each month for their retirement. They retired this week and expect to live another 28 years. Their investment account is currently valued at $487,300 and is expected to earn 7 percent annually in the future. How much money can they withdraw annually if they wish to spend all of their money during their lifetime? 

a. $5,158.75 b. $6,038.59 c. $39,269.75 d. $40,149.59

6. Suzie has $16,000 in her investment account today. She saves $500 a quarter and earns 8 percent interest, compounded quarterly. How much money will she have in her account three years from now?

a. $16,821.87 b. $18,509.53 c. $22,300.16 d. $26,997.91

7. Tom invested $150 at the beginning of each month for the last 14 years and earned 6 percent interest, compounded monthly. Julia invested $300 at the end of each month for the past 7 years and earned 6 percent interest, compounded monthly. Today, Tom has ______ than Julia.

a. $8,164.15 less b. $8,320.26 less c. $8,164.15 more d. $8,320.26 more

8. You just won a prize and will receive $5,000 today plus $5,000 one year from now. What is this prize worth to you today if you can earn 9 percent annually on your investments?

a. $9,174.31 b. $9,587.16 c. $10,000.00 d. $10,450.00

9. A generous benefactor invested money in a scholarship fund ten years ago at an interest rate of 8 percent. Every year, the fund awards $50,000 in scholarships to worthy college students. How much did this benefactor deposit into the account initially? Assume all interest is paid out annually but the principal amount remains untouched.

a. $400,000 b. $462,963 c. $500,000 d. $625,000

10. Even though you have no idea who you will marry, you are planning an elaborate wedding for 6 years from now. The estimated cost of the wedding is $75,000 and you expect to earn 5.5 percent on your savings. How much do you need to save each month for this purpose assuming that you have no money saved as of today? 

a. $881.59 b. $1,088.84 c. $1,557.50 d. $2,106.93

FINC 3304 - [QUIZ] CHAPTER 6 INTEREST RATES AND BOND VALUATION

CHAPTER 6

INTEREST RATES AND BOND VALUATION

1. The coupon is the:

a. amount of discount received when a bond is purchased.

b. amount paid to a bond dealer when a bond is purchased.

c. difference between the bid and ask price.

d. annual interest divided by the current bond price.

E. stated interest payment on a bond.

2. The principal amount of a bond that is repaid at the end of the loan term is called the:

A. face value.

b. premium value.

c. clean price.

d. dirty price.

e. compounded price.

3. The coupon rate for a bond is best defined as the:

a. annual interest divided by the current market price.

b. annual coupon divided by the dirty market price.

c. annual interest divided by the clean market price.

d. semi-annual interest divided by the par value.

E. annual interest divided by the face value.

4. The yield to maturity on a bond is:

a. equal to the coupon rate divided by the current market price.

b. another name for the current yield.

C. the current required market rate.

d. equal to the annual interest divided by the face value.

e. another name for the coupon rate.

5. The annual interest on a bond divided by the bond's market price is called the:

a. yield to maturity.

b. yield to call.

c. total yield.

D. current yield.

e. required yield.

6. A bond has a $1,000 face value, a market price of $1,115, and pays interest payments

of $90 every year. What is the coupon rate?

a. 4.50 percent

b. 6.75 percent

c. 7.39 percent

d. 8.25 percent

E. 9.00 percent

Coupon rate = 90/1000 = 9%

7. A $1,000 face value bond is currently quoted at 93.7. The bond pays semiannual

payments of $32.50 and matures in 8 years. What is the coupon rate?

a. 3.25 percent

b. 4.89 percent

c. 5.00 percent

D. 6.50 percent

e. 7.56 percent

Coupon rate = 32.5/1000 = 3.25% x 2 = 6.5%

8. A 7 percent bond has a yield to maturity of 6.75 percent, 10 years to maturity, a face

value of $1,000, and semiannual interest payments. What is the amount of each coupon

payment?

a. $33.75

B. $35.00

c. $50.00

d. $67.50

e. $70.00

coupon payment = (7% x 1000) / 2 =35

9. A 6 percent $1,000 bond matures in 4 years, pays interest semiannually, and has a

yield to maturity of 6.85 percent. What is the current market price of the bond?

a. $768.76

b. $801.38

c. $869.15

d. $910.27

E. $970.69

10. A $1,000 face value bond currently has a yield to maturity of 8.89 percent. The bond

matures in 7 years and pays interest annually. The coupon rate is 9 percent. What is the

current price of this bond?

a. $656.06

b. $778.24

c. $989.12

D. $1,005.56

e. $1,268.95

SEE BELOW

11. Lambert, Inc. bonds have a face value of $1,000. The bonds carry a 9 percent coupon,

pay interest semiannually, and mature in 11 years. What is the current price of these

bonds if the yield to maturity is 8.79 percent?

a. $705.14

b. $710.36

C. $1,014.62

d. $1,020.15

e. $1,641.04

SEE BELOW

12. An 8 percent semiannual coupon bond is priced at $1,204.60. The bond has a $1,000

face value and a yield to maturity of 4.88 percent. How many years will it be until this

bond matures?

A. 8.00 years

b. 8.65 years

c. 15.91 years

d. 16.00 years

e. 17.29 years

SEE BELOW

13. Gordon Industries has 6 percent coupon bonds outstanding with a face value of

$1,000 and a market price of $959.21. The bonds pay interest annually and have a yield

to maturity of 6.5 percent. How many years will it be until these bonds mature?

a. 6.0 years

b. 7.5 years

c. 10.0 years

D. 12.0 years

e. 13.0 years

SEE BELOW

14. The 8.5 percent annual coupon bonds of Eberly, Inc. are selling for $930.12. The

bonds have a face value of $1,000 and mature in 9 years. What is the yield to maturity?

a. 4.84 percent

b. 5.24 percent

c. 8.12 percent

d. 9.31 percent

E. 9.70 percent

SEE BELOW

15. The 6.5 percent, $1,000 face value bonds of The Theta Co. are currently selling at

$1,035.80. These bonds have 13 years left until maturity. What is the current yield?

a. 6.09 percent

B. 6.28 percent

c. 6.50 percent

d. 6.71 percent

e. 6.95 percent

SEE BELOW

16. A bond has a yield to maturity of 10.15 percent, an 11.5 percent annual coupon, a

$1,000 face value, and a maturity date 8 years from today. What is the current yield?

a. 9.47 percent

b. 10.15 percent

C. 10.73 percent

d. 11.50 percent

e. 11.86 percent

SEE BELOW

17. Waterfront Properties wants to raise $3.5 million by selling some coupon bonds at

par. Comparable bonds in the market have an 8 percent annual coupon, 10 years to

maturity, and are selling at 101.7 percent of par. What coupon rate should Waterfront

Properties set on its bonds?

a. 7.00 percent

b. 7.25 percent

c. 7.58 percent

D. 7.75 percent

e. 8.00 percent

SEE BELOW

18. One year ago, Auto Land issued 10-year bonds at par. The bonds have a coupon rate

of 6.5 percent and pay interest annually. Today, the market rate of interest on these bonds

is 6.25 percent. How does today's price of this bond compare to the issue price?

a. 1.82 percent lower

b. 1.68 percent lower

c. .25 percent higher

D. 1.68 percent higher

e. 1.82 percent higher

SEE BELOW

19. You own two bonds. Both bonds pay annual interest, have 8 percent coupons, $1,000

face values, and currently have 8 percent yields to maturity. Bond 1 has 9 years to

maturity and Bond 2 has 6 years to maturity. If the market rate of interest rises

unexpectedly to 9 percent, Bond _____ will be the most volatile with a price decrease of

_____ percent.

a. 1; 7.26

B. 1; 6.00

c. 1; 4.49

d. 2; 1.61

e. 2; 3.57

SEE BELOW

20. Cannon Industrial Equipment is currently issuing both 15-year and 25-year bonds at

par. The bonds each pay 7 percent annual interest and have face values of $1,000. You

decide to purchase one of each of these bonds. Assume the yield to maturity on each of

these bonds is 6.4 percent one year from now. Given this, you will realize _____ percent

price appreciation on the 15-year bond and _____ percent price appreciation on the 25-

year bond.

a. 5.44; 7.39

B. 5.44; 7.26

c. 5.68; 7.26

d. 5.68; 7.39

e. 5.90; 7.51

---------------------------------

Q9

 Enter 4×2 6.85/2 60/2 1,000

N I/Y PV PMT FV

Solve for -970.69

Q10

 Enter 7 8.89 90 1,000

N I/Y PV PMT FV

Solve for -1,005.56

Q11

 Enter 11×2 8.79/2 90/2 1,000

N I/Y PV PMT FV

Solve for -1,014.62

Q12

Enter 4.88/2 -1,204.60 80/2 1,000

N I/Y PV PMT FV

Solve for 16

Number of years = 16 / 2 = 8

Q13

 Enter 6.50 -959.21 60 1,000

N I/Y PV PMT FV

Solve for 12

Q14

 Enter 9 -930.12 85 1,000

N I/Y PV PMT FV

6 | Page

Solve for 9.70

Q15

Current yield = (.065 × $1,000) / $1,035.80 = .06275 = 6.28 percent

Q16

Enter 8 10.15 115 1,000

N I/Y PV PMT FV

Solve for -1,071.63

Current yield = $115 / $1,071.63 = .10731 = 10.73 percent

Q17

 Enter 10 -1,017 80 1,000

N I/Y PV PMT FV

Solve for 7.75

Since the current market yield on comparable bonds is 7.75%, Waterfront Properties

should set its coupon rate at 7.75% if it wants its bonds to sell at par.

Q18

Enter 9 6.25 65 1,000

N I/Y PV PMT FV

Solve for -1,016.82

Percent price change = ($1,016.82 − $1,000) / $1,000 = .01682 = 1.68 percent

Q19

Enter 9 9 80 1,000

N I/Y PV PMT FV

Solve for -940.05

Percent price change of Bond 1 = ($940.05 − $1,000) / $1,000 = -.05995 = -6.00 percent

Enter 6 9 80 1,000

N I/Y PV PMT FV

Solve for -955.14

Percent price change of Bond 2 = ($955.14 − $1,000) / $1,000 = -.04486 = -4.49 percent

Q20

Enter 14 6.4 70 1,000

N I/Y PV PMT FV

Solve for -1,054.41

Percent price change = ($1,054.41 − $1,000) / $1,000 = .05441 = 5.44 percent

Enter 24 6.4 70 1,000

N I/Y PV PMT FV

Solve for -1,072.60

Percent price change = ($1,072.60 − $1,000) / $1,000 = .0726 = 7.26 percent

REVIEW QUIZ FOR CHAPTER 6

BONDS, BOND VALUATION, AND INTEREST RATES

1. If a bond’s coupon rate exceeds its yield to maturity, the bond is selling at:

a. a discount. b. par. c. a premium.

2. Which one of the following bonds is the least interest rate sensitive?

a. 3-year, 6 percent coupon

b. 3-year, 0 percent coupon

c. 6-year, 6 percent coupon

d. 6-year, 0 percent coupon

3. A bond has a face value of $1,000, a market price of $987, and pays $37.50 in interest every six months. What is the coupon rate?

a. 3.75 percent b. 4.50 percent c. 6.38 percent d. 7.50 percent

4. A 9 percent, $1,000 bond matures in 16 years, pays interest semi-annually, and has a yield-to-maturity of 9.68 percent. What is the current market price?

a. $938.47 b. $945.23 c. $1,028.60 d. $1,108.19

5. A 6 percent annual coupon bond has a face value of $1,000, a market price of $1,012.40, and a yield-tomaturity of 5.87 percent. How many years is it until the bond matures?

a. 7.77 years b. 7.84 years c. 14.27 years d. 14.39 years

6. A bond has a $1,000 face value and a $989 market value. The bond pays interest semi-annually, has a yield-to-maturity of 7.47 percent, and matures in 12 years. What is the current yield?

a. 6.67 percent b. 7.41 percent c. 7.47 percent d. 8.01 percent

7. A $1,000 bond matures in 8 years and pays interest semi-annually. The bond is selling for $994.63 and has a yield-to-maturity of 7.49 percent. What is the coupon rate?

a. 6.70 percent b. 6.87 percent c. 7.25 percent d. 7.40 percent

8. Market interest rates and bond prices are:

a. unrelated. b. inversely related. c. directly related.

9. World Importers wants to raise $11 million by issuing 15-year, zero coupon bonds. The market requires a 7.8 percent return on similar bonds. The face value per bond will be $1,000. How many bonds must the firm issue? Ignore all issue and transaction costs.

a. 11,000 bonds

b. 12,898 bonds

c. 34,662 bonds

d. 33,937 bonds

10. Last year, you earned 11.67 percent on your investments. During that time period, inflation averaged 6.4 percent. What was your real rate of return based on the Fisher formula?

a. 4.953 percent b. 5.208 percent c. 5.513 percent d. 5.711 percent

 Answer

1. c

2. a

3. d ($37.50 × 2) / $1,000 = .075 = 7.50 percent

4. b Enter 16×2 9.68/2 45 1,000

N I/Y PV PMT FV

Solve for -945.23

5. d Enter 5.87 -1,012.40 60 1,000

N I/Y PV PMT FV

Solve for 14.39

6. b Enter 12×2 7.47/2 -989 1,000

N I/Y PV PMT FV

Solve for 36.648

Current yield = ($36.648 × 2) / $989 = .07411 = 7.41 percent

7. d Enter 8×2 7.49/2 -994.63 1,000

N I/Y PV PMT FV

Solve for 36.998

Coupon rate = ($36.998 × 2) / $1,000 = .0740 = 7.40 percent

8. b

9. d Enter 15 7.8 1,000

N I/Y PV PMT FV

Solve for -324.13

Number of bonds needed = $11,000,000 / $324.13 = 33,937 bonds

10. a (1 + .1167) = (1 + r) × (1 + .064); r = .04953 = 4.953 percent