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11. You’ve decided to buy a house that is valued at $1 million. You have $500,000 as a down payment on the house and you take out a mortgage for the rest. Your bank is offering you a 30year standard mortgage at a fixed nominal rate of 9% or a 15year mortgage at a fixed nominal rate of 9%. How much more interest will you pay if you took out a 30year mortgage instead of a 15year mortgage?
a. $535,480.20
b. $631,866.64
c. $685,414.66
d. $738,962.68
e. $876,543.21
12. How long will it take for you to pay off $1,000 charged on your credit card, if you plan to make the
minimum payment of $15 per month and the credit card charges 24% per annum?
a. 10 years
b. 12 years
c. 15 years
d. 17 years
e. You may not be able to pay off the debt
13. Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.
a. Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).
b. Investment B pays $125 at the end of every 6month period for the next 10 years (a total of 20 payments).
c. Investment C pays $125 at the beginning of every 6month period for the next 10 years (a total of 20 payments).
d. Investment D pays $2,500 at the end of 10 years (just one payment).
e. Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
14. Which of the following statements is CORRECT?
a. The cash flows for an ordinary annuity all occur at the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, then the series is an annuity.
c. The cash flows for an annuity due must all occur at the ends of the periods.
d. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
15. You have 2 options to buy a membership. One is to pay $5,000 upfront today and the other one is to pay
$500 each year starting today. If the prevailing discount rate is 8%, how many years do you remain as a member before the $500 annual payment becomes more expensive than the onetime membership?
a. 14.5 years
b. 17.5 years
c. 18.5 years
d. 19.5 years
e. 21.5 years
16. You observed an upwardsloping normal yield curve. Which of following statement is the MOST correct?
a. Pure expectation theory must be correct.
b. There is a positive maturity risk premium.
c. If the pure expectation theory is correct, future (shortterm) rates are expected to be higher than current (shortterm) rates.
d. Inflation must be expected to change in the future.
e. Default risk premium or liquidity premium must be increasing in the future.
17. Charles Townsend Agency issues 15year, AArated bonds. What is the yield on these bonds? Disregard crossproduct terms, i.e., if average is necessary, use the arithmetic average.
Relationship between bond ratings and DRP
Rating 
Default Risk Premium 
U.S. Treasury 
 
AAA 
0.60% 
AA 
0.80% 
A 
1.05% 
BBB 
1.45% 
Real riskfree rate (r*) = 2.8% (expected to remain constant)
Inflation rate = 5%/yr for each of next five years, 4% thereafter
MRP = 0.1*(t – 1)%, t is the security’s maturity, LP = 0.55%
a. 5.55%
b. 8.48%
c. 9.33%
d. 9.88%
e. 10.12%
18. The yield on a oneyear Treasury security is 5.84%, and twoyear Treasury security has a 7.88% yield. Suppose the securities do not have a maturity risk premium, what is the market’s estimate of the oneyear Treasury rate one year from now?
a. 8.118%
b. 9.55%
c. 9.92%
d. 11.354%
e. 12.129%
19. Assume a scenario in which there is no maturity risk premium (MRP = 0) and the real riskfree rate is expected to remain constant, and the yield curve is likely to be normal for the next 10 years. Is inflation expected to increase, decrease, or stay the same over the next 10 years?
a. Stay the same
b. Decrease
c. Increase
d. Increase at first and then decrease
e. None of above
20. Crockett Corporation's 5year bonds yield 6.65%, and 5year Tbonds yield 4.75%. The real riskfree rate is r* = 3.60%, the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for Tbonds, the liquidity premium on Crockett's bonds is LP = 0.90% versus zero for T?bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%, where t = number of years to maturity. What inflation premium (IP) is built into 5year bond yields?
a. 0.68%
b. 0.75%
c. 0.83%
d. 0.91%
e. 1.00%

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