# finance data bank

Question # 00003503 Posted By: spqr Updated on: 11/13/2013 12:29 PM Due on: 11/28/2013
Subject Finance Topic Finance Tutorials:
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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 30-year standard mortgage at a fixed nominal rate of 9% or a 15-year mortgage at a fixed nominal rate of 9%. How much more interest will you pay if you took out a 30-year mortgage instead of a 15-year 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 6-month period for the next 10 years (a total of 20 payments).

c. Investment C pays \$125 at the beginning of every 6-month 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 one-time 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 upward-sloping 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 (short-term) rates are expected to be higher than current (short-term) 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 15-year, AA-rated bonds. What is the yield on these bonds? Disregard cross-product 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 risk-free 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 one-year Treasury security is 5.84%, and two-year 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 one-year 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 risk-free 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 5-year bonds yield 6.65%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 3.60%, the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for T-bonds, 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 5-year bond yields?

a. 0.68%

b. 0.75%

c. 0.83%

d. 0.91%

e. 1.00%

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