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Finance 201 > Midterm 2 Part III > Flashcards

Midterm 2 Part III Flashcards

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1
Q

(Compound value solving for n) How many years will it take to get the following (round your answer to the nearest year):

$995 to become $2,800 at 12% compounded monthly
A

9 years

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2
Q

(Present value of an annuity) What is the present value of the following annuity?

$3,000 a year for 8 years discounted at 7% annually
A

$17,913.90

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3
Q

(Present value of an annuity) What is the present value of the following annuity?

$645 a year for 3 years discounted at 3% annually
A

$1,824.45

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4
Q

(Present value of an annuity) What is the present value of the following annuity?

$300 a year for 2 years discounted at 5% annually
A

$557.82

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5
Q

(Compound annuity) What is the accumulated sum of the following streams of payments?

$1,200 a year for 5 years compounded annually at 10%
A

$7,326.12

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6
Q

(Compound annuity) What is the accumulated sum of the following streams of payments?

$250 a year for 12 years compounded annually at 8%
A

$4,744.28

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7
Q

(Compound annuity) What is the accumulated sum of the following streams of payments?

$10,000 a year for 3 years compounded annually at 22%
A

$37,084.00

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8
Q

(Compound annuity) What is the accumulated sum (FV) of each of the following streams of payments?

$360 a year for 22 years compounded annually at 5%
A

$13,861.88

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9
Q

(Compound interest with non-annual periods) You have decided to get a car because you are tired of walking the 6 miles to get to school in the cold winter months. You go to your local Ford dealer and decide on getting a 2012 Ford Fiesta for $13,200 MSRP. You have saved up some money from your last summer internship. For the rest of the money you decide to get an auto loan. The dealership offers you a loan with a 7% annual interest. However, to make sure you are getting the best deal you call your bank to ask them what the interest would be for an auto loan. The banker is a friend of yours and can get you a 6% rate compounded monthly. Which alternative is most attractive?

A

The BANKER friend

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10
Q

Perpetuity

A

An annuity with an infinite number of periods

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11
Q

Annuity due

A

A payment at the beginning of the period (BEGIN)

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12
Q

True or False: When calculating annuity due, you will have a higher number than if you were dealing with an ordinary annuity.
And WHY?

A

True. Because the sooner you get the money the more it’s worth.

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13
Q

Cash flows from this investment are expected to be $40 per year at the end of years 4, 5, 6, 7, and 8 (8 years total). If you require a 20% rate of return, what is the present value of these cash flows?

A

$69.22

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14
Q

What is the present value of a 10-year $5,000 annuity due if the discount rate is 10%?

A

$33,795.12

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15
Q

What is the present value of following streams of future cash flows if the discount rate is 11%?

Year 1 Year 2 Year 3

$14,000 $16,540 $19,889

A

$40,580

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16
Q

What is the present value of following streams of future cash flows given at the end of each year if the discount rate is 15%?

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

$0 $0 $0 $21,000 $21,000 $21,000 $21,000

A

$39,421

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17
Q

What is the present value of the following stream of cash flows if the discount rate is 9%?

Year 1 - $0
Year 2 - $0
Year 3 - $19,800
Year 4 - $16,840
Year 5 - $12,120
A

$35,096.28

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18
Q

If you are going to receive $70,000 for 20 years starting 5 years from now, what is the present value of the cash flows discounted at 12%?

A

$332,288

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19
Q

What is the today’s value of a $5,000 annual perpetuity starting in 40 years discounted at 8%?

A

$3,107.09

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20
Q

What is the present value of an annual payment of $10,000 that is received in perpetuity if the discount rate is 13%?

A

$76,923

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21
Q

Suppose that an investment product pays an investor $10,000 in perpetuity. If the appropriate discount rate is 12%, what should the price (or present value) of this product be?

A

$83,333.33

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22
Q

A particular investment product pays an investor 5 equal payments of $15,000 in each year, however the first payment starts immediately. If the appropriate discount rate is 10%, what is the price (or present value) of this annuity due?

A

$62,547.98

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23
Q

What is the present value of the following stream of cash flows if the discount rate is 9%?

Year 1 - $15,500
Year 2 - $17,250
Year 3 - $19,800
Year 4 - $16,840
Year 5 - $12,120
A

$63,835.44

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24
Q

(Perpetuity) Calculate the present value of the following perpetuity?

$500 discounted at 4% annually
A

$12,500

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25
Q

(Perpetuity) Calculate the present value of the following perpetuity?

$100 discounted at 3% annually
A

$3,333.33

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26
Q

(Perpetuity) Calculate the present value of the following perpetuity?

$900 discounted at 5% annually
A

$18,000

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27
Q

(Perpetuity) Calculate the present value of the following perpetuity?

$1,500 discounted at 6% annually
A

$25,000

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28
Q

(Present value of an annuity due) What is the present value of a 20-year annuity due of $2,500 given an 8% discount rate?

A

$26,509.00

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29
Q

MINI-CASE

Name: April
Current age: 25
Tax rate: 20%
Assumed portfolio return: 8% annually
Projected retirement age: 65
 April nest-egg goal: $3,000,000

Calculate the required monthly savings that April needs to have in order to reach her goal to accumulate $3,000,000 when she retires if she makes payment at the end of each month until she retires?

A

$859.35

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30
Q

MINI-CASE

Name: April
Current age: 25
Tax rate: 20%
Assumed portfolio return: 8% annually
Projected retirement age: 65
April nest-egg goal: $3,000,000

Calculate the required monthly savings April needs to have to reach her goal if she starts saving at age 35?

A

$2,012.94

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31
Q

MINI-CASE

Name: April
Current age: 25
Tax rate: 20%
Assumed portfolio return: 8% annually
Projected retirement age: 65
April nest-egg goal: $3,000,000

Calculate the required monthly savings April needs to have to reach her goal if she starts saving at age 50?

A

$8,669.56

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32
Q

Lisa is putting together a retirement plan and is scheduled to retire in 32 years. She is planning to open a retirement account and invest an equal amount each month into the retirement account. If she expects to earn 9% per year in the account and is planning to have $2,000,000 in the account at retirement, what is the amount of the monthly investment?

A

$902.32

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33
Q

Blake is planning to retire in 38 years. He is thinking about opening a retirement account and plans to invest an equal amount each year into the account. He expects to earn 13% per year in the account and is planning to have $1,750,000 in the account at retirement, what is the amount of Blake’s annual investment?

A

$2,209

34
Q

(Challenge)

(Loan amortization) The Jones family recently purchased a new home for $2,300,000. The family paid $250,000 down at signing and decided to pay the rest over 15 years in equal monthly payments that include principal payments plus 4.5% interest on the unpaid balance. Determine the amount of the equal monthly payments the Jones family will have to make over the life of the loan?

A

$15,682.36

35
Q

(Solving for Annuity) Mary and John had their first child a week ago. They decide to set up a savings account for their child’s college education in 18 years. Mary figures that tuition costs for her child to get a 4-year degree at the local university at the end of 18 years will be $40,000. At their local bank, they can offer an account with 3% annual yield. How much will Mary and John have to pay at the end of each month to attain their goal?

A

$139.89

36
Q

(Challenge)

(Present value of an ordinary annuity) In the month of December, you receive a job offer from Credit Suisse. The letter tells you that you will be starting on January 1st, and you will receive an annual salary to be paid at the end of each year of $70,000. The letter also says that this is a 4-year contract after which you will be expected to do an MBA. Before accepting you decide to calculate the present value of your 4-year contract with Credit Suisse as of your starting date. What is your contract worth at that time given a 15% discount rate?

A

$199,848.48

37
Q

(Complex present value of an annuity due) Alex just started his junior year in high school (2 years until he graduates). His mom is worried about his grades and if he will be able to be accepted at the local college. His mom decides that if Alex is accepted two years from now, she will give him $5,000 a year to help out with his expenses during his 4-year degree. What is the present value of Alex’s annuity if the payments are made at the beginning of each school year in school? Use a 12% discount rate.

A

$13,559.60

38
Q

(Challenge)

(Future value of an annuity) You plan to retire in 30 years. When you retire you plan on purchasing your dream house, which currently costs $350,000, and is expected to increase in value every year at a rate of 3%. Assuming that your investment can earn 10% annually, how much do you need to invest at the end of each year for the next 30 years to buy the home when you retire?

A

$5,164.58

39
Q

If you are compounding a cash flow, you are:

A

Finding a future value

40
Q

Today, a round-trip plane ticket from Los Angeles to New York costs $350. If the average annual inflation rate is 2.5%, who much will the ticket cost 30 years from now?

A

$734.15

41
Q

You want $15,000, fifteen years from now. If you can earn 8% per year in your savings account, how much do you have to deposit in today?

A

$4,729

42
Q

Which of the following best describes the difference between an annuity due and an ordinary annuity?

A

An ordinary annuity pays at the end of the period, but an annuity due pays at the beginning.

43
Q

You are planning to retire 40 years from now. If your retirement account pays an annual rate of 6% compounded monthly and you start making a monthly contribution of $400 a month today, how much will you have when you retire in 40 years?

A

$800,579

44
Q

If you deposit $10,000 in an account with annual rate of 9% compounded semi-annually, how long will it take for you to have $2,000,000 in the account?

A

60.18 years

45
Q

Suppose you deposit $10,000 in an account today that pays an interest rate which is compounding monthly. If your goal is to have $2,000,000 in 40 years, the stated annual rate must be at least:

A

13.32%

46
Q

Which of the following gives the smallest effective yield? Assume that 1 year is 365 days.

A

18.65% APR compounded monthly

47
Q

How does a perpetuity differ from an ordinary annuity?

A

A perpetuity has payments that go on forever while an ordinary annuity has a limited numbers of cash flows.

48
Q

Suppose you want to establish a fund that will pay $5,000 a year forever to your favorite charity. If the discount rate is 8%, how much do you have to set a side today?

A

$62,500

49
Q

You have a son who is 5 years old. You want to provide financial help when he goes to college in exactly 13 years. You are planning to give him $20,000 a year at the beginning of each year for 4 years to pay his educational expenses. How much do you have to set aside today if you can earn an annual rate of 5% on all invested funds?

A

$39,490

50
Q

What is the value of an asset that pays $5,000 at the end of each of the next three years, $7,500 at the end of each of the following three years, and $10,000 at the end of each of the final three years? Assume a discount rate of 7%.

A

$46,675

51
Q

What should you be willing to pay now in order to receive $12,000 annually forever starting 40 years from now if you require 8.5% on the investment?

A

$5,861

52
Q

You bought a new car today which cost you $20,000. You financed the entire cost with a 5-year loan at 4.00%. If you make payments at the end of each month starting a month from now, how much is your monthly payment?

A

$368.33

53
Q

4 years ago you took out a student loan of $20,000 with the annual interest rate of 8% compounded monthly. Because it is a student loan, you did not make any payments while you were in school but interest was still accruing on the amount borrowed. You just graduated. As such, you must now start paying back your loan by making equal, monthly, end of the month payments. If you plan to pay back the loan over the next 10 years, how much is your monthly payment?

A

$333.81

54
Q

You just started a full-time job today and received information on the firm’s retirement savings program. Your employer will match all your contributions on a 1-to-1 basis and you expect an average annual return of 6%. You decided to make a monthly contribution to your retirement account of $315 at the beginning of each month starting today. How much will you have in 40 years?

A

$1,260,912

55
Q

You are considering buying a house. Your current annual salary is $100,000 and you want the monthly payment to be no more than 25% of your monthly income. You can get 25-year mortgage at 4.2% APR. Insurance and taxes will be $300 per month and must be included when calculating your maximum loan amount. If you can make a down payment of $30,000, what is the maximum amount you can spend on a house?

A

$360,895

56
Q

You just welcomed a new baby girl to your family today. You want your daughter to go to Harvard in 18 years for her college education. This year, tuition and fee are $60,000 if she were attending today. You expect the cost to increase by 4% each year. Assume the full amount is payable at the beginning of each year. Your savings account earns an annual rate of 6% but is compounded monthly.

What will be the cost of attending for one year when she starts college in 18 years?

A

$121,549

57
Q

You just welcomed a new baby girl to your family today. You want your daughter to go to Harvard in 18 years for her college education (assumed to be 4 years in length). This year, tuition and fees are $60,000 IF she were attending today. You expect the cost to increase by 4% each year. Assume the full amount is payable at the beginning of each year. Your savings account earns an annual rate of 6% but is compounded monthly.

(Challenge Problem) If you are going to make a monthly deposit at the beginning of each month starting a month from today until the first month your daughter starts college in 18 years, how much do you have to put in every month?

A

$1,217

58
Q

True or False: Bonds = Fixed income

A

True

59
Q

What are the two reasons to learn about bonds?

A
  1. Bonds finance the nation
  2. Bonds play a major role in the majority of personal savings
60
Q

True or False: Bonds are the backbone of the world’s pension funds.

A

True

61
Q

True or False: The two main reasons the text states for the importance of understanding bonds are the bond market is an important source of financing and bonds play a role in most personal investment plans.

A

True

62
Q

In the bond market, firms raise debt financing directly from ________.

A

Investors

63
Q

What is the relationship between bonds and debt capital?

A

Bonds raise debt capital. They are the primary ways that corporations borrow money.

64
Q

What is a bond?

A

Basically a debt agreement with investors. Corporations pay money to the investors per month in addition to paying back the full loan amount in exchange for the money they need RIGHT NOW.

65
Q

What does it mean that a bond is a fixed income security?

A

It means they pay a fixed interest payment each year.
This is in contrast with stocks or equity, where dividends may vary from year to year.

66
Q

True or False: The PMT given each period of a bond is interest + principal.

A

FALSE. The coupon payments are only interest. The principal is paid at the very end of the bond life.

67
Q

Par Value

A

Also known as face value (FV). This is the amount that the corporation promises to pay at the end of the bond.

68
Q

What is another name for coupon rate?

A

Coupon yield

69
Q

True or False: The coupon rate can change during the life of the bond.

A

False

70
Q

Maturity

A

The number of years from when the bond expires

71
Q

Bond indenture

A

The bond contract between the corporation and the investor. Describes all the bond’s features.

72
Q

Covenants

A

Rules that the company outlines. Promises they will keep to protect bondholders. If they break these covenants, they are in default.

73
Q

What are the two types of bond covenants?

A

Affirmative and negative

74
Q

Affirmative bond covenant

A

All the things the corporation promises it will do like pay taxes on time, maintain debt ratio, etc.

75
Q

Negative bond covenant

A

Things the company will NOT do like sell certain assets, pay large dividends, etc.

76
Q

Debt capital

A

Firm financings that show up on the BS

77
Q

Why choose bonds over banks?

A

Because banks act as a middle man and take a portion of money away from the company. Selling/buying bonds is more direct.

78
Q

What is the written agreement between the bond issuer and its bondholders called?

A

Indenture

79
Q

The period of time for which a bond remains outstanding is called:

A

Maturity

80
Q

The stated interest payment made on a bond is the:

A

Coupon

81
Q

What types of loans are always classified as a secure loan?

A

Mortage and car loan.

NOT credit card

Finance 201 (18 decks)

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