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Commerce 2FA3 Mid-term exam #1 Solutions 1) I want this exam to be marked with the grading scheme for a) Version A b) Version B c) Version C d) Version D 2) Purchasing a 5-year bond from a large corporation that was not the initial issuer of the bond is best characterized as what type of transaction? a) A primary market transaction in the money market b) A secondary market transaction in the money market c) A primary market transaction in the capital market d) A secondary market transaction in the capital market e) An over the counter transaction in an auction market 3) Which of the following possible primary goals of the firm's managers are the firm's owners most likely to support? a) maximize net income b) ensure regular dividend payments c) maximize the value of the current owners equity d) maximize the growth rate of revenue e) maximize the company's asset base 4) If you put $500 into a bank account that pays an interest rate of 10% compounded semi-annually, what will the account balance be at the end of five years? a) $750 b) $805 c) $814 d) $1,297 e) $1,327 Page 3 of 11 Commerce 2FA3 Mid-term exam #1 Solutions 5) Six months ago you purchased a bond for $975. The bond has just paid a coupon of $45. If the current price of that bond is $955, what was your return on this purchase on an effective annual basis? a) -2.1% b) 2.5% c) 2.6% d) 5.0% e) 5.2% 6) Which of the following is not a feature of the form of business organization? a) A sole proprietorship requires the least amount of paperwork to set up. b) Partnerships are subject to double taxation. c) It is easier to raise capital and transfer ownership with a corporation. d) A partnership has the most limited life. e) Limited partners do not have unlimited liability. 7) If you are indifferent between receiving $1,000 today and receiving $2,500 in five years, what is your required rate of return to the nearest percent? a) 20% b) 30% c) 19% d) 25% e) 10% 8) You want to retire as a millionaire. How much would you have to deposit at the start of each month for the next 30 years to reach that goal, assuming that you were able to earn 8% as an effective annual rate of return? a) $705 b) $710 c) $715 d) $720 e) $725 Page 4 of 11 Commerce 2FA3 Mid-term exam #1 Solutions 9) When considering an investment which of the following is least likely to be a factor in your investment decision? a) The level of risk in the investment. b) The time until you receive payment. c) The rate of return on other investments of similar risk. d) The existence of a secondary market for the investment. e) The current T-Bill rate. 10) How much would you be willing to pay for $5,242 to be received 16 years from now if you require a return of 5.2% on an effective annual basis? a) $1,871.39 b) $2,329.41 c) $2,305.59 d) $2,861.35 e) $1,752.04 11) You've been quoted an interest rate of 10% simple interest for 3 years. What would this be if converted to an APR with monthly compounding? a) 10% b) 10.5% c) 9.1% d) 8.8% e) 11% 12) Which of the following interest rates is the highest? a) 16.00% effective annual rate b) 15.75% APR with semi-annual compounding c) 15.50% APR with monthly compounding d) 15.25% APR with continuous compounding e) cannot be determined from the information given Page 5 of 11 Commerce 2FA3 Mid-term exam #1 Solutions 13) An investment that will pay $5,000 four years and 4 months from now is selling for $3,800. What rate of return would this investment yield on an effective annual basis? a) 6.54% b) 7.29% c) 6.35% d) 7.54% e) it would depend on the risk level of the investment 14) If you invested $5,000 at 15% with annual compounding, how long would it take for your investment to grow to a value of $20,000? a) 10 years b) 9.9 years c) 9.5 years d) 26.7 years e) 10.3 years 15) What is the present value of $500 to be received one year from now plus $700 to be received two years from now plus $900 to be received three years from now if the appropriate discount rate is 8% compounded annually? a) $2,100 b) $1,944 c) $1,792 d) $1,778 e) $1,772 Page 6 of 11 Commerce 2FA3 Mid-term exam #1 Solutions 16) You are shopping for a new house. You have $25,000 to use as a down payment. The bank has offered a mortgage rate of 7.50% APR, semi-annual compounding with an amortization period of 20 years. How much can you spend on the house if you are willing to pay $1,500 per month? a) $187,828 b) $212,828 c) $189,726 d) $214,726 e) It would depend on the term of the mortgage. 17) You have decided to buy furniture worth $5,000. You have been offered 3 months no interest and no payments, with the balance payable in 36 monthly installments. The first payment is due 3 months from today. If the monthly compounded APR is 18% after the 3-month interest free period, what are your monthly payments? a) $180.76 b) $178.09 c) $175.00 d) $177.43 e) $186.23 18) To settle a debt of $225, a friend of yours has offered to pay you $20 per month for a year. What is the implied rate of interest in these terms? a) 6.67% effective annual b) 12% APR with monthly compounding c) 12% effective annual d) 15% APR with monthly compounding e) 21% effective annual Page 7 of 11 Commerce 2FA3 Mid-term exam #1 Solutions 19) You've been offered an investment that pays $5,000 at the end of every year. How much is this investment worth? a) $50,000 if the appropriate discount rate is 8% per year b) $45,000 if the appropriate discount rate is 9% per year c) $60,000 if the appropriate discount rate is 6% per year d) $100,000 if the appropriate discount rate is 5% per year e) $45,000 if the appropriate discount rate is 12% per year 20) You are saving for your child's university education. You think that they will need to be able to withdraw $25,000 on Sept. 1 on each of four years. How much will you need to have in the account just before the first withdrawal if the rate of return on the account is 6% annually? a) $100,000 b) $91,825 c) $86,628 d) $92,093 e) $87,254 21) If the terms of a loan agreement call for you to make periodic payments that include accumulated interest plus an amount towards the principal and a balloon payment at the end of the term, this type of a loan is a a) pure discount loan b) amortized loan c) interest only loan d) partial amortization loan e) consol 22) You borrowed $15,000 at an APR of 12% with monthly compounding 3 years ago. You have been paying $349 per month. How much do you still owe? a) $6,427.70 b) $6,180.57 c) $6,310.45 d) $6,360.61 e) $0 Page 8 of 11 Commerce 2FA3 Mid-term exam #1 Solutions 23) If the YTM of a bond is 8.75% and it has a coupon rate of 7.5% the bond will be selling at a) par b) a premium c) a discount d) it would depend on the time to maturity e) it would depend on the risk level of the issuer 24) Which of the following provisions will decrease the value of a bond a) callable b) retractable c) extendable d) convertible e) a sinking fund 25) Assume you have two $1,000 face value bonds, with the same coupon rate, from the same company. One will mature in 7 years, the other in 5 years. Which bond will decrease more in price if market interest rates rise? a) The price decrease will be the same. b) The 5-year bond will decrease more in price. c) The 7-year bond will decrease more in price. d) It would depend on the coupon rate. e) The bonds will actually rise in price. 26) If a $1,000 face value 10% semi annual coupon bond with 5 years to maturity is trading at $1,081.11, what is it's YTM? a) 7% b) 8% c) 9% d) 10% e) 11% Page 9 of 11 Commerce 2FA3 Mid-term exam #1 Solutions 27) Which of the following are you unlikely to see in a bond's indenture? a) The date of maturity b) The name of the trustee for the issue c) The coupon rate d) The duration of the bond e) The details of a call provision 28) When no specific assets are pledged as collateral, a debt issue is called a a) note if the initial time to maturity is over 20 years b) consol c) debenture d) preferred share e) mortgage bond 29) Which one of the following forms of debt issue is the most senior? a) Note b) Debenture c) Subordinated debenture d) Mortgage bond e) They are all the same level of seniority. 30) Duration is a) The same as time to maturity for a coupon paying bond b) A measure that combines interest rate and default risk c) A measure of interest rate risk d) A measure of default risk e) A method of calculating the yield to call of a bond 31) Volatility can be used to estimate a) The duration of a bond b) The change in price of a bond due to inflation c) The change in price of a bond due to a change in interest rates d) The change in price of a bond due to a change in default risk e) The change a bond's yield due to changes in duration Page 10 of 11 Commerce 2FA3 Mid-term exam #1 Solutions 32) The duration of a 3-year 15% coupon bond is a) greater than a 3-year 5% bond b) equal to a 4 year pure discount bond c) dependent on the discount rate d) slightly more than 3 years e) dependent on the bond rating 33) You have a portfolio of 3 pure discount bonds, with a face value of $1,000 each. The bonds are priced to yield 8% on an effective annual basis. If the bonds have times to maturity of 3, 5, and 10 years, what is the duration of this portfolio? a) 6 Years b) 10 Years c) 5.37 Years d) 5.73 Years e) It would depend on the risk level of the bonds. 34) Which of the following has the highest level of interest rate risk? a) A ten-year pure discount bond. b) A portfolio of bonds with a duration of 10.2 years. c) A low coupon paying 10 year bond. d) A 12-year 16% bond with a YTM of 8% and a duration of 8.74 years e) It depends on the probability of default on the above investments. 35) If the CPI increased from 107.2 to 127.3 over five years, what was the average rate of inflation on an effective annual basis? a) 3.0% b) 3.5% c) 3.75% d) 4.0% e) 18.75% 36) Currently available interest rates are 6% for a 4-year term deposit and 6.5% for a 5-year term deposit. What is the implied forward rate for the fifth year? a) 6.50% b) 8.42% c) 8.50% d) 8.52% e) 9.00% Page 11 of 11 Commerce 2FA3 Mid-term exam #1 Solutions Page 12 of 11

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