## 16 Mar Consider a bond with a coupon rate of 10% and

Consider a bond with a coupon rate of 10% and annual coupons. The par value is $1,000, and the bond has 10 years to maturity. The yield to maturity (return to bondholder) is 10%. What is the value of the bond?

$1,000

$980

$950

$1,105

Consider a bond with a 10% semiannual coupon bond, 15 years to maturity, and a par value of $1,000. The current price is $1028.09. What is the yield to maturity?

10.25%

9.02%

8.59%

9.64%

Consider a bond with a 10% semi-annual coupon bond, 15 years to maturity, and a par value of $1,000. The current price is $1028.09. What is the current yield?

10.28%

9.73%

9.64%

10%

Consider a bond with a 10% semi-annual coupon bond, 15 years to maturity, and a par value of $1,000. The current price is $1028.09. What is the capital gain yield?

-0.085%

1.33%

-1.22%

1.22%

The principal amount of a bond that is repaid at the end of the loan term is called the bond’s

maturity

face value

coupon rate

coupon

yield to maturity

The rate of return required by investors in the market for owning a bond is called the

Face value

Yield to maturity

Coupon

Maturity

Coupon rate

A bond with a 7% coupon that pays interest semiannually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.

$1,000; $7

$1,000; $35

$1,070; $35

$1,070; $70

$1,007; $70

Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.61%. What is the current market price of a $1,000 face value bond?

$833.26

$915.12

$430.24

$473.06

$1,081.05

A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the bond is $932. What is the yield to maturity for this bond?

5.85%

6.18%

10.15%

8.38%

A AAA firm’s bonds will mature in eight years, and the coupon is $65. The YTM is 8.2%. What is the Bond’s market value?

$1,048.43

$903.04

$912.58

$925.12

What will be the FV of $500 in 3 years at an interest rate of 5%?

$550.41

$582.95

$680.25

$578.81

You have $100 but need $180 four years later. To achieve this goal, how much should the interest rate be?

15.38%

16.66%

16.51%

15.83%

The mortgage quoted rate is 6% annually. How much is the actual rate? (Hint: The mortgage is paid monthly.)

6.00%

6.57%

6.17%

6.47%

What is the NPV of the following cash flows. The discount rate is 5%.

Year CF

1 0

2 0

3 100

4 100

5 200

$301.05

$364.33

$325.36

$350.92

At 4% interest, how long would it take to triple your money?

Year CF

1 0

2 0

3 100

4 100

5 200

26.64 years

29.01 years

27.27 years

28.01 years

You are borrowing $18,000 to buy a car. The terms of the loan call for monthly payments for 5 years at 6 percent interest (APR=5%). What is the actual (effective) annual rate?

5%

5.04%

5.12%

5.25%

An insurance company is offering a new policy to its customers. The detail of the policy is as follows. The purchaser makes the following five payments to the company.

First year $500

Second year $600

Third year $700

Third year $700

Fourth year $800

Fifth year $900

Assume that the interest rate is 10%. How much is the lump sum value of the five payments as of today?

2,500.00

2728.51

$2,988.43

2,898.93

What is the nominal annual rate (APR) if a bank charges you a 4 percent actual rate (EAR=4%) compounded weekly (52 weeks a year)?

3.62%

3.92%

3.72%

3.84%

Your sister turned 30 today, and she is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that’s expected to provide a return of 8% per year. She plans to retire 35 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year.

$112,997

$108,179

$98,601

$161,686

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

8.00%

8.82%

8.40%

7.62%

You are given the investment alternatives. Assume a 20% discount rate. How much is the NPV?

Year 1 $0

Year 2 $0

Year 3 $5000

Year 4 $3000

Year 5 $2000

Year 6 $8000

$8,804.11

$7,492.50

$8,514.18

$7,823.22

You are given the investment alternatives. Assume 20% discount rate. How much is the NFV (value by the end of year 6)?

Year 1 $0

Year 2 $0

Year 3 $5000

Year 4 $3000

Year 5 $2000

Year 6 $8000

$18,000

$23,360

$23,880

$24,470

Beta of stock A = 1.0; Beta of stock B = 1.5. Pick the correct answer.

Stock B’s return > stock A’s return

Stock A’s return < Stock B’s return

Stock B is always a better choice than stock A to anybody

There is no difference between the returns of the two stocks

Years Market return Stock A return Stock B return

1 -3% -16% 5%

2 5% 20% 5%

3 1% -18% 5%

4 10% 25% 5%

5 -6% -14% 5%

Based on the chart, the average return of market return is

1.4%

1.1%

1.3%

1.2%

Years Market return Stock A return Stock B return

1 -3% -16% 5%

2 5% 20% 5%

3 1% -18% 5%

4 10% 25% 5%

5 -6% -14% 5%

Based on the chart, the risk of market return (standard deviation) is (hint: you can use stdevp function in excel to find standard deviation)

6.11%

6.35%

5.88%

5.93%

Years Market return Stock A return Stock B return

1 -3% -16% 5%

2 5% 20% 5%

3 1% -18% 5%

4 10% 25% 5%

5 -6% -14% 5%

Based on the chart, the stock A’s average return is

0.45%

-0.06%

1.53%

2.97%

Years Market return Stock A return Stock B return

1 -3% -16% 5%

2 5% 20% 5%

3 1% -18% 5%

4 10% 25% 5%

5 -6% -14% 5%

Based on the chart, The beta of stock B’s return is (hint: stock B's stock return shows no deviation. So it should be a risk free security)

0.05

2.00

0.00

1.00

Choose the correct answer

Strike in Jacksonville

High inflation

Recession

Hyper interest rates

Pick the correct answer (SML: security market line).

Returns should decreases with beta

The slope of SML = market risk premium

Beta shows diversifiable risk

The intercept of SML = market return

Beta of stock A is 1.2 and σ is 21%. Beta of stock B is 0.8 and σ is 26%. You have a total investment of $200,000, among which 50% invest in stock A and the rest in B. Imagine your total investment including this portfolio is well diversified. Pick the correct answer.

Stock A’s return 0, then IRR < 0

NPV < 0, then IRR < WACC (weighted average cost of capital, the discount rate)

NPV decreases with WACC (weighted average cost of capital, the discount rate)

NPV = 0, then IRR = 0

Find the IRR

Year 0 1 2 3

Cash flows -$1000.00 $425.00 $425.00 $425.00

13.21%

12.87%

13.56%

13.85%

Find the payback period

Year 0 1 2 3

Cash flows -$1150 $500 $500 $500

2.30 years

1.86 years

2.03 years

2.17 years

Find the MIRR

WACC: 10%

Year 0 1 2 3

Cash flows -$1000 $450 $450 $450

14.20%

13.78%

15.50%

12.32%

Find the crossover rate with the following information.

Required rate of return: 10.25%

Year 0 1 2 3 4

CFS -$2000 $750 $750 $750 $750

CFL -$4,000 $1,500 $1,500 $1,500 $1,500

18.27%

18.45%

16.25%

18.61%

Suppose Big D, Inc., just paid a dividend of $1 per share. It is expected to increase its dividend by 5% per year. If the market requires a return of 10% on assets of this risk. How much will be the dividend be two years from now?

$1.21

$1.32

$1.10

$1.43

Suppose a firm’s stock is selling for $10. D1=1, and dividends are expected to grow at 5% per year. What is the required return?

15%

5%

12%

9%

Suppose a firm’s stock is selling for $10. D1=1, and dividends are expected to grow at 5% per year. What is the dividend yield?

7%

9%

8%

10%

M&M Foods

2008 2009

Sales $5,831 $6,423

COGS 3,670 4,109

Interest 291 280

Depreciation 125 122

Cash 250 313

Accounts receivable 1,092 1,162

Current liabilities 717 1,051

Inventory 1,495 1,521

Long-term debt 2,400 1,100

Net fixed assets 4,006 4,123

Common stock 1,900 2,100

Taxes 590 670

Dividend paid in 2009 to investors is $200.

Calculate M&M Foods Company's net income in 2009.

$1,242

$2,192

$1,912

$2,571

M&M Foods

2008 2009

Sales $5,831 $6,423

COGS 3,670 4,109

Interest 291 280

Depreciation 125 122

Cash 250 313

Accounts receivable 1,092 1,162

Current liabilities 717 1,051

Inventory 1,495 1,521

Long-term debt 2,400 1,100

Net fixed assets 4,006 4,123

Common stock 1,900 2,100

Taxes 590 670

Dividend paid in 2009 to investors is $200.

Calculate the cash flow from operation.

$1,630

$1,602

$1,573

$1,521

M&M Foods

2008 2009

Sales $5,831 $6,423

COGS 3,670 4,109

Interest 291 280

Depreciation 125 122

Cash 250 313

Accounts receivable 1,092 1,162

Current liabilities 717 1,051

Inventory 1,495 1,521

Long-term debt 2,400 1,100

Net fixed assets 4,006 4,123

Common stock 1,900 2,100

Taxes 590 670

Dividend paid in 2009 to investors is $200.

Calculate cash flow from investment.

-$204

-$251

-$239

-$249

M&M Foods

2008 2009

Sales $5,831 $6,423

COGS 3,670 4,109

Interest 291 280

Depreciation 125 122

Cash 250 313

Accounts receivable 1,092 1,162

Current liabilities 717 1,051

Inventory 1,495 1,521

Long-term debt 2,400 1,100

Net fixed assets 4,006 4,123

Common stock 1,900 2,100

Taxes 590 670

Dividend paid in 2009 to investors is $200.

Calculate cash flow from financing.

-$1,200

-$1,300

-$1,500

-$1,400

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