Name:

NetID:

HADM

2250 Prelim

Prof. Andrey D. Ukhov

In Class.
Name (please print):

Cornell ID:

Ct {*G-}-* ro ,*;

NetID:
Instructions:
- Print your name and ID on all pages.
- Close book, close notes.
- One or multiple financial calculators and non-financial calculators are allowed.
- You have exactly 75 minutes for the exam.

Total 16 questions, 32 points, and 7 pages (including the cover and formula pages).
Make sure that no page is missing in your exam.
When working on questions,
o For problem solving: show your work to earn partial credits; write your final
answers in the box below each question.
o For multiple choice questions: no partial credit is available; copy your
choices (A/BlClDlE) to the table in page 2.
o For short answer questions: do not exceed the number of words specified.
The questions are NOT presented in the order of difficulty.
Allocate your time wisely.

By signing below you agree to the University rules on exams. Any violation of academic
integrity will result in serious penalty.

(Signature)
Tests without a signature

will

be discarded.

Good Luck!

Prof, Andrey D. Ukhov, HADM 2250 Fall 2012, PreIim I

1/8

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NetID:

Name:

Multiple Choice Questions (Total 6 Questions,2 points each)

Please legibly write your answers

(AlBlClDlE) within the boxes below.

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Please double-check your answers before submitting the exam.

in multiple-cho ice questions.

No partial credit is possible

For instructor's use only

Score
Q0

I -6

Q7-16
Total

Prof. Andrey D. Ukhov, HADM 2250 Fall 2012, Prelim

218

NetID:

Name:

1.

Which of the following cash flowpatterns is an "annuity due"?

A. A stream of cash flows occurring for less than two years
B. An annuity stream of payments that are disbursed rather than received
C. An annuity stream of payments that are received rather than disbursed
D. A set of equal cash flows occurring at the end of each period
il, A uet af equal c*sh flslss occui"ring in the beginniarg of each period

2.

A loan where the borrower pays interest each period, and repays some principal of the loan over
time until the final payment is called a(n) _
loan.
kA. amortized
B. continuous
C. balloon
D. pure discount
E. interest-only

3.

The interest rate charged per period multiplied by the number of periods per year is called the

fs

rate.

A. effective annual
A, annual percentage
C. periodic interest
D. compound interest
E. daily interest

4. Compute the yield to maturity (YTM) for

4 year zero-coupon bond that you bought for

$6s8.731

.73r - 1000 I (T + YTM)^4

( 1+yTM)n4 - 1000 I 659.731 (1+YTM)^2 - t.2320ggg
658

I+YTM

1.51 80703 5

- 1.10gggg

YTM: lI%

Prof. Andrey D. Ukhov, FIADM 225A Fall 2012, Prelim I

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NetID:

Name:

5. You are starting abar. A reasonable rate of return for this business is I5%o (per year).
The bar will bring profits of $ 100,000 at the end of first year. The profits will grow at
per year. You expect the bar to operate forever. You expect to run the bar for 6 years,
collect 6 years of profits, and sell the bar immediately after you receive 6th year of
profits. How much will you sell the bar for?

R:

15%:0.15,

g:3%:

0.03.

The buyer of the bar is buying a perpetuity.

The first payment the buyer receives after buying at

C7: C*(1+g)^6:

$100,000 * (1 + 0.03)

Value(attimet:6):

C7

3o/o

l(r

-g):

"

6:

t:

6, equals C7 which is:

$119,405.23

$119,405.23 /(0.15

- 0.03): $995,043.58

6. You own two bonds in your portfolio. One is a 5 year zero coupon bond, the other
one is a3-year zero coupon bond. You bought them when interest rate was 10olo
(annual). The interest rate increased to 12o/o immediately after you bought the two
bonds. What was the percent gain (or loss) on your portfolio (on your total holdings).

Price paid for 5-year bond: P5

Price paid for 3-year bond: P3
TOTAL PAID : $T,372.236

:
:

1000
1000

/ (1+0.10)^5:5620.9213
/ (1+0.10)^3 : $751.3148

Values after rates increase:

P5 : 1000 / (1+0. l2)^5 : 5567.4269
P3 : 1000 / (1+0.12)^3 : $71 1.7802

TOTAL PAID :51,279.207

Percent change in portfolio value (loss):

($r,27 9.207 - st,37 2.23 6 ) I sT,37 2.23 6

- 0.067 7 9

Prof. Andrey D. Ukhov, HADM 2250 Fall 2012, Prelim I

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NetID:

Name:

Problems (10 questions. 2 points each)

7.

Five Guys Co. is considering taking loans from two banks. First National Bank charges 13.1%
compounded monthly on its loans. First United Bank charges 13.4%o compounded semiannually.
Which bank would Five Guys choose?

Solution: EAR and APR question.

FNB has EAR:(1+13.1%112)^12-l:13.916%; FLIB has EAR:(1+13.4%12\^2-I:13.849%.
Therefore FUB charges lower effective interest rate.
Partial credit if both EARs are correctly calculated.

8.

Suppose a mutual fund firm offers to quadruple your money in 36 months. What rate of return per

quarter are you being offered?

::
::

i 12.2s%
i
..................

i ..........................

...:

Solution: Timeline and cash flows for the quadruple part. We have T:3613:12 quarters, PV:l and
FV=4, we need R. R: (4l|)^(1112)-l :12.246oh or 12.25o/o.
Partial credit if all timeline/cash flow information is correct or all basic known information is
correctly recognized.

9.

You put up $32,000 today in exchange for an 8 percent, 24-year annuity. The first payment is
made in two years. What will the annual cash flow be?
:

3282.44

olution : Annuity with PV= 3 2000 *( 1 +. 0 8) =3 4 5 60, R:8 0%, T :24 w e need C. C:jiiii^44
Partial credit if all known info is correctly identified. esp. the PV of the annuity is 34560.
S

10. You are buying a bar in Detroit. You will pay for the bar now (January 1') and receive the frst
cash flow (profits) from the bar of $25,000 exactly one year from now. From that time onward,
you will receive quarterly profits, and the profits will decay at l%o per quarter, forever. APR :
2)%o.How much would you pay for this bar?

?$socl

o\
1
Vo

a)

Qr oh

v?

{= *.1,o:,3,-.
O.OS t?c.ol

Uot

\ tE 66(.\
Gb.og)3

ql6.t[6]
,

=3

11. Michael Coreleone offers six-for-seven loans to his friends. That is, he lends six dollars today and
gets seven dollars back in a week. What is the annual rate his friends are effectively paying him

for the loans?

:

i 302,7

53.8204

Solution: Timeline and cash flows.

Weekly rate rs 716-1:1 6.6667%. EAI{ - (1 . 1 6667)"52-1:3 027 .5382 or 302,753.8zoh.
Partial credit if the weeklv rate is correct and the EAR formula is set correctl
.**-

Prof. Andrey D. Ukhov, FIADM 2250 Fall 2012, Prelim I

--"-"\-+._

sl8

NetID:

Name:

12. Given an interest rate of 10% compounded quarterly, what is the value in year seven of a
perpetual annual cash flow stream of $110 each year that begins in year eleven? __________________

i 787'88

flows.

Solution: Timeline and cash

First calculate EAR:(l+.114)^4-l:10.381o/o. As of year ten the PV:110/.10381:1059.5987.
In year seven PV: I 059. 5 987 I (1.1038 I )^3:787.88.
Partial credit if EAI{- 1 0.3 8106. PV as of year ten- I 05 9 .5981 and PV of CAT SCVCN 15 PV
1o)/(1.10381)"3.
13. You have just made your first $2,000 contribution to your individual retirement account.
Assuming you earn a 12%o rate of return and make no additional contributions, what will your
account be worth when you retire in 40 years?
186,10 r.94

Solution: Timeline and cash flows.

PV:2000, r:I2Yo, T:40, then FV:2000* ( 1 +. 12)^40 : 186, L01.94.
Partial credit if all known info (PV" r. T) is correctly identified.

14. Sunstone Resorts has identified an investment project that pays $1,200 in one year, $1,400 in two
years, $1,600 in three years, and $1,800 in four years. If the discount rate is 6.75 percent, what is
the maximum price Sunstone should pay for the project?

i 5054.06
i--_------------------

i......................................................................................................i

Solution: Timeline and cash flows.

pv:1 200/1.0675^ 1+1 4001 1.067 5^2+t6001 t.0675^3+1 800 I r.067 5^4 : 5054.06.
Partial credit if PV:1200I|.0675 1+1400/1.0675^2+160011.0675^3+1800II.0675"4.

5. You are starting a club in New York City. The club will bring profits of $50,000 every six months,
growing at 3Yo per six-month period, forever. You will keep the club for 3 years, and sell it
immediately after receiving the 6th payment. How much is the business worth today? Assume

APR:20%.

V"=.ffi.o'=?lY,}85.}i
16. Assume the total cost of a college education will be $500,000 when your child enters college in
16 years. You presently have $100,000 to invest. What annual rate of interest must you earn on
your investment to cover the cost of your child's college education? (You invest all money now
and make no additional investments into the account.)

i---*-*i
Solution: Timeline and cash flows.

T:16, PV:100,000 and FV:500,000 we need r. R:(500,000/100,000)"(ll16)

Partial credit if all known info (T. PV. FV) is correctly identified.

Prof. Andrey D. Ukhov, IIADM 2250 Fall 2012, Prelim I

10:587-0-

- | :10.58oh.

618