University of Engineering & Technology

Institute of Business & Management

Practice Questions: Business Finance

Program/Session: BBA 2018 Date: 06-11-2020

1. You would like to buy a house that is currently on the market at $85,000, but you
cannot afford it right now. However, you think that you would be able to buy it
after 4 years. If the expected inflation rate as applied to the price of this house is
6% per year, what is its expected price after four years?
2. Jack has deposited $6,000 in a money market account with a variable interest
rate. The account compounds the interest monthly. Jack expects the interest rate
to remain at 8% annually for the first 3 months, at 9% annually for the next 3
months, and then back to 8% annually for the next 3 months. Find the total
amount in this account after 9 months.
3. You expect to receive $10,000 as a bonus after 5 years on the job. You have
calculated the present value of this bonus and the answer is $8000. What discount
rate did you use in your calculation?
4. You have borrowed $850 from your sister and you have promised to pay her
$1000 after 3 years. With annual compounding, find the implied rate of interest
for this loan.
5. Single payment, interest rate? Ampere Banking Corporation offers two types of
certificates of deposit, each requiring a deposit of $10,000. The first one pays
$11,271.60 after 24 months, and the second one pays $12,139.47 after 36 months.
Find their monthly-compounded rate of return.
6. What is the future value of 7000 after 5 years under 12 percent annual
compounding? Semiannual compounding? Quarterly compounding? Monthly
compounding? Daily compounding
7. What is the effective annual rate (EAR)? What is the ear for a nominal rate of 12
percent, compounded semiannually? Compounded quarterly? Compounded
monthly? Compounded daily?
8. Suppose someone offered to sell you a note calling for the payment of $1,000 15
months from today. They offer to sell it to you for $850. You have $850 in a
bank time deposit which pays a 6.76649 percent nominal rate with daily
compounding, which is a 7 percent effective annual interest rate, and you plan to
leave the money in the bank unless you buy the note. The note is not risky--you
are sure it will be paid on schedule. Should you buy the note? Check the
decision in three ways: (1) by comparing your future value if you buy the note
versus leaving your money in the bank, (2) by comparing the PV of the note with
your current bank account, and (3) by comparing the ear on the note versus that
of the bank account.
9. Ali is borrowing Rs.10,000 at a compound annual interest rate of 17%. Amortize
the loan if annual payments are made for 6 years.
10. Hamza will receive the set of cash flows 5000, 5000, 7000, 8000, 6000 for 5
years. What is the Present Value at a discount rate of 10% if amount received at
the end of the year.