BBA – 207 – Principles of Finance

Exam #2 – Chapters 4, 5 & 6

Prof. John D. Fuller

1) At an annual interest rate of 7%, the present value of $5000 received in five years is closest to:
A) $3565.
B) $6750.
C) $7015.
D) $7035.

2) Consider the following time line:

If the current market rate of interest is 8%, then the present value of the cash flows on this
timeline is closest to:
A) $1000.
B) $857.
C) $860.
D) $926.

3) Consider the following timeline detailing a stream of cash flows:

If the current market rate of interest is 10%, then the present value of this stream of cash flows is
closest to:
A) $674.
B) $600.
C) $460.
D) $287.

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today

and will provide $250,000 one year from now, $450,000 two years from now, and $650,000
three years from now.
4) If the appropriate interest rate is 10%, then Nielson Motors should:
A) invest in this opportunity since the NPV is positive.
B) not invest in this opportunity since the NPV is positive.
C) invest in this opportunity since the NPV is negative.
D) not invest in this opportunity since the NPV is negative.

5) If the current rate of interest is 8%, then the future value 20 years from now of an investment
that pays $1000 per year and lasts 20 years is closest to:
A) $45,762.
B) $36,725.
C) $9818.
D) $93,219.

6) If the appropriate interest rate is 8%, then present value of $500 paid at the end of each of the
next 40 years is closest to:
A) $23.
B) $5962.
C) $6439.
D) $20,000.

7) The effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly is
closest to:
A) 9.65%.
B) 10.00%.
C) 10.38%.
D) 12.50%.

Use the table for the next two (2) question(s) below.

Consider the following investment alternatives:

Investment Rate Compounding

A 6.25% Annual
B 6.10% Daily
C 6.125 Quarterly
D 6.120 Monthly

8) Which alternative offers you the highest effective rate of return?

A) Investment A
B) Investment B
C) Investment C
D) Investment D

9) The lowest effective rate of return you could earn on any of these investments is closest to:
A) 6.150%.
B) 6.250%.
C) 6.289%.
D) 6.300%.

Use the information for the question below.

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is
five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can
lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at
the end of each month). Your firm can borrow at 6% APR with quarterly compounding.

10) The effective annual rate on your firm's borrowings is closest to:
A) 6.00%.
B) 6.14%.
C) 6.25%.
D) 6.30%.

11) If an investment providing a nominal return of 12.25% only offers a real rate of return of
5.70%, then the inflation rate is closest to:
A) 5.70%.
B) 6.20%.
C) 6.55%.
D) 12.25%.

12) If the current inflation rate is 4% and you have an investment opportunity that pays 10%,
then the real rate of interest on your investment is closest to:
A) 10.0%.
B) 14.0%.
C) 6.0%.
D) 5.8%.

13) Which of the following statements is FALSE?

A) Bonds are securities sold by governments and corporations to raise money from investors
today in exchange for promised future payments.
B) By convention the coupon rate is expressed as an effective annual rate.
C) Bonds typically make two types of payments to their holders.
D) The time remaining until the repayment date is known as the term of the bond.

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches
maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8%
and that the coupon payments are to be made semiannually.

14) How much will each semiannual coupon payment be?

A) $60
B) $40
C) $120
D) $80
Answer: B

15) Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at:
A) par.
B) a discount.
C) a premium.
D) None of the above

16) Assuming the appropriate YTM on the Sisyphean bond is 9.0%, then the price at which this
bond trades will be closest to:
A) $946.
B) $919.
C) $1086.
D) $1000.

17) Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at
A) a premium.
B) a discount.
C) par.
D) None of the above

18) What is the relationship between a bond's price and its yield to maturity? (short answer)
Bond price has the inverse relationship with the YTM. Since, the price of the bond is the total
present value of all the future payments, the present value of the future payment decreases as the
YTM increases. So, when YTM increases, price decreases and vice versa.

19) If a bond is currently trading at its face (par) value, then it must be the case that:
A) the bond's yield to maturity is less than its coupon rate.
B) the bond's yield to maturity is equal to its coupon rate.
C) the bond's yield to maturity is greater than its coupon rate.
D) the bond is a zero-coupon bond.

Consider the following four corporate bonds that have semiannual compounding:

Bond #1 #2 #3 #4
Price $1000.00 $932.05 $1067.95 $1098.96
Coupon Rate 8% 7% 9% 9%
Years to Maturity 5 10 10 20
20) Which of these bonds sells at a discount?
A) #1
B) #2
C) #3
D) #4