FIN 311 Sample First Quiz

FIN 311-01

Spring 2014

D Swanton

Roosevelt University

Principles of Finance

SAMPLE FIRST QUIZ

 numerical answers

Do all the problems.  Include calculations and/or explanations in your answers wherever appropriate.  More credit will be given for correct reasoning than for correct arithmetic.

1.         I buy a zero-coupon bond with a face value of $10,000 and a maturity of 20 years.

(a)        If I want to make 8% on my money, how much should I pay for the bond?  $2,145.48

(b)        If I pay $6,139.13 for the bond and hold it until it matures, what rate of return will I have made?  2.47%

2.         I borrow $10,000 to be paid back over five years at 8%.

(a)        If I repay the loan in equal annual payments, how big are the payments?  Write the first two lines of the amortization.   $2,504.56

(b)        If the annual payments are $2,123.96,, what interest rate am I paying?  2.04%

(c)        If the payments in part (a) are made monthly instead of annually, how big are they?  $202.76

3.         I invest $1,000 at 5%.  How long will it take to triple?  22.5 yrs

4.         I am planning on investing for retirement.  I estimate that I will need $600,000 at age 67.  I expect to earn 6%.  I am now 25 and have nothing in the plan yet, and from this year I will be contributing equal annual amount.

(a)       How big must those contributions be?  $3,410.05

(b)      If I have the $600,000 when I retire and expect to live for another 25 years, what will my annual income be if I average 4% rate of return for those 25 years?  $38,407.18

5.         A twenty-year, 5% coupon, $1,000 bond is for sale.  It makes annual (once per year) interest payments.

(a)        If its yield to maturity is 7%, what is its price?  $788.12

(b)        If its price is $1,080.20, what is its yield to maturity?    4.39%

(c)        If the bond in part (b) is stripped and the coupon payments sold to one investor while the face value payment is sold to another, what does each pay?

$656.68, $423.52

6.         A perpetuity has an original face value of $1,000.00 and original yield of 6%.

(a)    If it is priced to yield 5%, what is that price?  $1,200.00

(b)   If its price is $1,200.00, what is its yield?  5%