Principles of Finance
SAMPLE FIRST QUIZ
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?
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%