MIDTERM EXAM-2

Spring Semester T-TH 9:00-11:00 Session

Mar. 23, 2006
Name:
1.

The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net
for recessionary periods. The money will be set aside in a separate savings account
which pays 3.25 percent interest compounded monthly. They deposit the first $1,500
today. If the company had wanted to deposit an equivalent lump sum today, how much
would they have had to deposit?
a.
b.
c.
d.
e.

2.

$82,964.59
$83,189.29
$83,428.87
$83,687.23
$84,998.01
On June 1, you take out a mortgage in the amount of $124,900 at a 6 percent rate
compounded monthly. Payments are to be made at the end of each month for thirty
years. How much of the first loan payment is interest? (Assume that each month is
equal to 1/12 of a year.)

a.
b.
c.
d.
e.

3.

$600.00
$624.50
$633.33
$644.20
$648.84

You are considering two savings options. Both options offer a 4 percent rate of return.
The first option is to save $1,200, $1,500, and $2,000 a year over the next three years,
respectively. The other option is to save one lump sum amount today. If you want to
have the same balance in your savings at the end of the three years, regardless of the
savings method you select, how much do you need to save today if you select the lump
sum option?
a.
b.
c.
d.
e.

$4,318.67
$4,491.42
$4,551.78
$4,607.23
$4,857.92

4.

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year
forever. What rate of return are you earning on this policy?
a.
b.
c.
d.
e.

5.

3.25 percent
3.33 percent
3.43 percent
3.50 percent
3.67 percent

All else constant, a bond will sell at _____ when the yield to maturity is _____ the
coupon rate.
a.
b.
c.
d.
e.

6.

a premium; higher than

a premium; equal to
at par; higher than
at par; less than
a discount; higher than
Which one of the following bonds has the greatest interest rate risk?

a.
b.
c.
d.
e.

7.

5-year; 9 percent coupon

5-year; 7 percent coupon
7-year; 7 percent coupon
9-year; 9 percent coupon
9-year; 7 percent coupon

All else constant, as the market price of a bond increases the current yield _____ and
the yield to maturity _____
a.
b.
c.
d.
e.

8.

increases; increases.
increases; decreases.
remains constant; increases.
decreases; increases.
decreases; decreases.
The Fisher Effect primarily emphasizes the effects of _____ risk on an investors rate
of return.

a.
b.
c.
d.
e.

default
market
interest rate
inflation
maturity

9.

Gugenheim, Inc. offers a 7 percent coupon bond with annual payments. The yield to
maturity is 5.85 percent and the maturity date is 9 years. What is the market price

of a
$1,000 face value bond?
a.
b.
c.
d.
e.
10.

$742.66
$868.67
$869.67
$1,078.73
$1,079.59
A bond which, at the election of the holder, can be swapped for a fixed number of
shares of common stock at any time prior to the bonds maturity is called a _____ bond.

a.
b.
c.
d.
e.
11.

zero coupon
callable
putable
convertible
warrant
A 12-year, 5 percent coupon bond pays interest annually. The bond has a face value of
$1,000. What is the change in the price of this bond if the market yield rises to 6
percent from the current yield of 4.5 percent?

a.
b.
c.
d.
e.
12.

11.11 percent decrease

12.38 percent decrease
12.38 percent increase
14.13 percent decrease
14.13 percent increase
Next years annual dividend divided by the current stock price is called the:

a.
b.
c.
d.
e.
13.

yield to maturity.
total yield.
dividend yield.
capital gains yield.
earnings yield.
How much are you willing to pay for one share of stock if the company just paid an
$.80 annual dividend, the dividends increase by 4 percent annually and you require an
8 percent rate of return?

a.
b.
c.
d.
e.

$19.23
$20.00
$20.40
$20.80
$21.63

14.

The common stock of Grady Co. returned an 11.25 percent rate of return last year.
The dividend amount was $.70 a share which equated to a dividend yield of 1.5
percent. What was the rate of price appreciation on the stock?
a.
b.
c.
d.
e.

15.

1.50 percent
8.00 percent
9.75 percent
11.25 percent
12.75 percent
Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of
9.5 percent. The company just paid their annual dividend of $1.20. What is the rate of
growth of their dividend?

a.
b.
c.
d.
e.
16.

5.2 percent
5.5 percent
5.9 percent
6.0 percent
6.3 percent
The preferred stock of North Coast Shoreline pays an annual dividend of $1.70 and
sells for $20.24 a share. What is the rate of return on this security?

a.
b.
c.
d.
e.
17.

5.95 percent
7.08 percent
8.40 percent
11.90 percent
14.17 percent
Which one of the following statements concerning net present value (NPV) is correct?

a.
b.
c.
d.
e.
18.

An investment should be accepted if, and only if, the NPV is exactly equal to zero.
An investment should be accepted only if the NPV is equal to the initial cash flow.
An investment should be accepted if the NPV is positive and rejected if it is negative.
An investment with greater cash inflows than cash outflows, regardless of when the
cash flows occur, will always have a positive NPV and therefore should always be
accepted.
Any project that has positive cash flows for every time period after the initial
investment should be accepted.
The length of time required for an investment to generate cash flows sufficient to
recover the initial cost of the investment is called the:

a.
b.
c.
d.
e.

net present value.

internal rate of return.
payback period.
profitability index.
discounted cash period.

19.

What is the net present value of a project with the following cash flows and a required
return of 12 percent?
Year
0
1
2
3
a.
b.
c.
d.
e.

20.

Cash Flow
-$28,900
$12,450
$19,630
$ 2,750

-$287.22
-$177.62
$177.62
$204.36
$287.22
The discount rate that makes the net present value of an investment exactly equal to
zero is called the:

a.
b.
c.
d.
e.

external rate of return.

internal rate of return.
average accounting return.
profitability index.
equalizer.