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Descriptive Problems 1. Which of the following statements is correct?
Descriptive Problems1. Which of the following statements is correct?a. Assuming an annual interest rate of 10%, the future value at t=1 of $5,000 depositedtoday is $6,050.b. The sum of two future cash flows made at different dates will always be greater thanthe sum of their present values, assuming that the interest rate is positive.c. If the discount rate is zero, the present value of a cash flow is lower than its futurevalue.d. If there is no inflation, the real interest rate is greater than the nominal interest rate.2. Which of the following statements is correct?a. The higher the frequency of compounding, the higher the effective annual rate for thesame stated annual rate.b. From two bank offers, an investor always chooses the one with the higher statedannual rate.c. If the discount rate is zero, the present value of a cash flow is lower than its futurevalue.d. None of the above.3. If inflation and real interest rates are greater than zero, the nominal interest rate ________ thereal interest rate plus the inflation ratea. Is exactly equal tob. Is greater thanc. Is less thand. Could be equal to, greater than, or less thane. None of the above4. Which of the following characteristics applies to a debt contract?a. The contract makes you one of the creditors of the issuing firm.b. The contract includes voting rights on corporate governance.c. The contract makes you one of the owners of the issuing firm.d. Both a and b.e. None of above.25. The main difference between consol bonds and fixed-coupon bonds is thata. Consol bonds pay variable coupons whereas fixed-coupon bonds pay fixed coupon.b. Consol bonds pay coupons forever whereas fixed-coupon bonds have fixed maturity.c. Consol bonds entail limited liability whereas fixed-coupon bonds do not.d. Consol bonds holders are residual claimants whereas fixed-coupon bond holders arenot.6. The main difference between zero-coupon bonds and fixed-coupon bonds is thata. Zero-coupon bonds holders are owners of the issuing firm whereas fixed-couponbonds holders are not.b. Zero-coupon bonds holders are residual claimants whereas fixed-coupon bondsholders are not.c. Zero-coupon bonds do not pay coupons whereas fixed-coupon bonds do.d. Zero-coupon bonds have a zero face value whereas fixed-coupon bonds have apositive face value.Work-out Problems (Show your work!):7. You have just won the lottery and are told that you can receive annual payments of$120,000 forever (with the first payment occurring next year), or you can receive a lumpsum payment today. If the discount rate is 8% p.a., what lump sum would the lotterycompany have to offer you to be indifferent between accepting it or the fixed payments?a. $1,000,000b. $1,200,000c. $1,500,000d. $1,800,000e. $2,000,0008. You are planning to rent your apartment starting at t=4 (today is t=0). You will rent theapartment for 5 years and receive an annual payment of $16,500 (you will receive thefirst of the five annual payments at t=4). Assuming an interest rate of 14%, what is thepresent value of all the payments at t=0? (Round to the 2nd decimal place.)(10 points)a. $26,445.86b. $38,234.33c. $56,734.65d. $46,369.45e. $32,621.7639. With an interest rate of 15%, how many years will it take a given amount to triple invalue? (Round to the 2nd decimal place.)a. 7.86b. 5.76c. 6.90d. 3.34e. 11.9310. You are planning to retire at t=20. After retirement, you will need $140,000 each year for30 years, with the first payment needed at t=21. Suppose that you plan to make equalannual deposits in your bank account from t=1 to t=20, and that your bank pays an annualinterest rate of 9%. Given the information above, what is the minimum amount youshould deposit each year from t=1 to t=20 to be able to fulfill your retirement plans?a. $21.225.65b. $48,234.33c. $16,767.15d. $28,113.92e. $36,354.3411. Assume that you hold a security that guarantees the following three cash flows:t=1 $3,000t=2 ???t=3 $9,000You don’t remember the exact amount of the cash flow at t=2. Assuming that the presentvalue of the three cash flows is $15,000 and that the interest rate is 12%, find the missingcash flow.a. $3,542.28b. $4,954.44c. $5,915.45d. $6,813.12e. $7,420.2912. You are about to deposit $2,000 into one of the following savings accounts to be left ondeposit for 11 years. Each bank offers an account with a different interest rate andcompounding period. If you want to maximize your wealth, which of the following bankaccounts will you choose?a. Bank A: 6.12 percent rate, compounded semi-annuallyb. Bank B: 6.12 percent rate, compounded monthlyc. Bank C: 6.12 percent rate, compounded dailyd. Bank D: 6.08 percent rate, compounded quarterlye. Bank E: 6.25 percent rate, compounded yearly413. You open a bank account in t=0 and you make an initial deposit of $15,000. Nothinghappens at t=1 and t=2. From t=3 to t=10 (t=3 and t=10 included) you make annualdeposits of $7,500 in the bank account. At t=10, you use all the money that you haveaccumulated in the bank account to buy a perpetuity. The first payment of the perpetuityoccurs at t=11. Assuming an interest rate of 14%, what is the payment guaranteed by theperpetuity? (Round your answer to the 2nd decimal point).a. $21,679.56b. $48,234.33c. $56,494.39d. $12,282.45e. $26,621.7614. What is the price of a 15-year maturity bond with a 10 percent coupon rate and quarterlypayments? (Assume that the stated yield to maturity of similar bonds is 8.4 percent andround your answer to the 2nd decimal point)a. $1,375.35b. $2,433.67c. $1,135.73d. $875.84e. $1,685.3215. ABC Corp. just issued 20-year maturity bonds with a 10% coupon rate and semi-annualpayments. The bonds sold for $1,197.93 each. Calculate the company’s stated cost ofdebt. (Round your answer to the 2nd decimal point).a. 6.99%b. 6.71%c. 7.99%d. 5.92%e. 3.99%16. DEF Inc. just issued bonds with a 12% coupon rate and quarterly payments. The bondssold for $1,197.93 each. The appropriate yield to maturity is 10%. Calculate the bondmaturity in years. (Round your answer to the 2nd decimal point).a. 46.27b. 78.71c. 92.46d. 154.27e. 185.10517. GHJ Inc. just paid an annual dividend of $1.42 and its dividends are expected to grow ata constant rate of 6% forever. If investors require a 13.5% rate of return on this stock,what is its market price? (Round your answer to the 2nd decimal point).a. $12.34b. $20.06c. $24.33d. $35.65e. $46.4918. KLM Corp. is expected to pay a dividend of $4 one year from today. The dividend isexpected to grow at a 5% annual rate into the foreseeable future. If the price of the stockis currently $37.50, what is the required return on the stock? (Round your answer to the2nd decimal point).a. 11.11%b. 13.89%c. 15.66%d. 18.12%e. 22.65%19. NOP Corp. just paid an annual dividend of $3.75. The company’s stock currently sellsfor $37.00 per share. The required rate of return on NOP’s stock is 15%. Compute theexpected constant growth rate in NOP’s dividends. (Round your answer to the 2nddecimal point).a. 5.76%b. 4.42%c. 8.76%d. 3.54%e. 6.85%20. Adam is considering the purchase of a 15-year bond. The par value is $5,000, the yield tomaturity on this bond is currently 6.5% and coupon payments are paid semi-annually.The current market value of the bond is $5,830.46. What is the bond’s annual couponrate? (Round your answer to the 2nd decimal point).a. 15.54%b. 8.25%c. 4.13%d. 13.89%e. 5.75%
