BRUCE: I/YR = 5; PV = -150000; PMT = 0; FV = 1000000; and then solve for N = 38.88.BRENDA: I/YR = 10; PV = -150000; PMT = 0; FV = 1000000; and then solve for N = 19.90.FIN303Exam-type questionsFor Midterm 2Chapter 21. Suppose you have $2,000 and plan to purchase a 3-year certificate of deposit (CD) thatpays 4% interest, compounded annually. How much will you have when the CDmatures?a. $2,324.89b. $2,591.45c. $2,249.73 *d. $2,011.87PV= -2,000; I=4%;N=3 PMT=0; FV=?2. Suppose a U.S. government bond promises to pay $2,249.73 three years from now. If thegoing interest rate on 3-year government bonds is 6%, how much is the bond worthtoday?a. $2,011.87b. $2,591.45c. $2,324.89d. $1,888.92 *PV=?; I=6%; N=3; PMT=0; FV=2,249.733. What is the future value of a 5-year ordinary annuity with annual payments of$200, evaluated at a 15 percent interest rate?a. $ 670.44b. $ 842.91c. $1,169.56d. $1,348.48 *Financial calculator solution:Inputs: N = 5; I = 15; PV = 0; PMT = -200. Output: FV =$1,348.48.4. What is the present value of a 5-year ordinary annuity with annual payments of$200, evaluated at a 15 percent interest rate?a. $ 670.43 *b. $ 842.91c. $1,169.56d. $1,348.48Financial calculator solution:Inputs: N = 5; I = 15; PMT = -200; FV = 0. Output: PV =1$670.43.5. A real estate investment has the following expected cash flows:Year Cash Flows1 $10,0002 25,0003 50,0004 35,000The discount rate is 8 percent. What is the investment’s present value?a. $103,799b. $ 96,110 *c. $ 95,353d. $120,000PV = $10,000/1.08 + $25,000/(1.08)2 + $50,000/(1.08)3 + $35,000/(1.08)4 = $9,259.26 + $21,433.47 + $39,691.61 + $25,726.04 = $96,110.38  $96,110.6. If $100 is placed in an account that earns a nominal 4 percent, compoundedquarterly, what will it be worth in 5 years?a. $122.02 *b. $105.10c. $135.41d. $120.90Financial calculator solution:Inputs: N = 20; I = 1; PV = -100; PMT = 0. Output: FV =$122.02.7. In 1958 the average tuition for one year at an Ivy League school was $1,800.Thirty years later, in 1988, the average cost was $13,700. What was the growth rate in tuition over the 30-year period?a. 12%b. 9%c. 6%d. 7% *Financial calculator solution:Inputs: N = 30; PV = -1800; PMT = 0; FV = 13700. Output: I =7.0%.8. At an inflation rate of 9 percent, the purchasing power of $1 would be cut in halfin 8.04 years. How long to the nearest year would it take the purchasing power of$1 to be cut in half if the inflation rate were only 4 percent?a. 12 yearsb. 15 yearsc. 18 years *d. 20 years2Financial calculator solution:Inputs: I = 4; PV = -1; PMT = 0; FV = 0.50.Output: N = -17.67  18 years.9. South Penn Trucking is financing a new truck with a loan of $10,000 to be repaidin 5 annual end-of-year installments of $2,504.56. What annual interest rate is thecompany paying?a. 7%b. 8% *c. 9%d. 10%Financial calculator solution:Inputs: N = 5; PV = 10000; PMT = -2504.56; FV = 0. Output: I =8%.10. Gomez Electronics needs to arrange financing for its expansion program. Bank Aoffers to lend Gomez the required funds on a loan in which interest must be paidmonthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, withinterest due at the end of the year. What is the difference in the effective annualrates charged by the two banks?a. 0.25%b. 0.50%c. 0.70% *d. 1.00%Bank A: 8%, monthly.EARA = 1mk1mNom = 11208.0112 = 8.30%.Bank B: 9%, interest due at end of yearEARB = 9%.9.00% - 8.30% = 0.70%.11. You recently received a letter from Cut-to-the-Chase National Bank that offersyou a new credit card that has no annual fee. It states that the annual percentagerate (APR) is 18 percent on outstanding balances. What is the effective annual interest rate? (Hint: Remember these companies billyou monthly.)a. 18.81%b. 19.56% *c. 19.25%d. 20.00%Use the formula for calculating effective rates from nominal ratesas follows:EAR = (1 + 0.18/12)12 - l = 0.1956 or 19.56%.312. Jill currently has $300,000 in a brokerage account. The accountpays a 10 percent annual interest rate. Assuming that Jill makesno additional contributions to the account, how many years will ittake for her to have $1,000,000 in the account?a. 23.33 yearsb. 3.03 yearsc. 16.66 yearsd. 12.63 years *Enter the data given in your financial calculator:I = 10; PV = -300000; PMT = 0; FV = 1000000. Then solve for N = 12.63 years.13. You are considering buying a new car. The sticker price is $15,000 and you have$2,000 to put toward a down payment. If you can negotiate a nominal annualinterest rate of 10 percent and you wish to pay for the car over a 5-year period,what are your monthly car payments?a. $216.67b. $252.34c. $276.21 *d. $285.78First, find the monthly interest rate = 0.10/12 = 0.8333%/month.Now, enter in your calculator N = 60; I/YR = 0.8333; PV = -13000;FV = 0; and then solve for PMT = $276.21.14. Today, Bruce and Brenda each have $150,000 in an investmentaccount. No other contributions will be made to their investmentaccounts. Both have the same goal: They each want their accountto reach $1 million, at which time each will retire. Bruce hashis money invested in risk-free securities with an expected annualreturn of 5 percent. Brenda has her money invested in a stockfund with an expected annual return of 10 percent. How many years after Brenda retires will Bruceretire?a. 12.6b. 19.0 *c. 19.9d. 29.4Step 1: Find the number of years it will take for each $150,000 investment togrow to $1,000,000.BRUCE: I/YR = 5; PV = -150000; PMT = 0; FV = 1000000;and then solve for N = 38.88.BRENDA: I/YR = 10; PV = -150000; PMT = 0; FV = 1000000;and then solve for N = 19.90.Step 2: Calculate the difference in the length of time for theaccounts to reach $1 million:Bruce will be able to retire in 38.88 years, or 38.88 –19.90 = 19.0 years after Brenda does.4Chapter 715. One of the basic relationships in interest rate theory is that, other things heldconstant, for a given change in the required rate of return, the the time tomaturity, the the change in price.a. longer; smaller.b. longer; greater.c. shorter; smaller.d. Statements b and c are correct. *16. Which of the following statements is most correct?a. All else equal, long-term bonds have more