61 Questions for Extra Credit Points. Due 12/16 (Wednesday)(Please show your work and provide your explanation)You need to show your work and explanations. Jotting down only the answers is not acceptable. If you do all 100 questions, you will get up to 3 extra pointsadded to your final total score (after I determine your total score based on mid-terms, HWs, and the final).Chapter 51. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than10 years, hence that each payment is for $20,000 rather than for $10,000.b. The discount rate increases.c. The riskiness of the investment’s cash flows decreases.d. The total amount of cash flows remains the same, but more of the cashflows are received in the earlier years and less are received in the later years.e. The discount rate decreases.b2. Which of the following statements is CORRECT?a. The cash flows for an ordinary (or deferred) annuity all occur at thebeginning of the periods.b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.c. The cash flows for an annuity due must all occur at the beginning of the periods.d. The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.e. If some cash flows occur at the beginning of the periods while othersoccur at the ends, then we have what the textbook defines as a variable annuity.c3. You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of thefollowing statements is CORRECT?a. The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.b. The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.c. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.d. The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.e. If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.d4. Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?a. $825,835b. $869,300c. $915,052d. $963,213e. $1,011,374dBEGIN ModeN 20I/YR 5.25%PMT $75,000FV $0.00PV $963,2135. Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?a. $28,532b. $29,959c. $31,457d. $33,030e. $34,681aN 20I/YR 8.25%PV $275,000FV $0.00PMT $28,5326. Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?a. 8.46%b. 8.90%c. 9.37%d. 9.86%e. 10.38%eInterest payment: $250.000 1 2 3 4 CFs: 10,000 -250 -250 -250 -250 -10,000 10,000 -250 -250 -250 -10,250IRR (quarterly) = 2.50%Annual effective rate = 10.38% vs. nominal rate = 10.00%7. Your bank offers to lend you $100,000 at an 8.5% annual interest rate tostart your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?a. $7,531b. $7,927c. $8,323d. $8,740e. $9,177bFind the required payment:N 10I 8.5%PV $100,000FV $0PMT $15,241 Found with a calculator or Excel.Amortization schedule (first 2 years)Year Beg. Balance Payment Interest Principal End. Balance1 100,000 15,241 8,500 6,741 93,2592 93,259 15,241 7,927 7,314 85,945Chapter 61. Assume that interest rates on 20-year Treasury and corporate bonds are as follows:T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18%The differences in these rates were probably caused primarily by:a. Tax effects.b. Default risk differences.c. Maturity risk differences.d. Inflation differences.e. Real risk-free rate differencesb2. A bond trader observes the following information:- The Treasury yield curve is downward sloping.- Empirical data indicate that a positive maturity risk premium appliesto both Treasury and corporate bonds.- Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.On the basis of this information, which of the following statements is most CORRECT?a. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.b. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.c. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.d. The corporate yield curve must be flat.e. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping.c3. If the pure expectations theory of the term structure is correct, which of the following statements would be CORRECT?a. An upward sloping yield curve would imply that interest rates are expected to be lower in the future.b. If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%, this would imply the market believes that 1-year rates will be 7.5% one year from now.c. The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.d. Interest rate price risk is higher on long-term bonds, but reinvestment rate risk is higher on short-term bonds.e. Interest rate price risk is higher on short-term bonds, but reinvestment rate risk is higher on long-term bonds.d4. If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a
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