BUAD 306 Fall 2024 Professor Kristy Jansen Mock Exam 1 MULTIPLE CHOICE Choose the one alternative that best completes the statement or answers the question 1 You hope to buy your dream car five years from now Today that car costs 62 500 You expect the price to increase by an average of 2 9 percent per year How much will your dream car cost by the time you are ready to buy it If you earn an annual interest rate of 10 4 percent how many years will it take to 2 quintuple your money A 73 340 00 B 68 666 67 C 72 103 59 D 66 818 02 E 69 023 16 A 14 23 years B 13 01 years C 14 79 years D 16 27 years E 15 02 years Version 1 1 You grandfather invested 16 600 years ago to provide annual payments of 700 a year 3 to his heirs forever What is the rate of return A 3 65 percent B 4 22 percent C 4 10 percent D 4 25 percent E 4 33 percent 4 Which one of the following statements related to annuities and perpetuities is correct B A perpetuity comprised of 100 monthly payments is worth more than an annuity of A An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest compounded annually 100 monthly payments provided the discount rates are equal C Most loans are a form of a perpetuity D The present value of a perpetuity cannot be computed but the future value can E Perpetuities are finite but annuities are not Which one of the following compounding periods will yield the lowest effective annual 5 rate given a stated future value at Year 5 and an annual percentage rate of 10 percent A Annual B Semi annual C Monthly D Daily E Continuous Version 1 2 6 What is the EAR of 18 9 percent compounded continuously A 19 06 percent B 20 80 percent C 19 43 percent D 19 89 percent E 21 38 percent A 725 20 B 706 16 C 714 94 D 736 36 E 710 46 You just acquired a home mortgage for 30 years in the amount of 184 500 at 4 65 7 percent interest compounded monthly How much of the first payment will be interest if the loan is repaid in equal monthly payments A 1 000 par value corporate bond that pays 60 annually in interest was issued last year 8 Which one of these would apply to this bond today if the current price of the bond is 996 20 A The bond is currently selling at a premium B The current yield exceeds the coupon rate C The bond is selling at par value D The current yield exceeds the yield to maturity E The coupon rate has increased to 7 percent Version 1 3 You own a bond that pays 64 in interest annually The face value is 1 000 and the 9 current market price is 1 021 61 The bond matures in 11 years What is the yield to maturity 10 Oil Wells offers 5 65 percent coupon bonds with semiannual payments and a yield to maturity of 6 94 percent The bonds mature in seven years What is the market price per bond if the face value is 1 000 A 6 12 percent B 6 22 percent C 6 46 percent D 6 71 percent E 5 80 percent A 949 70 B 929 42 C 936 48 D 902 60 E 913 48 The price sensitivity of a bond increases in response to a change in the market rate of 11 interest as the A coupon rate increases B time to maturity decreases C coupon rate decreases and the time to maturity increases D time to maturity and coupon rate both decrease E coupon rate and time to maturity both increase Version 1 4 Why is empire building a symptom of agency problems between shareholders and 12 managers A Empire building is an optimal thing to do for managers and shareholders and it is completely unrelated to agency problems B Empire building happens when managers try to grow the company as much as possible even when this is suboptimal For example managers might overpay companies that are acquired through M A activity C Empire building happens when managers shirk and spend more time promoting their personal brand rather than making the interest of the corporation D Empire building is the same thing as entrenchment managers make it extremely hard to replace them E Empire building happens when the managers want to buyout 100 percent share of the company and become dictators of the company 13 Which of the following statement is correct A All else equal a secured debt is riskier than a debenture B All else equal a subordinated debt is riskier than a senior debt C All else equal a bond with a sinking fund is riskier than one without D All else equal a AAA rated bond riskier than a junk bond E None of them above 14 Which of the following are advantages of the corporate form of business ownership I limited liability for firm debt II double taxation III ability to raise capital IV unlimited firm life A I and II only B III and IV only C I III and IV only D II III and IV only E I II III and IV You are comparing two annuities which offer quarterly payments of 2 500 for five 15 years and pay 0 75 percent interest per month Annuity A will pay you on the first day of each Version 1 5 month while annuity B will pay you on the last day of each month Which one of the following statements is correct concerning these two annuities A These two annuities have equal present values but unequal futures values at the end of year five B These two annuities have equal present values as of today and equal future values at the end of year five C Annuity B is an annuity due D Annuity A has a smaller future value than annuity B E Annuity B has a smaller present value than annuity A Forty years ago Lisa invested 5 000 Today that investment is worth 430 065 11 16 What is the annual rate of return she earned on this investment A 11 68 percent B 11 71 percent C 11 78 percent D 11 91 percent E 12 02 percent A 40 88 percent B 8 41 percent C 8 72 percent D 8 87 percent E 8 95 percent 17 You want to buy a new sports car for 41 750 and the finance office at the dealership has quoted you an 8 6 percent APR loan compounded monthly for 48 months to buy the car What is the effective annual rate EAR on this loan 18 You are the beneficiary of a life insurance policy The insurance company informs you that you have two options for receiving the insurance proceeds You …