# Fin101 Quiz MCQs (2015) Solution

uestion I: Multiple Choice (2 marks each for a total of 22 marks)Choose the alternative that BEST answers each of the following questions.1. You invest $1 at 8% compounded annually. How long does it take for the $1 todouble?A)B)C)D)E)0.93 years.1.08 years.9.01 years.13 years.The one dollar can never double at this interest rate.2. Which of the below statements best describes the relationship between the duration ofa zero-coupon bond and interest rate changes?A)B)C)D)E)The duration of a zero-coupon bond is shorter when interest rates increase.The duration of a zero-coupon bond is shorter when interest rates decrease.The duration of a zero-coupon bond is longer when interest rates increase.The duration of a zero-coupon bond is longer when interest rates decrease.None of the above.3. Which of the following statements best describes the importance of the reinvestmentassumption as it relates to bonds with varying coupons and lengths of maturity?A) The importance of the reinvestment assumption increases with a low couponbond and a long term to maturity.B) The importance of the reinvestment assumption increases with a high couponbond and a long term to maturity.C) The importance of the reinvestment assumption increases with a low couponbond and a short term to maturity.D) The importance of the reinvestment assumption increases with a high couponbond and a short term to maturity.E) The reinvestment assumption isnt related to coupons or maturities.4. Which of the following scenarios can help mitigate agency problems betweenshareholders and management?A)A company executive buying a corporate jet.B)A CFO deciding to invest in a friends company.C)The CEO receiving part of her salary in the form of company stock options.D)The CEO paying a hefty salary to his nephew who works at the company.E)The CEO moving the companys headquarters to Hawaii to enjoy the sun inhis free time.5. You sign up for a new credit card with a Quoted Rate, or Annual Percentage Rate(APR), of 15% compounded daily (assuming 365 days in a year). What is theEffective Annual Rate (EAR) on this credit card?A) 13.98%.B) 15.34%.C) 16.08%.D) 16.18%.E) 17.36%.6. What is the annual yield to maturity on a 10 year 2.2% coupon bond paid semiannually with a $1,000 par value and a price of $989?A)B)C)D)E)1.16%.1.55%.1.94%.2.32%.2.71%.7. What is the effective monthly interest rate which is equivalent to a quoted rate of 13%with semiannual compounding?A)B)C)D)E)1.055%.1.507%.0.976%.13.42%.1.065%.8. You expect that interest rates will decline in the near future (contrary to the marketconsensus that rates will rise). Which bond would be your best investment if you areright?A)B)C)D)E)Zero coupon, 25 year maturity.9% coupon, 5 year maturity.2% coupon, 5 year maturity.9% coupon, 25 year maturity.2% coupon, 25 year maturity.9. Michelle has been presented two investment opportunities by her bank. She caninvest her savings either in a golden account which offers a quoted rate of 5.29%compounding monthly or in a supersaver account which offers a quoted rate of 5.33%compounding semiannually. If she has total savings of $156,000 and her investmenthorizon is four years, which investment should she choose and why?A)She should choose golden account because it brings $109.90 more in fouryears.B)She should choose supersaver account because it brings $115.41 more in fouryears.C)She should choose golden account because it brings $98.76 more in four years.D)She should choose supersaver account because it brings $98.76 more in fouryears.E)She should choose golden account because it brings $139.90 more in fouryears.10. Which of the following statements are incorrect?I.II.III.A zero coupon bond has a greater price volatility compared to a 5%coupon bond assuming that they have equal time to maturity.If the coupon rate is equal to the yield to maturity, the bond is priced atpar.If your risk preference is low volatility you tend to invest in relativelylonger term coupon bonds rather than shorter term coupon bonds, allelse being equal.A) Only IB) Only IIC) Only IIID) All of the aboveE) None of the above11. All else constant, a coupon bond that is selling at a premium, must have:A)B)C)D)E)A coupon rate that is equal to the yield to maturity.A market price that is less than par value.Semi-annual interest payments.A yield to maturity that is less than the coupon rate.A par value which is different than its face value.Question II: (5 marks)What would the price be today of a 10-year bond issued 8 years ago with 2 yearsof maturity left that pays a 4% annual coupon ($1,000 face value) and has a6.72% YTM?Question III: (10 marks)You purchase a house for $750,000 – you are able to make a down payment constituting1/3 of the cost of the house and take a mortgage to cover the rest. The mortgage younegotiate with the bank is a 30 year, 5% mortgage compounded semi-annually, and youmake monthly mortgage payments.a) Under these terms, what is your monthly mortgage payment? (6 marks)b) Assume that you can only afford monthly payments of $2,500. Given thesame rate above (5% mortgage with semi-annual compounding), how much willyou still owe the bank at the end of the 30 year period? (4 marks)Question IV: (8 marks)You are helping a friend plan for retirement. She turns 55 today and plans to retire in 10years when she is 65. Her current savings is $2 million dollars and she expects tocontribute $100,000 annually to her retirement account for the next 10 years. With thefirst payment taking place one year from today and the last payment taking place in 10years. Assume that the market interest rate is 6% per year for the entire planning horizon.a) How much will your friend have in her account when she retires in 10 years? (5marks)b) Fast forward 10 years. Your friend retires today, and because of poor economicconditions, she ended up accumulating $3 million dollars in her account. Also,because of medical advancements, your friend will live forever! Assuming thatshe will draw equal annual payments starting two years from today, and given thesame market interest rates of 6% per year, how much can she draw every year? (3marks)

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