Fin 401 Final Exam Solutions

FIN 401 Final Exam Solutions

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FIN 401 Final Exam Solutions

1. Your credit card company charges you 1.5% per month. What is the annual percentage rate (APR) on your account? What is the actual interest rate you pay to the credit card company per year?

a. APR is 15%; the actual interest rate is 16.08%

b. APR is 16.08%; the actual interest rate is 15%

c. APR is 18%;the actual interest rate is 19.56%

d. APR is 19.56%; the actual interest rate is18%

2. You are comparing two annuities which offer monthly payments of $500 for ten years and pay 0.5% interest per month. Annuity A will pay you on the first day of each month while annuity B will pay you on the last day of each month. Which following statementsareCORRECT concerning these two annuities?

I. Annuity A has a higher value than annuity Bas of 10 years from today.

II. Annuity B has a higher value than annuity A as of 10 years from today.

III. Annuity A has a higher value than annuity B today.

IV. Annuity B has a higher value than annuity A today.

a. I and III only

b. I and IV only

c. II and III only

d. II and IV only

3. The Tarpley Life Insurance Co. is trying to sell you an investment policy that pays you and your heirs $15,000 per year forever. If a sales associate told you that the policy cost $200,000 today. At what interest rate would this be a fair deal?

a. 7%

b. 7.5%

c. 8%

d. 8.5%

4. The principal amount of a bond that is repaid at maturity is called the:

a. coupon.

b. face (or par) value.

c. coupon rate.

d. yield to maturity.

5. Which one of the following bonds has the greatest price risk?

a. 3-year; 4 percent coupon

b. 3-year; 6 percent coupon

c. 7-year; 6 percent coupon

d. 7-year; 4 percent coupon

6. You own a bond that has an 8%coupon and matures 8 years from now. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5%, then you...