Name____________________
Villanova University
Villanova School of Business
VSB 2010
Spring 2013
Exam 1
Dr. G. Grover
100 points
As a community committed to the Augustinian ideals of truth, unity and love, Villanova
University prides itself on maintaining the highest standards of academic integrity and
does not tolerate any forms of academic dishonesty or misconduct. Accordingly, each
student who takes an examination is expected to sign the following statement:
I___________________ (your name) have not had any unsanctioned prior access to this
examination and will conduct myself in an honest manner in regard to all aspects of this
examination. Unless authorized by the course professor, I will not discuss the contents of
this examination, in general or specific terms, until the examination is administered to all
students.
Choose the best answer to the following questions: (2 points each)
1. Matilda would like to purchase 200 shares of New Company shares when they are
first issued next month. The broker who sells the shares to Matilda must ensure
that the shares are accompanied by a:
A. Green Shoe
B. Rights Offer
C. Red Herring
D. Prospectus
E. Tombstone
2. The clean price of a $1,000 par value, 9 percent coupon bond is $1,100. The bond
pays coupons semi-annually, and is one month away from its next coupon
payment. What is the dirty (invoice) price of this bond?
A. $1,062.50
B. $1,092.50
C. $1,100.00
D. $1,107.50
E. $1,137.50
3. Which of the following terms is defined as an underwriting for which the
underwriters assume full responsibility for any unsold shares?
A. Initial public offering
B. Best efforts underwriting
C. Rights offer underwriting
D. Private Placement underwriting
E. Firm commitment underwriting
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4. If a bond’s current yield exceeds its coupon rate, the bond is selling at:
A. A discount
B. Par (or face) value
C. A premium
D. Either discount or premium, but not at par
E. Not enough information available to answer the question
5. The price at which you would sell a Treasury bond would be its:
A. Bid price
B. Asked price
C. Call price
D. Put price
E. Bid-Asked price
6. Which of the following bonds is likely to have the least volatility in price?
A. Zero percent coupon; 5 years to maturity
B. Zero percent coupon; 10 years to maturity
C. 5 percent coupon; 10 years to maturity
D. 8 percent coupon; 5 years to maturity
E. 8 percent coupon; 10 years to maturity
7. The price of a $1,000 par value Treasury bond quoted at 95:04 is:
A. $95.04
B. $950.04
C. $950.40
D. $951.25
E. $954.00
8. Which one of the following best matches the primary goal of financial
management?
A. Increasing the firm’s market share
B. Minimizing the firm’s total expenses
C. Maximizing the firm’s earnings per share
D. Maximizing the market value of existing stock
E. Minimizing the taxes paid by the firm
9. Leslie bought 5 Treasury bonds just auctioned off by the U.S. Treasury. She
plans to sell them in about 6 months. This transaction took place in the:
A. Primary, debt and capital markets
B. Primary, equity and money markets
C. Primary, debt and money markets
D. Secondary, debt and money markets
E. Secondary, debt and capital markets
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10. A sole proprietorship:
A. Provides limited liability for its owner
B. Involves significant legal costs during the formation process
C. Has an unlimited life
D. Its income is subject to double taxation
E. Is not likely to be concerned with agency problems
11. The capital structure of a firm refers to the firm’s:
A. Buildings and equipment
B. Combination of assets
C. Combination of long-term debt and equity
D. Availability of cash
E. Current assets and liabilities
12. The written agreement between a corporation and its lenders that spells out the
terms of the bond issue is called the:
A. Debenture
B. Indenture
C. Registration Statement
D. Trustee Agreement
E. Private Placement Agreement
Answers to multiple choice questions:
1.________
2.________
3.________
4. _________ 5._________ 6.________
7.________
8. ________
9.________
10.________ 11. ________ 12._______
Show all your work (clearly) for full or partial credit. No credit will be given unless
work is shown. When using your financial calculator, show the inputs you are
entering into your calculator. Please circle your final answer.
1. Al and Hal each borrow $20,000 from their parents (remember this is a loan, not a
gift), and promise to repay the amount at an interest rate of 0.50 percent per
month, by making equal monthly payments to their parents. How long will it take
each of them to pay back the loan if Al pays $250 each month and Hal pays $80
each month?
(6 points)
Al:
Hal:
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2. You plan to deposit $2,000 each quarter, starting three months from today, into a
“Home Down Payment Account”. Your financial planner assures you that you
will have the required $70,000 you need, 7 years from today for the purchase of
your home. What APR are you being promised?
(6 points)
What is the EAR of the above investment?
3. Daisy Flowers has just retired with $650,000 in her retirement account. She
would like $5,000 each month to pay her bills (and have some fun). She expects
to receive a $1,500 check each month from Social Security, and will obtain the
rest from her retirement account, which should earn an interest of 6 percent,
compounded monthly. If she ends up living for 30 years in retirement, would she
leave an inheritance for her children or will she be in debt at the time of her
death? What will her kids be left with – inheritance or debt, and what is the
amount?
(6 points)
4. The Winter Comfort Company wants to raise $6 million for a construction
project, by issuing zero-coupon bonds, with 25 years to maturity and a yield to
maturity of 3.8 percent. How many bonds would they need to issue to raise the
required amount? Use semi-annual compounding.
(5 points)
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5. Your lovely great-aunt Irma has left you a nice inheritance - $20,000 a year
forever. Given an interest rate of 5 percent, how much is the inheritance worth
today if:
(8 points)
You receive the first payment today
You receive the first payment a year from now
You receive the first payment 6 years from now, when you have achieved a
sufficient level of maturity
6. Moe Blacko has been offered a new contract by his employer which will give him
the following amounts on an after-tax basis:
 A sign-on bonus of $30,000 today
 $60,000 one year from now
 $70,000 two years from now
 and $90,000 three years from now
Given an interest rate of 7 percent, what is this contract worth today? (8 points)
Moe, who is independently wealthy, doesn’t plan to spend any of this money but
deposit each amount as soon as he receives it, into an account earning an interest
of 7 percent a year. What will the balance in the account be in February 2028?
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7. You have decided to buy your dream car for a price of $75,000. Not being
independently wealthy like Moe Blacko, you do not have the cash to pay for it.
However, there is a bank willing to lend you money to buy the car, at an interest
rate of 6 percent if you promise to make a 20 percent down payment and will
repay the loan in equal monthly installments over the next 5 years. (10 points)
What is the amount of your monthly installments?
What is the total amount of interest you will be paying over the duration of the
loan?
You receive a big bonus one year after you have taken the loan, and would like to
pay off the loan at this point. What amount must be paid off, assuming you made
your scheduled payments for the first year?
8. Jack Blue plans to borrow $40,000 at an interest rate of 6 percent for a 3-year
period. Calculate Jack’s payments and total interest that will be paid for each of
the following types of loans:
(11 points)
Pure Discount Loan
Interest-Only Loan
Amortized Loan
Year 1
_______________
_______________
______________
Year 2
_______________
_______________
______________
Year 3
_______________
_______________
______________
Total Payments_______________
_______________
______________
Total Interest _______________
_______________
______________
Which of these loans is the best? Explain.
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9. Mrs. Fields is planning to invest in some bonds. Her choices are:
 A municipal bond paying 4 percent interest
 A corporate bond paying a 6 percent interest
If Mrs. Fields’s tax rate is 35 percent, and the above two bonds are equally risky,
which of the two bonds should she invest in? Please show your work. (3 points)
10. The following bond quotation for Pepsico Inc. was obtained from Yahoo.com.
Use the information to answer the questions below:
(11 points)
Coupon
Maturity
Price
Fitch Rating
4.500
15-Feb-2020
116.78
AA
Assume the bond pays semi-annual coupons and has a par value of $1,000.
a. Calculate the current yield of the bond.
b. Calculate the bond’s yield to maturity.
c. You bought the above bond at the quoted price today, and sold it 4 years later for
$1080. What is your holding period yield (HPY) over this time period?
11. You earned a return of 5.2 percent on your bond portfolio over the last 2 years. If
the average inflation over this time period was 2.8 percent, what was your real
rate of return?
(2 points)
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