Name____________________
Section_________________
Villanova University
Villanova School of Business
Department of Finance
FIN 1113
Spring 2009
Exam 2
Dr. G. Grover
60 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: (1 point each)
1. You are comparing two separate investments. Each one is for a period of 20 years
and pays $5,000 a year. You require a 10 percent return on these investments.
Investment P pays at the beginning of each year, and investment Q pays at the end
of each year. Which one of the following statements is accurate?
a. Both investments are equally valuable today.
b. Investment Q is worth more today because of the timing of its cash flows.
c. Investment P has a lower present value, but a higher future value than
investment Q.
d. Investment P has a higher present value, but a lower future value than
investment Q.
e. Investment P has both a higher present value and a higher future value
than investment Q.
2. Which one of the following statements is correct concerning annual percentage
rates (APRs)?
a. The APR is greater than the EAR for a loan with monthly payments.
b. The APR is equal to the monthly interest rate multiplied by 12 for a credit
card that computes interest on a monthly basis.
c. The APR is equal to one plus the monthly interest rate raised to the 12th
power for an account which charges interest on a monthly basis.
d. The APR is the best measure of the actual rate you are paying on a loan.
e. When comparing investment, you should compare their APRs rather than
their EARs.
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3. Jessica wants to invest $3,000 for five years. Which one of the following will
provide her with the largest future value?
a. 6 percent simple interest
b. 6 percent interest, compounded annually
c. 6 percent interest, compounded quarterly
d. 6 percent interest, compounded monthly
e. 6 percent interest, compounded daily
4. Al, Sal, and Hal are triplets. All three decide to borrow $10,000 so they can each
purchase a used vehicle. All three agree to repay their loans in full in one year
from an inheritance they will each be receiving. Al borrows his money at 7
percent, compounded monthly. Sal borrows his money at 7 percent, compounded
annually. Hal agrees to a loan with 7 percent simple interest. Given this
information, which one of the following statements is correct?
a. Al, Sal, and Hal will each owe the same amount one year from now.
b. Al will have to repay less money than either Sal or Hal.
c. Sal will have to repay the same amount as Al, but less than Hal.
d. Hal will owe less money than either Sal or Al.
e. Sal will owe the same amount as Hal, but less than Al.
5. You want to invest an amount of money today and receive back twice that amount
in the future. You expect to earn 12 percent interest. Approximately how long
must you wait for your investment to double in value?
a. 6 years
b. 8 years
c. 9 years
d. 12 years
e. 15 years
6. Which one of the following statements is correct?
a. The future value of an annuity increases when the interest rate decreases.
b. The present value of an annuity increases when the interest rate increases.
c. The present value of an annuity is unaffected by the number of annuity
payments.
d. The future value of an annuity is unaffected by the amount of each annuity
payment.
e. The present value of an annuity increases when the interest rate decreases.
7. When you discount money, you are:
a. Agreeing to invest funds at a lower than normal rate of interest.
b. Offering to accept less value than that to which you are entitled.
c. Stating the rate of interest you require for investment.
d. Computing the present value of a future amount.
e. Calculate the future value of a present amount.
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8. An increase in the amount of an annuity payment will:
a. Have no effect on the present value of the annuity.
b. Decrease the present value of the annuity.
c. Increase the future value of the annuity.
d. Have no effect on the future value of the annuity due.
e. Decrease the present value of the annuity due.
Show all your work (clearly) for full or partial credit. No credit will be given unless
work is shown. When using a financial calculator to solve problems, show the
values of the inputs you have entered.
1. Twenty five years ago, Mary Beth invested $10,000. Fifteen years ago, she
added an additional $15,000 to her account. She earned 9 percent compounded
monthly for the first 10 years, and 10 percent compounded quarterly, for the last
15 years. What is Mary Beth’s investment worth today?
(5 points)
2. When Charles was born, his parents opened an investment account in his name
and deposited $4,000 in to the account. The account has earned an average
annual rate of return of 10 percent. Today, the account is valued at $57,683.97.
How old is Charles?
(4 points)
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3. At the end of this month, Brianna will start saving $300 a month for retirement
through her company’s retirement plan. Her employer will contribute an additional
$0.20 for every $1.00 that Brianna saves. If she is employed by this firm for 20 more
years, and earns an average of 9 percent on her retirement savings, how much will she
have in her retirement account 20 years from now?
(6 points)
How much will Brianna have in her account if she starts saving today, instead of
waiting for a month, but still makes the same number of deposits as above?
4. Fancy Interiors offers credit to customers at a rate of 1.25 percent per month.
(5 points)
a. What is the interest rate they are required to disclose to their customers by law?
b. What interest rate would their customers actually be paying, if they take the
credit offered by Fancy Interiors?
5. Upon graduation, you decide to set up an endowment at Villanova University in your
parents’ name (to honor and thank them for putting up with you!!). This fund will
award scholarships to students for a Study Abroad program. The school expects to
earn an average rate of return of 6 percent and distribute $30,000 annually in
scholarships for the foreseeable future. What should the amount of your gift be to
make this possible?
(4 points)
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6. You have decided to buy a new car, which will cost $50,000, including taxes,
registration, etc. You plan to make a 10 percent down payment on the purchase
price and borrow the rest at 9 percent APR over 5 years.
(6 points)
a. What is the amount of each monthly payment, if the first payment is to be
made a month from now?
b. What will the outstanding balance of the loan be three years from now,
assuming you have made all scheduled payments up to this point?
7. I am planning to retire in 12 years. I currently have $200,000 in a bond account and
$300,000 in a stock account. I plan to add $15,000 per year at the end of each of the
next 12 years to my bond account. I expect the stock account to earn an annual return
of 10 percent, and the bond account to earn an annual return of 7 percent. When I
retire, I plan to transfer my money to an account that earns 6 percent a year. I plan to
withdraw an equal amount for each of the next 20 years at the end of each year and
have nothing left. How much can I withdraw each year?
(8 points)
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8.You plan to borrow $80,000 to purchase a boat. You are considering 3 loan
alternatives, and will be required to make annual payments (if needed), over 4
years, and pay a 10 percent annual interest for each type of loan. Specify the timing
and amount of the payments you will make to repay your loan, and the total interest
you would pay under each alternative:
(14 points)
Year
Pure Discount Loan:
Interest-Only Loan:
Amortized Loan:
1.
______________
__________________
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2.
______________
__________________
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3.
______________
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4.
______________
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Total
Interest
______________
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Which alternative do you pay the least amount of interest in and why?
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