Question

SHOW ALL WORK. Preferred if you showed how to do it on both financial calculator and by hand.

1. The nominal rate is 12% per annum. What is the effective annual rate if interest rates are compounded continuously?

A. 1%

B. 12%

C. 12.68%

D. 12.75%

2. Which of the following are true?

(a) To adjust for inflation, it is always correct to use real interest rates as discount rates

(b) A flat yield curve indicates that interest rates are expected to remain constant

(c) Long-term interest rates tend to be lower than short-term interest rates during economic recovery

d) Normally, yield curves are downward sloping

3. . You just won the lottery and must choose one of the following guaranteed payoffs. The interest rate is 7%. Ignore tax consequences. Which would you choose to maximize your prize?

A. $100,000 paid in cold hard cash today

B. $140,000 paid five years from today

C. $50,000 paid one year from today and $68,000 paid four years from today

D. $14,000 per year for 10 years, with the first payment paid today

4. You deposit $3,500 today into an account guaranteed to pay 5.7% APR, compounded monthly. If you make no other deposits or withdrawals for the next five years, how much will you have in the account five years from today?

A. $3,699.50

B. $3,704.79

C. $4,617.88

D. $4,651.03

5. You are managing a small company and need to buy some equipment for your product line. Kangaroo Manufacturing is offering free credit on a $20,000 piece of equipment. You pay down $2,000 and then $600 a month for the next 30 months. Turtle Machines does not offer free credit but will give you a $2,000 off the list price of the equipment as a discount. If the rate of interest is 10% a year, which company is offering a better deal?

A. Kangaroo

B. Turtle

C. They are effectively offering the same deal

D. Not enough information

Answer 1