11. You’ve decided to buy a house that is
valued at $1 million. You have $500,000 as a down payment on the house and you
take out a mortgage for the rest. Your bank is offering you a 30-year standard
mortgage at a fixed nominal rate of 9% or a 15-year mortgage at a fixed nominal
rate of 9%. How much more interest will you pay if you took out a 30-year
mortgage instead of a 15-year mortgage?

a.
$535,480.20

b.
$631,866.64

c.
$685,414.66

d.
$738,962.68

e.
$876,543.21

12. How long will it take for you to pay
off $1,000 charged on your credit card, if you plan to make the

minimum payment of $15 per month
and the credit card charges 24% per annum?

a.
10
years

b.
12
years

c.
15
years

d.
17
years

e.
You
may not be able to pay off the debt

13. Which of the following investments
would have the lowest present value?
Assume that the effective annual rate for all investments is the same
and is greater than zero.

a. Investment A pays $250 at the end of
every year for the next 10 years (a total of 10 payments).

b. Investment B pays $125 at the end of
every 6-month period for the next 10 years (a total of 20 payments).

c. Investment C pays $125 at the beginning
of every 6-month period for the next 10 years (a total of 20 payments).

d. Investment D pays $2,500 at the end
of 10 years (just one payment).

e. Investment E pays $250 at the beginning
of every year for the next 10 years (a total of 10 payments).

14. Which of the following statements is CORRECT?

a. The cash flows for an ordinary annuity all
occur at the beginning of the periods.

b. If a series of unequal cash flows occurs at regular intervals, then the series
is an annuity.

c. The cash flows for an annuity due must all occur at the ends of the periods.

d. The cash flows for an annuity must all be
equal, and they must occur at regular intervals, such as once a year or once a
month.

e. If some cash flows occur at the beginning of the periods while others occur
at the ends, then we have what the textbook defines as a variable annuity.

15. You have 2 options to buy a membership. One is to pay
$5,000 upfront today and the other one is to pay

$500 each year
starting today. If the prevailing
discount rate is 8%, how many years do you remain as a member before the $500
annual payment becomes more expensive than the one-time membership?

a. 14.5 years

b. 17.5 years

c. 18.5 years

d. 19.5 years

e. 21.5 years

16. You observed an upward-sloping normal
yield curve. Which of following statement is the MOST correct?

a.
Pure
expectation theory must be correct.

b.
There
is a positive maturity risk premium.

c.
If
the pure expectation theory is correct, future (short-term) rates are expected
to be higher than current (short-term) rates.

d.
Inflation
must be expected to change in the future.

e.
Default
risk premium or liquidity premium must be increasing in the future.

17. Charles Townsend Agency issues
15-year, AA-rated bonds. What is the yield on these bonds? Disregard
cross-product terms, i.e., if average is necessary, use the arithmetic average.

Relationship
between bond ratings and DRP

Rating

Default Risk Premium

U.S. Treasury

AAA

0.60%

AA

0.80%

A

1.05%

BBB

1.45%

Real risk-free rate (r*) = 2.8%
(expected to remain constant)

Inflation rate = 5%/yr for each
of next five years, 4% thereafter

MRP = 0.1*(t – 1)%, t is the
security’s maturity, LP = 0.55%

a.
5.55%

b.
8.48%

c.
9.33%

d.
9.88%

e.
10.12%

18. The yield on a one-year Treasury security is 5.84%, and
two-year Treasury security has a 7.88% yield. Suppose the securities do not
have a maturity risk premium, what is the market’s estimate of the one-year
Treasury rate one year from now?

a.
8.118%

b.
9.55%

c.
9.92%

d.
11.354%

e.
12.129%

19. Assume a scenario in which there is no
maturity risk premium (MRP = 0) and the real risk-free rate is expected to
remain constant, and the yield curve is likely to be normal for the next 10
years. Is inflation expected to increase, decrease, or stay the same over the
next 10 years?

a.
Stay
the same

b.
Decrease

c.
Increase

d.
Increase
at first and then decrease

e.
None
of above

20. Crockett Corporation’s 5-year bonds
yield 6.65%, and 5-year T-bonds yield 4.75%.
The real risk-free rate is r* = 3.60%, the default risk premium for
Crockett’s bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium
on Crockett’s bonds is LP = 0.90% versus zero for T?bonds, and the maturity
risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%,
where t = number of years to maturity.
What inflation premium (IP) is built into 5-year bond yields?

a. 0.68%

b. 0.75%

c. 0.83%

d. 0.91%

e. 1.00%