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%