Final1 solution
FINA 200
JMSB - First Sample Final Exam
Suggested Solution
Section I: 26 Multiple Choice Questions (2 marks each – total of 52 marks)
1. b $15,000 FV, 5 n, 4 i, COMP PMT = $2,769
2. a
3. c 3 to 6 months
4. a
5. c
6. a
7. a
8. d
9. a
10. b
11. a
12. b
13. c
14. b
15. b
16. b
17. b
18. c
19. a
20. d
21. a
22. b
23. c
24. c
25. b
26. b
Section II: 13 True/False (1 mark each – Total of 13 marks)
27. a
28. a
29. a
30. a
31. a
32. b
33. b
34. b
35. b
36. a
37. a
38. a
39. a
Section III: 5 Case Studies (Total of 35 marks)
Case 1 (5 marks)
a) 5,000 PV, 0.5833 I, 36 n, COMP PMT = $154.38
($154.38 x 36) - $5,000 = $558
b) Ahmed is a male under 25
c) Advantage: Low monthly cost Disadvantage: Hidden fees
d) Good: Paying minimum balance assures his credit rating Bad: High cost source of financing
Case 2 (10 marks)
a) $1,000 FV, $50 PMT, 10 n, 8 I, COMP PV = $798.70
b) Interest rate risk – as rates rise, bond values fall and vice versa – i.e. this creates uncertainty as to future bond values should the investor have to sell.
c) MER = management expense ratio – calculated as annual operating costs and fees divided by average assets of fund. Yes, all bond mutual funds charge a MER.
d) Preferreds pay dividends, bonds pay interest.
Preferreds are a type of equity, bonds represent debt.
Preferreds may have no maturity, bonds have a known maturity date.
Case 3 (10 marks)
a)
Step 1 ($56,000 + $40,000) ÷ 12 $ 8,000
Step 2 x 0.4 $ 3,200
Step 3 Property taxes $400 Car loan $104 -504 $ 2,696
Step 4 $2,696 PMT, 300 n, 0.5 I, COMP PV $418,438
Step 5 + ($25,000 - $10,000) $ 15,000 $433,438
b) The TDS ratio assumes that total debt servicing (exclusive of heating) will cost the couple 40% of their gross income. No, it’s not a good ratio to use because it may result in over indebtedness if you consider that taxes probably eat up about 30% of their gross
JMSB - First Sample Final Exam
Suggested Solution
Section I: 26 Multiple Choice Questions (2 marks each – total of 52 marks)
1. b $15,000 FV, 5 n, 4 i, COMP PMT = $2,769
2. a
3. c 3 to 6 months
4. a
5. c
6. a
7. a
8. d
9. a
10. b
11. a
12. b
13. c
14. b
15. b
16. b
17. b
18. c
19. a
20. d
21. a
22. b
23. c
24. c
25. b
26. b
Section II: 13 True/False (1 mark each – Total of 13 marks)
27. a
28. a
29. a
30. a
31. a
32. b
33. b
34. b
35. b
36. a
37. a
38. a
39. a
Section III: 5 Case Studies (Total of 35 marks)
Case 1 (5 marks)
a) 5,000 PV, 0.5833 I, 36 n, COMP PMT = $154.38
($154.38 x 36) - $5,000 = $558
b) Ahmed is a male under 25
c) Advantage: Low monthly cost Disadvantage: Hidden fees
d) Good: Paying minimum balance assures his credit rating Bad: High cost source of financing
Case 2 (10 marks)
a) $1,000 FV, $50 PMT, 10 n, 8 I, COMP PV = $798.70
b) Interest rate risk – as rates rise, bond values fall and vice versa – i.e. this creates uncertainty as to future bond values should the investor have to sell.
c) MER = management expense ratio – calculated as annual operating costs and fees divided by average assets of fund. Yes, all bond mutual funds charge a MER.
d) Preferreds pay dividends, bonds pay interest.
Preferreds are a type of equity, bonds represent debt.
Preferreds may have no maturity, bonds have a known maturity date.
Case 3 (10 marks)
a)
Step 1 ($56,000 + $40,000) ÷ 12 $ 8,000
Step 2 x 0.4 $ 3,200
Step 3 Property taxes $400 Car loan $104 -504 $ 2,696
Step 4 $2,696 PMT, 300 n, 0.5 I, COMP PV $418,438
Step 5 + ($25,000 - $10,000) $ 15,000 $433,438
b) The TDS ratio assumes that total debt servicing (exclusive of heating) will cost the couple 40% of their gross income. No, it’s not a good ratio to use because it may result in over indebtedness if you consider that taxes probably eat up about 30% of their gross