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Finance Practice Paper

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Finance Practice Paper
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Please answer all questions

Q1.a. Kashif Naeem needs $50,450 at the end of six years, and his only investment outlet is a 10 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, he makes an initial investment at the beginning of the first year. (Q2) i. What single payment could be made at the beginning of the first year to help Kashif achieve this objective? (4) ii. What amount could Kashif pay at the end of each year annually for six years to achieve this same objective? (4)

Q1.b. A property will provide $15,000 a year forever. If its value is $175,000 what must be the discount rate? (2) (Q14)

Q2. a. On January 1, 2005, Noman bought 500 shares of stock for Rs.19 per share. On December 31, 2008, he sold the stock for Rs.31.50 per share. What is his annual rate of return? Interpolate to find the exact answer. (4) (Q4. Mr. Strong)

2. b. If investors are to earn a 6 percent real interest rate, what nominal interest rate must they earn if the inflation rate is 8 percent? (2) (Q10)

2. c. Calculate the EAR for the following cases: (2) i. APR 24%: Compounding period 1 month ii. APR 12%: Compounding period 3 months

2. d. Calculate the APR for the following cases: (2) i. EAR 10%: Compounding period 1 month ii. EAR 8.24%: Compounding period 3 months

Q3. Mr. Asad Naseer has decided to start saving for his retirement. Beginning on his twenty-first birthday, Mr. Naseer plans to invest Rs.2,000 each birthday into a savings investment earning a 7 percent compound annual rate of interest. He will continue this savings program for a total of 10 years and then stop making payments. But his savings will continue to compound at 7 percent for 35 more years, until Mr Naseer retires at age 65. Ms. Hira Mughal also plans to invest Rs.2,000 a year, on each birthday, at 7 percent, and will do so for a total of 35 years. However, he will not begin his contributions until her thirty-first birthday.

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