Questions: Department of Finance

Towson University
Department of Finance
Fin331
Dr. M. Rhee
2010 Spring

NAME:

ID#:

1. If the interest is compounded quarterly with 8% APR, which of the following statements is CORRECT?

a. The periodic rate of interest is 2% and the effective rate of interest is 4%.
b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
e. The periodic rate of interest is 8% and the effective rate of interest is also 8%.
Answer: d

2. What is the coefficient of variation for security a? Probability
Ra(State=?)
Rb(State=?)
Boom
35%
0.30
0.06
Average
40%
0.10
0.06
Recession
25%
--0.15
-0.05

a. 1.00
b. 1.25
c. 1.36
d. 1.73
e. 1.90
Answer: d

3. You plan to save $6,400 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. How much will you have 4 years from today?

a. $22,980.31
b. $22,685.69
c. $26,221.12
d. $29,461.93
e. $31,524.26 Answer: d
BEGIN Mode
N 4 Alternative setup:
I/YR 5.7% 0 1 2 3 4
PV $0.00 $6,400 $6,400 $6,400 $6,400
PMT -$6,400 NFV = $29,461.93
FV $29,461.93

4. Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

a. Investment A pays $250 at the beginning 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 end of every year for the next 10 years (a total of 10 payments). Answer: a
A dominates B because it