Principles of Finance
SAMPLE FIRST QUIZ
Do all the problems. Include calculations and/or explanations in your answers wherever appropriate. More credit will be given for correct reasoning than for correct arithmetic.
1. I buy a zero-coupon bond with a face value of $10,000 and a maturity of 20 years.
(a) If I want to make 8% on my money, how much should I pay for the bond? $2,145.48
(b) If I pay $6,139.13 for the bond and hold it until it matures, what rate of return will I have made? 2.47%
2. I borrow $10,000 to be paid back over five years at 8%.
(a) If I repay the loan in equal annual payments, how big are the payments? Write the first two lines of the amortization. $2,504.56
(b) If the annual payments are $2,123.96,, what interest rate am I paying? 2.04%
(c) If the payments in part (a) are made monthly instead of annually, how big are they? $202.76
3. I invest $1,000 at 5%. How long will it take to triple? 22.5 yrs
4. I am planning on investing for retirement. I estimate that I will need $600,000 at age 67. I expect to earn 6%. I am now 25 and have nothing in the plan yet, and from this year I will be contributing equal annual amount.
(a) How big must those contributions be? $3,410.05
(b) If I have the $600,000 when I retire and expect to live for another 25 years, what will my annual income be if I average 4% rate of return for those 25 years? $38,407.18
5. A twenty-year, 5% coupon, $1,000 bond is for sale. It makes annual (once per year) interest payments.
(a) If its yield to maturity is 7%, what is its price? $788.12
(b) If its price is $1,080.20, what is its yield to maturity? 4.39%
(c) If the bond in part (b) is stripped and the coupon payments sold to one investor while the face value payment is sold to another, what does each pay?
(d) If the bond in part (b) again is not stripped but impaired when another investor buys out the right to receive the third interest payment, what is the bond worth?
6. A perpetuity has an original face value of $1,000.00 and original yield of 6%.
(a) If it is priced to yield 5%, what is that price? $1,200.00
(b) If its price is $1,200.00, what is its yield? 5%