FIN 311 Sample Second Quiz

FIN 311-01/10

Spring 2015

D Swanton

Roosevelt University

Principles of Finance


Numerical answers

 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%

  1. I am planning on investing for retirement. I estimate that I will need $100,000 per year for twenty years. I expect to earn 6%while accumulating and 4% in retirement. . I am now 25 expecting to retire at 67 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? $7,724

(b)           I started on that plan ten years ago and am now 35 and have $80,000 in the plan. If I continue to make the contributions from part (a), what retirement income can I expect? $89,645


  1. A twenty-year, 5% coupon, $1,000 bond is for sale. It makes annual (once per year) interest payments.

(a)             What cash flow can I expect if I buy the bond?

                                                             $50, $50, … , $50+$1,000

(b)            If its yield to maturity is 7%, what is its price? $788.12

(c)            If its price is $1,080.20, what is its yield to maturity? 4.39%  

(d)       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? $258.42 and $529.70


4.      A perpetuity has an original face value of $1,000.00 and original yield of 6%.

(a)   What is the promised, annual, coupon payment?  $60

(b)  If it is priced to yield 5%, what is that price? $1,200.00

(c)   If its price is $1,200.00, what is its yield? 5.00%


5.       Consider Project A with cash flows:

.               A: -$10,000,  $3,200, $3,200, $3,200, $3,200

and cost of capital k = 6%.

(a)     What are its NPV and IRR?  Is it acceptable?

(b)      Sketch its NPV profile.

6.    Now consider Project B with cash flows:

.               B: -$3,000, $2,000, $4,000, $6,000, -$10,000

and cost of capital k  =  7%.  The spread sheet says that the NPV is -$368 and the IRR is 15%.

(a)     Is it acceptable?

(b)     The NPV and IRR tests seem to disagree.  Explain.

(c)     A little computation shows that at k  =  44% the NPV is 0.  Sketch the NPV profile and explain.