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Principles of Finance, 6e
Besley/Brigham
Chapter 09
Principles of Finance, 6e
Besley/Brigham
Chapter 09
d.
8.33%
e.
9.21%
ANSWER:
d
RATIONALE:
Numerical solution: Financial calculator
solution: Use interest rate conversion feature Inputs: P/YR = 365; NOM% = 8. Output:
EFF% = rEAR = 8.328% ≈ 8.33%.
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 - Application
Business Program-3 - Analytic
DISC-FIN-05 - Financial Analysis and Cash Flows
DISC-FIN-09 - Investments
Time Estimate-a - 5 min.
TOPICS:
Effective Annual Rate
62. You can deposit your savings at the Darlington National Bank, which offers to pay 12.6 percent interest compounded
monthly, or at the Bartlett Bank, which will pay interest of 11.5 percent compounded daily. (Assume 365 days in a year.)
Which bank offers the higher effective annual rate?
a.
Darlington National Bank.
b.
Bartlett Bank.
c.
Both banks offer the same effective rate.
d.
Cannot be determined from the information provided.
e.
Workable only if the banks use the same compounding period.
ANSWER:
a
RATIONALE:
Numerical solution: Darlington Bartlett
Financial calculator solution: Use interest rate
conversion feature Inputs: P/YR = 12; NOM% = 12.6. Output: EFF% = rEAR = rEAR
Darlington = 13.354%. Inputs: P/YR = 365; NOM% = 11.5. Output: EFF% = rEAR Bartlett =
12.185%. rEAR Darlington > rEAR Bartlett
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 - Application
Business Program-3 - Analytic
DISC-FIN-05 - Financial Analysis and Cash Flows
DISC-FIN-09 - Investments
Time Estimate-a - 5 min.
TOPICS:
Effective Annual Rate
Principles of Finance, 6e
Besley/Brigham
Chapter 09
end-of-month installments. If each of the monthly installments is $1,500, what is the effective annual interest rate on this
mortgage?
a.
15.87%
b.
14.75%
c.
13.38%
d.
16.25%
e.
16.49%
ANSWER:
a
RATIONALE:
Cash flow time line:
Financial calculator solution: Calculate periodic rate Inputs: N = 3600; PV = −120,000; PMT
= 1,500; FV = 0. Output: I = 1.235% per period. Use interest conversion feature Inputs:
NOM% = 1.235% × 12 = 14.82; P/YR = 12. Output: EFF% = 15.868% ≈ 15.87%.
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS
:
Blooms Taxonomy-2 - Application
Business Program-3 - Analytic
DISC-FIN-05 - Financial Analysis and Cash Flows
DISC-FIN-09 - Investments
Time Estimate-a - 5 min.
TOPICS:
Effective Annual Rate
64. You have just borrowed $20,000 to buy a new car. The loan agreement calls for 60 monthly payments of $444.89 each
to begin one month from today. If the interest is compounded monthly, then what is the effective annual rate on this loan?
a.
12.68%
b.
14.12%
c.
12.00%
d.
13.25%
e.
15.08%
ANSWER:
a
RATIONALE:
Cash flow time line:
Financial calculator solution: Calculate periodic rate and simple rate Inputs: N = 60; PV =
−20,000; PMT = 444.89. Output: I = 1.0. NOM% = 1.0% × 12 = 12.00%. Use interest rate
conversion feature Inputs: P/YR = 12; NOM% = 12.0. Output: EFF% = rEAR = 12.68%. Or
Principles of Finance, 6e
Besley/Brigham
Chapter 09
payment of $1,050 at the end of Year 4. Your friend says she can get you some of these securities at a cost of $900 each.
Your money is now invested in a bank that pays an 8 percent simple (quoted) interest rate, but with quarterly
compounding. You regard the securities as being just as safe, and as liquid, as your bank deposit, so your required
effective annual rate of return on the securities is the same as that on your bank deposit. You must calculate the value of
the securities to decide whether they are a good investment. What is their present value to you?
a.
$1,000
b.
$866
c.
$1,050
d.
$901
e.
$893
ANSWER:
e
RATIONALE:
Cash flow time line:
Equation
solution: Calculate the effective annual rate on the bank deposit
Calculate the PV of the investment
Financial
calculator solution: Calculate the effective annual rate on the bank deposit Inputs: P/YR =
4, NOM% = 8. Output: EFF% = rEAR = 8.24%. Calculate the PV of the investment Inputs:
N = 4; I = 8.24; PMT = 50; FV = 1,000. Output: PV = −$893.26 ≈ $893. Alternate method:
Using cash flows Inputs: = 0; = 50; N1 = 3; = 1,050; I = 8.24. Output: NPV =
$893.26 ≈ $893.
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-2 - Application
Business Program-3 - Analytic
DISC-FIN-05 - Financial Analysis and Cash Flows
DISC-FIN-09 - Investments
Time Estimate-a - 5 min.
TOPICS:
PV and Effective Annual Rate
Principles of Finance, 6e
Besley/Brigham
Chapter 09
ANSWER:
c
RATIONALE:
Cash flow time line:
Equation solution:
Financial calculator solution: Inputs: N = 360; I = 14.75/12 ≈ 1.2292; PV1 = −120,000; FV =
0. Output: PMT = $1,493.409 ≈ $1,493.41.
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARD
S:
Blooms Taxonomy-2 - Application
Business Program-3 - Analytic
DISC-FIN-05 - Financial Analysis and Cash Flows
DISC-FIN-09 - Investments
Time Estimate-a - 5 min.
TOPICS:
Loan Payment
68. Your company is planning to borrow $1,000,000 on a 5-year, 15 percent, annual payment, fully amortized term loan.
What fraction of the payment made at the end of the second year will represent repayment of principal?
a.
29.83%
b.
57.18%
c.
35.02%
d.
64.45%
e.
72.36%
Principles of Finance, 6e
Besley/Brigham
Chapter 09
day he retires, 2 years from today, and he will receive a total of 3 retirement payments. Inflation is expected to be constant
at 5 percent. Your father has $100,000 in savings now, and he can earn 8 percent on savings now and in the future. How
much must he save each year, starting today, to meet his retirement goals?
a.
$1,863
b.
$2,034
c.
$2,716
d.
$5,350
e.
$6,102
ANSWER:
d
RATIONALE:
Cash flow time line:
Principles of Finance, 6e
Besley/Brigham
Chapter 09
Cengage Learning Testing, Powered by Cognero
Page 58
Year 9.) How much should you contribute to the account each year in order to fully provide for your child's education?
a.
$1,133.16
b.
$1,393.42
c.
$1,477.02
d.
$1,507.81
e.
$1,622.33
ANSWER:
b
RATIONALE:
Cash flow time line:
Step 1:
Calculate college costs at t = 10, 11, 12, 13:
t = 10: (10,000) (1.05)10 = $16,288.95
t = 11: (10,000) (1.05)11 = $17,103.39
t = 12: (10,000) (1.05)12 = $17,958.56
t = 13: (10,000) (1.05)13 = $18,856.49
Step 2:
Find the NPV of the cash flows:
= 25,000
= 0
= −16,288.95
= −17,103.39
= −17,958.56
= −18,856.49
I
= 6
Solve for NPV = −$10,871.03
Step 3:
Find the payment stream which equates to the NPV.
BEGIN
N = 10
I = 6
PV = −10,871.03
FV = 0
Solve for PMT = $1,393.42.
POINTS:
1
DIFFICULTY:
Hard
ACCREDITING STANDARDS:
Blooms Taxonomy-2 - Application
Business Program-3 - Analytic
DISC-FIN-05 - Financial Analysis and Cash Flows
DISC-FIN-09 - Investments
Time Estimate-a - 5 min.
