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Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term 1 year 2 years 3 years 5 years 10 years 20 years
Rate
(EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15%
33)
Consider an investment that pays $1000 certain at the end of each of the next four years. If the
investment costs $3,500 and has an NPV of $74.26, then the four year risk-free interest rate is
closest to:
33)
A)
4.58%
B)
4.5%
C)
4.55%
D)
4.53%
Use the information for the question(s) below.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a
new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a
monthly lease payment of $4000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly
compounding.
34)
The effective annual rate on your firm's borrowings is closest to:
34)
A)
6.24%
B)
6.17%
C)
6.14%
D)
6.00%
35)
If the current inflation rate is 4% and you have an investment opportunity that pays 10%, then the
real rate of interest on your investment is closest to:
35)
A)
5.8%
B)
14.0%
C)
6.0%
D)
10.0%
36)
The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest
to:
36)
A)
8.24%
B)
8.33%
C)
8.00%
D)
8.30%
37)
Which of the following statements is false?
37)
A)
The ability to deduct the interest expense increases the effective after-tax interest rate paid on
the loan.
B)
For loans to borrowers other than the U.S. Treasury, the stated interest rate is the maximum
amount that investors will receive.
C)
The equivalent after-tax interest rate is r- (×r).
D)
Interest rates vary based on the identity of the borrower.
Use the information for the question(s) below.
You are in the process of purchasing a new automobile that will cost you $27,500. The dealership is offering you either a
$2,500 rebate (applied toward the purchase price) or 1.9% financing for 48 months (with payments made at the end of the
month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 6.5% for 48
months.
38)
If you take the $2,500 rebate and finance your new car through your credit union your monthly
payments will be closest to:
38)
A)
$541
B)
$652
C)
$593
D)
$595
39)
You are considering purchasing a new truck that will cost you $34,000. The dealer offers you 1.9%
APR financing for 48 months (with payments made at the end of the month). Assuming you
finance the entire $34,000 and finance through the dealer, your monthly payments will be closest to:
39)
A)
$1,086
B)
$736
C)
$594
D)
$708
40)
You are considering purchasing a new automobile that will cost you $28,000. The dealer offers you
4.9% APR financing for 60 months (with payments made at the end of the month). Assuming you
finance the entire $28,000 and finance through the dealer, your monthly payments will be closest to:
40)
A)
$527
B)
$467
C)
$1,454
D)
$478
41)
Which of the following statements is false?
41)
A)
To compensate for the risk that they will receive less if the firm defaults, investors demand a
lower interest rate than the rate on U.S. Treasuries.
B)
The right discount rate for a cash flow is the rate of return available in the market on other
investments of comparable risk and term.
C)
The equivalent after-tax interest rate is r(1 -).
D)
The actual cash flow that the investor will get to keep will be reduced by the amount of any
tax payments.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the information for the question(s) below.
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the
month) with a loan at 5.9% APR. You monthly payments are $617.16 and you have just made your 24th monthly payment
on your SUV.
42)
Assuming that you have made all of the first 24 payments on time, then how much interest have you paid over
the first two years of your loan?
Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term 1 year 2 years 3 years 5 years 10 years 20 years
Rate
(EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15%
43)
After examining the yield curve, what predictions do you have about interest rates in the future? About future
economic growth and the overall state of the economy?
44)
You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender
quotes you a rate of 6. 5% APR for a 30-year fixed rate mortgage (with payments made at the end of each
month). The mortgage lender also tells you that if you are willing to pay 1 point, they can offer you a lower rate
of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the
lower rate and pay the points you will need to borrow an additional $3250 to cover points you are paying the
lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better
off paying the 1 point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
45)
Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Use the table for the question(s) below.
Suppose the term structure of interest rates is shown below:
Term 1 year 2 years 3 years 5 years 10 years 20 years
Rate
(EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15%
46)
What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one, three, and five years
?
47)
You are in the process of purchasing a new automobile that will cost you $25,000. The dealership is offering
you either a $1,000 rebate (applied toward the purchase price) or 3.9% financing for 60 months (with payments
made at the end of the month). You have been pre-approved for an auto loan through your local credit union
at an interest rate of 7.5% for 60 months. Should you take the $2000 rebate and finance through your credit
union or forgo the rebate and finance through the dealership at the lower 3.9% APR?
Use the table for the question(s) below.
Suppose you have the following Loans / Investments
Credit Card 14.90% APR (Monthly Compounding)
Automobile Loan 5.90% APR (Monthly Compounding)
Home Equity Loan 8.25% APR (Monthly Compounding)
Money Market Fund 5.10% EAR
48)
What is the effective after-tax rate of each instrument, expressed as an EAR?
Use the information for the question(s) below.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a
new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a
monthly lease payment of $4000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly
compounding.
49)
Should you purchase the delivery truck or lease it? Why?
Answer Key
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Answer Key
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Answer Key
Testname: C5
Answer Key
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