FIN 325 Exam 1 Study Guide With
Complete Solutions
What is the monthly payment on a $200,000, 15-year mortgage if the
interest rate is 6%. - ANSWER 1688
N=12*15, I/y = 6/12, PV = 200000, FV = 0 and solve for PMT
You have 15 years until you plan to retire. You are saving $500 each month
for retirement. You expect to earn 8% on your investment. How much will
you have accumulated in 15 years? - ANSWER 173019
Make sure your calculator is set to an ending annuity. N=15*12, I/y=8/12,
PV=0, PMT=500 and solve for FV
Your friend is going to purchase a car and will finance it. She is borrowing
$20,000 at a monthly rate of 0.50% and will pay it off over 5 years. What is
the monthly payment? - ANSWER 386.67
PV = 20,000
I/y = 0.50
n = 12 * 5
FV = 0
CPT PMT which equals $386.67
You invest in a stock mutual fund. Your purchase price is $78.44 per share.
During the year you receive a distribution of $1.87 and at the end of the
year the fund is selling for $79.8 per year. What is your realized return
during the year? - ANSWER 4.1178
((ending price - beginning price) + distribution) / beginning price
,So if beginning price is 70 and ending price is 75 and distribution is 1.5
(75-70+1.5)/70 = 9.29%
You are looking at a rental property. You believe you can purchase it for
$150,000 and will hold it for 5 years and then sell it. You anticipate
receiving the following cash inflows at the end of each year.
Year 1: $3,500
Year 2: $4,500
Year 3: $5,000
Year 4: $3,000
Year 5: $3,500 and you then you believe you will sell it for $175,000
What is your expected return? This is an IRR problem and you will need to
use your cash flow register. - ANSWER 5.59
Use your cash flow register
CF0: -150,000
CF1: $3,500
F01:1
CF 2: $4,500
F02:1
CF 3: $5,000
F03:1
CF 4: $3,000
F04:1
CF 5: $3,500 + 175,000
F05:1
Because stocks historically have outperformed bonds and cash, all
investors should overweight stocks. - ANSWER False
Older investors tend to be more risk averse (lower risk tolerance) and thus
may have very little invested in stocks. They cant' go back in the work force
and earn back losses.
, All rational investors are risk averse and thus will seek to minimize the
amount of risk they take. - ANSWER False
This is a false statement. If you simply minimize risk you will only hold risk-
free assets. The will minimize their risk for any level of expected return.
Thus, of all the portfolios that I could construct that would have an expected
return of 10%, I'll choose the one with the least amount of risk.
Investments, in the final analysis, is simply a risk-return trade-off. In order
to have a chance to earn a return above that of a risk-free asset, investors
must take risk. The larger the return expected, the greater the risk that
must be taken. - ANSWER True
No free lunch in the investing world.
Expected return is the anticipated return for some future time period,
whereas realized return is the actual return that occurred over some past
period. - ANSWER True
Treasury bonds, generally accepted as being free from default risk, are less
risky than corporate bonds, and therefore have a higher required rate of
return. - ANSWER False
This is a false statement as treasury bonds would have a lower required
rate of return because they are less risky.
Municipal bond yields are stated on a before tax basis and corporate bond
yields are stated on an after tax basis. - ANSWER False
This is backwards as muni bond yield are stated on an after tax basis and
corporate yields are before taxes.
Risk averse investors should not necessarily avoid junk bonds - ANSWER
True
Junk bond expected returns may adequately compensate the investor for
the higher level of risk.
Complete Solutions
What is the monthly payment on a $200,000, 15-year mortgage if the
interest rate is 6%. - ANSWER 1688
N=12*15, I/y = 6/12, PV = 200000, FV = 0 and solve for PMT
You have 15 years until you plan to retire. You are saving $500 each month
for retirement. You expect to earn 8% on your investment. How much will
you have accumulated in 15 years? - ANSWER 173019
Make sure your calculator is set to an ending annuity. N=15*12, I/y=8/12,
PV=0, PMT=500 and solve for FV
Your friend is going to purchase a car and will finance it. She is borrowing
$20,000 at a monthly rate of 0.50% and will pay it off over 5 years. What is
the monthly payment? - ANSWER 386.67
PV = 20,000
I/y = 0.50
n = 12 * 5
FV = 0
CPT PMT which equals $386.67
You invest in a stock mutual fund. Your purchase price is $78.44 per share.
During the year you receive a distribution of $1.87 and at the end of the
year the fund is selling for $79.8 per year. What is your realized return
during the year? - ANSWER 4.1178
((ending price - beginning price) + distribution) / beginning price
,So if beginning price is 70 and ending price is 75 and distribution is 1.5
(75-70+1.5)/70 = 9.29%
You are looking at a rental property. You believe you can purchase it for
$150,000 and will hold it for 5 years and then sell it. You anticipate
receiving the following cash inflows at the end of each year.
Year 1: $3,500
Year 2: $4,500
Year 3: $5,000
Year 4: $3,000
Year 5: $3,500 and you then you believe you will sell it for $175,000
What is your expected return? This is an IRR problem and you will need to
use your cash flow register. - ANSWER 5.59
Use your cash flow register
CF0: -150,000
CF1: $3,500
F01:1
CF 2: $4,500
F02:1
CF 3: $5,000
F03:1
CF 4: $3,000
F04:1
CF 5: $3,500 + 175,000
F05:1
Because stocks historically have outperformed bonds and cash, all
investors should overweight stocks. - ANSWER False
Older investors tend to be more risk averse (lower risk tolerance) and thus
may have very little invested in stocks. They cant' go back in the work force
and earn back losses.
, All rational investors are risk averse and thus will seek to minimize the
amount of risk they take. - ANSWER False
This is a false statement. If you simply minimize risk you will only hold risk-
free assets. The will minimize their risk for any level of expected return.
Thus, of all the portfolios that I could construct that would have an expected
return of 10%, I'll choose the one with the least amount of risk.
Investments, in the final analysis, is simply a risk-return trade-off. In order
to have a chance to earn a return above that of a risk-free asset, investors
must take risk. The larger the return expected, the greater the risk that
must be taken. - ANSWER True
No free lunch in the investing world.
Expected return is the anticipated return for some future time period,
whereas realized return is the actual return that occurred over some past
period. - ANSWER True
Treasury bonds, generally accepted as being free from default risk, are less
risky than corporate bonds, and therefore have a higher required rate of
return. - ANSWER False
This is a false statement as treasury bonds would have a lower required
rate of return because they are less risky.
Municipal bond yields are stated on a before tax basis and corporate bond
yields are stated on an after tax basis. - ANSWER False
This is backwards as muni bond yield are stated on an after tax basis and
corporate yields are before taxes.
Risk averse investors should not necessarily avoid junk bonds - ANSWER
True
Junk bond expected returns may adequately compensate the investor for
the higher level of risk.
