FIN 3403 Exam 2 Practice problem
With All Correct Answers.
Consider a $300,000, 30-year mortgage with monthly payments and a nominal rate (monthly
compounding) of 5.90%. What portion of the first 29 payments goes toward paying interest? -
Answer P/YR= 12, PV= 300,000, N= 360, I=5.90
Solve: PMT: 1,779.41
1,779.41 x 29= 51,602.89
1 Input 29 shift AMORT
42,139.60/51,602.89= 82
What is the monthly payment on a $290,000.00 mortgage? Assume a standard mortgage (360
months) with monthly payments. Use a nominal rate (monthly compounding) of 6.40%. -
Answer P/YR: 12, N=360, I:6.40, PV: 290,000
Solve: PMT $1,813
You just won a lottery which will pay you $330,000 at the end of each of the next 20 years. If
your discount rate is 7.00%, what is the present value of your winnings? - Answer P/YR: 1, N:
20, PMT: 330,000, I: 7
Solve: PV $3,496,024
What is the present value of an ordinary annuity that pays $700 per year for 16 years? Use an
annual interest rate of 8.25%. - Answer P/YR: 1, N: 16, PMT: 700, I: 8.25
Solve: PV $6,098
What is the present value of an ordinary annuity that pays $900 at the end of each of the next
18 years? Use a nominal rate (monthly compounding) of 8.50%. (Hint: use EAR). - Answer Step
1: Find EAR
P/Y: 12, I: 8.50
Solve: shift EFF%: 8.84
Step 2: Solve for PV
P/YR: 1, I:8.84, N:18, PMT: 900
Solve: PV $7,965
, Solve: shift EFF%: 9.92
Step 2: Solve for PV
P/YR: 1, I:9.92, N:13, PMT: 550
Solve: PV $4,312
You currently have $3,000 in an account, and you plan to deposit $1,000 into the account at the
end of each of the next 6 years. If the account earns a nominal rate (monthly compounding) of
5.10%, how much will be in the account at the end of the 6th year? (Hint: use EAR). - Answer
Step 1: Find EAR
P/Y: 12, I: 5.10
Solve: shift EFF%: 5.22
Step 2: Solve for PV
P/YR: 1, I:5.22, N:6, PMT: 1000, PV: 3000
Solve: FV: $10,911
What is the present value of $7,000 to be received after 7 years? Use a nominal rate (monthly
compounding) of 7.75%. - Answer Step 1: Find EAR
P/Y: 12, I: 7.75
Solve: shift EFF%: 8.03
Step 2: Solve for PV
P/YR: 1, I:8.03, N:7, FV: 7000
Solve: PV $4,076
CAPM problem: suppose the treasury bond rate is 6%, the average return on s&p 500 index is
12% and disney has a beta of 1.2. according to capm what should the rrr of disney stock be? -
Answer kj= 0.6 + 1.2(.12-.06)= .132 or 13.2%
bond valuation problem: A firm decides to issue 20 year bonds with a par value of $1000 and
annual coupon payments. The return on corporate bonds of similar risk is 6%, so they decide to
offer a 6% coupon interest rate. What would be the fair price for these bonds?
Hint: coupon rate determines PMT
Now suppose interest rate falls directly after we issue the bond. The RRR on bonds of similar
risk drops to 5%. What would happen to the bonds intrinsic value?
With All Correct Answers.
Consider a $300,000, 30-year mortgage with monthly payments and a nominal rate (monthly
compounding) of 5.90%. What portion of the first 29 payments goes toward paying interest? -
Answer P/YR= 12, PV= 300,000, N= 360, I=5.90
Solve: PMT: 1,779.41
1,779.41 x 29= 51,602.89
1 Input 29 shift AMORT
42,139.60/51,602.89= 82
What is the monthly payment on a $290,000.00 mortgage? Assume a standard mortgage (360
months) with monthly payments. Use a nominal rate (monthly compounding) of 6.40%. -
Answer P/YR: 12, N=360, I:6.40, PV: 290,000
Solve: PMT $1,813
You just won a lottery which will pay you $330,000 at the end of each of the next 20 years. If
your discount rate is 7.00%, what is the present value of your winnings? - Answer P/YR: 1, N:
20, PMT: 330,000, I: 7
Solve: PV $3,496,024
What is the present value of an ordinary annuity that pays $700 per year for 16 years? Use an
annual interest rate of 8.25%. - Answer P/YR: 1, N: 16, PMT: 700, I: 8.25
Solve: PV $6,098
What is the present value of an ordinary annuity that pays $900 at the end of each of the next
18 years? Use a nominal rate (monthly compounding) of 8.50%. (Hint: use EAR). - Answer Step
1: Find EAR
P/Y: 12, I: 8.50
Solve: shift EFF%: 8.84
Step 2: Solve for PV
P/YR: 1, I:8.84, N:18, PMT: 900
Solve: PV $7,965
, Solve: shift EFF%: 9.92
Step 2: Solve for PV
P/YR: 1, I:9.92, N:13, PMT: 550
Solve: PV $4,312
You currently have $3,000 in an account, and you plan to deposit $1,000 into the account at the
end of each of the next 6 years. If the account earns a nominal rate (monthly compounding) of
5.10%, how much will be in the account at the end of the 6th year? (Hint: use EAR). - Answer
Step 1: Find EAR
P/Y: 12, I: 5.10
Solve: shift EFF%: 5.22
Step 2: Solve for PV
P/YR: 1, I:5.22, N:6, PMT: 1000, PV: 3000
Solve: FV: $10,911
What is the present value of $7,000 to be received after 7 years? Use a nominal rate (monthly
compounding) of 7.75%. - Answer Step 1: Find EAR
P/Y: 12, I: 7.75
Solve: shift EFF%: 8.03
Step 2: Solve for PV
P/YR: 1, I:8.03, N:7, FV: 7000
Solve: PV $4,076
CAPM problem: suppose the treasury bond rate is 6%, the average return on s&p 500 index is
12% and disney has a beta of 1.2. according to capm what should the rrr of disney stock be? -
Answer kj= 0.6 + 1.2(.12-.06)= .132 or 13.2%
bond valuation problem: A firm decides to issue 20 year bonds with a par value of $1000 and
annual coupon payments. The return on corporate bonds of similar risk is 6%, so they decide to
offer a 6% coupon interest rate. What would be the fair price for these bonds?
Hint: coupon rate determines PMT
Now suppose interest rate falls directly after we issue the bond. The RRR on bonds of similar
risk drops to 5%. What would happen to the bonds intrinsic value?
