[20 Multiple choice questions, 1.5 points each, 30 points in total]
Q1. You have $4000 available for immediate investment and are hoping to have $6000 in 17 months’
time. What is the effective annual rate (EAR) of interest you must earn to meet your objective?
A) Cannot be determined with the information provided
B) 33.13%
C) 50%
D) 77.6%
E) 150%
Q2. A worker would like to withdraw $5000, at the end of the first month of their retirement. They’d
also like this amount to grow by 0.24% each subsequent month to keep up with inflation. If they can
earn 4% EAR risk-free in government issued securities, how much must they have invested the day they
retire to meet their objective?
A) $125,000
B) $462,244.67
C) $881,252.93
D) $5,546,936.11
E) $5,722,527.58
Q3. If a bond pays $60 per quarter, has 19 quarters remaining until maturity and has a face value of
$1000, what must be the effective annual rate (yield) on this bond if the current price is $975?
A) 2.16%
B) 6.22%
C) 8.93%
D) 27.33%
E) 30%
Q4. Troy just bought a townhouse worth $600K. Since he owes a substantial mortgage on the property,
his net worth is $150K. If Troy believes that there is a 0.5% chance that his townhouse suffers a fire
doing $30K worth of damage and he has a utility function expressed as U(w) = ln(w) where w is his net
worth in 1000’s of dollars, what is his current expected utility?
A) 0 utiles
B) 4.7636 utiles
C) 5.0095 utiles
D) 5.0106 utiles
E) 6.3969 utiles
1
, Q5. Use information in Q4 to answer this question. What would be the maximum price Troy would be
willing to pay to fully eliminate the financial risk imposed by the fire hazard?
A) $17.26
B) $132.74
C) $150
D) $167.26
E) $3000
Q6. Purnia is considering three forms of credit but doesn’t know which is the most expensive. Sequence
these three choices from least to most expensive for Purnia:
Choice Credit type Terms
1 Credit card 19.99% APR compounded monthly
2 Payday loan 0.07% EDR
3 Angel investor 21.927115% EAR
A) 2, 1, 3
B) 1, 3, 2
C) 1, 2, 3
D) 1 & 3 are effectively the same, option 2 is more expensive
E) option 1 is the cheapest, 2 & 3 are effectively the same
Q7. XYA shares paid $2.03 as a quarterly dividend 3 months ago. XYA just announced a quarterly
dividend of $2.05. If the price of XYA is $22.96, what is the implied effective quarterly rate (EQR) for the
cost of capital? [Choose the closest]
A) 1%
B) 9%
C) 10%
D) 11%
E) Cannot be computed with the information provided
Q8. A stock has a CAPM beta estimate of 1.35 while the US T-bill rate is yielding 3% EAR. If the CAPM is
correct and the S&P500 has been yielding 7% EAR, then the expected return required for this stock is:
A) 5.4%
B) 7%
C) 8.4%
D) 9.59%
E) 12.59%
2
Q1. You have $4000 available for immediate investment and are hoping to have $6000 in 17 months’
time. What is the effective annual rate (EAR) of interest you must earn to meet your objective?
A) Cannot be determined with the information provided
B) 33.13%
C) 50%
D) 77.6%
E) 150%
Q2. A worker would like to withdraw $5000, at the end of the first month of their retirement. They’d
also like this amount to grow by 0.24% each subsequent month to keep up with inflation. If they can
earn 4% EAR risk-free in government issued securities, how much must they have invested the day they
retire to meet their objective?
A) $125,000
B) $462,244.67
C) $881,252.93
D) $5,546,936.11
E) $5,722,527.58
Q3. If a bond pays $60 per quarter, has 19 quarters remaining until maturity and has a face value of
$1000, what must be the effective annual rate (yield) on this bond if the current price is $975?
A) 2.16%
B) 6.22%
C) 8.93%
D) 27.33%
E) 30%
Q4. Troy just bought a townhouse worth $600K. Since he owes a substantial mortgage on the property,
his net worth is $150K. If Troy believes that there is a 0.5% chance that his townhouse suffers a fire
doing $30K worth of damage and he has a utility function expressed as U(w) = ln(w) where w is his net
worth in 1000’s of dollars, what is his current expected utility?
A) 0 utiles
B) 4.7636 utiles
C) 5.0095 utiles
D) 5.0106 utiles
E) 6.3969 utiles
1
, Q5. Use information in Q4 to answer this question. What would be the maximum price Troy would be
willing to pay to fully eliminate the financial risk imposed by the fire hazard?
A) $17.26
B) $132.74
C) $150
D) $167.26
E) $3000
Q6. Purnia is considering three forms of credit but doesn’t know which is the most expensive. Sequence
these three choices from least to most expensive for Purnia:
Choice Credit type Terms
1 Credit card 19.99% APR compounded monthly
2 Payday loan 0.07% EDR
3 Angel investor 21.927115% EAR
A) 2, 1, 3
B) 1, 3, 2
C) 1, 2, 3
D) 1 & 3 are effectively the same, option 2 is more expensive
E) option 1 is the cheapest, 2 & 3 are effectively the same
Q7. XYA shares paid $2.03 as a quarterly dividend 3 months ago. XYA just announced a quarterly
dividend of $2.05. If the price of XYA is $22.96, what is the implied effective quarterly rate (EQR) for the
cost of capital? [Choose the closest]
A) 1%
B) 9%
C) 10%
D) 11%
E) Cannot be computed with the information provided
Q8. A stock has a CAPM beta estimate of 1.35 while the US T-bill rate is yielding 3% EAR. If the CAPM is
correct and the S&P500 has been yielding 7% EAR, then the expected return required for this stock is:
A) 5.4%
B) 7%
C) 8.4%
D) 9.59%
E) 12.59%
2
