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FIN 300 – You purchase a bond for $15,000 which you plan to hold until it matures

Question 1 You purchase a bond for $15,000 which you plan to hold until it matures in 10 years. It pays 4% SIMPLE interest per year. How much interest will you earn on your investment if you hold it as planned? Question 2To improve your earnings from the investment in #1 you invest each year’s interest (which is paid at the end of the year) in a money market fund that pays 2% compound interest per year. You do this only until the bond matures in thebeginning of year 10. What will you earn if you do this? Question 3 Your firm must replace its delivery truck, so you purchase one for $42,500. You finance it for 5 years at 3% per year and make equal MONTHLY PAYMENTS each month for the 5 years (60 months). Assuming you finance the entire amount how much will you have PAID for the truck?Question 4When shopping to replace the delivery truck in the last question you found a competing dealer who offered this choice: Option 1. Get $3000 ‘cash back’, then pay the balance in 5 annual payments at 2.0%; Option 2. pay ‘full price’ in 5 annual installments at no (0%) interest. Which is the better deal, that is, under which deal will you PAY LESS? How much more or less does the better option cost compared to your answer in number 3 once all payments are made?Question 5 Your firm purchases a piece of property by buying it outright for $515,000. Historically, nearby property in the neighborhood has appreciated in value about 4% per year. Assuming you can rely on this historic appreciation what will the property be worth AT THE END OF 20 YEARS?Question 6 In doing some retirement planning you determined that you want to save $25,000 each year until you retire. You plan to invest it in a ‘guaranteed return mutual fund’ which pays COMPOUND interest at 4% per year; you plan to keep it invested there until you retire in 30 years. WHAT WILL THE INVESTMENT BE WORTH THEN?Question 7Your firm must replace its packaging machine after its useful life of 10 years passes and depreciation can no longer be claimed on it. The estimated replacement cost is $5,550,123. How much must the company save (invest) each year at 2% to accumulate enough to replace the machine?Question 8 You are offered two investments for the firm’s “retained earnings” ($4,238,000). As CFO you are looking for good ways to invest the firm’s hard earned money. Which option will give you a better return on and of investment (two ROIs)?Option 1 – pays out at 4% simple interest for five yearsOption 2 – pays out at 2% compound interest for four yearsQuestion 9Increasing the number of periods could impact all of the following exceptA – PV of an annuityB – PV of $1C – FV of $1D – FV of an annuity Question 10 For a given interest rate, the future value of $100 increases with the passage of time. Thus the longer the period of time, the greater the future value. True or False?Question 11 Everything else being equal, the lower the discount rate, the higher the present value. True or False?Question 12 Everything else being equal, the longer the period of time, the lower the present value. True or False?Question 13 John just inherited $100,000 from his Aunt Emma. He wants to retire in 25 years. John has decided to put the entire amount in a savings account paying 6% interest. This is an example of:a. present value of a lump sumb. present value of an annuityc. future value of a lump sumd. future value of an annuityQuestion 14 A term associated with future value is “compounding”; a term associated with present value is “discounting”.a. Trueb. Falsec. OK, if you can’t make up your mind: none of the aboveQuestion 15 As the interest rate increases for any given period, the future value interest factor willa. decreaseb. increasec. remain unchangedd. approach 1.0Question 16 For a given interest rate, as the length of time until receipt of funds increases, the present value interest factora. changes proportionallyb. increasesc. decreasesd. remains unchanged

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