# Multiple choice- bonds, TVM

Complete question in the attached file.

PLEASE CHOOSE YOUR ANSWER AND EXPLAIN BRIEFLY WHY YOU MADE THAT CHOICE.

1. Suppose you have the 2001 income statement for a firm, along with the 12/31/2000 and 12/31/2001 balance sheets. How would you calculate net capital spending?

A) Ending net fixed assets (2001) minus beginning net fixed assets (2000) plus 2001 depreciation

B) Beginning net fixed assets (2000) minus ending net fixed assets (2001) plus 2001 depreciation

C) Beginning net fixed assets (2000) plus ending net fixed assets (2001) minus 2001 depreciation

D) Ending net fixed assets (2001) minus beginning net fixed assets (2000) plus 2001 taxes paid

E) Ending net fixed assets (2001) plus beginning net fixed assets (2000) minus 2001 taxes paid

Use the following to answer questions 1a and 1b:

1-a. What is earnings before interest and taxes for 2001?

A) $ 30

B) $ 45

C) $ 60

D) $ 75

E) $120

1-b. What is cash flow to creditors for 2001?

A) $35

B) $25

C) $15

D) $ 5

E) -$15

2. You have the following data for a company. What is the return on assets (ROA)? Return on equity = 15%; Earnings before taxes = $50,000; Total asset turnover = 1.2; Profit margin = 7.5%; Tax rate = 35%.

A) 9%

B) 8%

C) 7%

D) 6%

E) 5%

Use the following to answer question 3:

In a growing midwestern town, the number of eating establishments at the end of each of the last five years are as follows:

Year 1 = 273; Year 2 = 279; Year 3 = 302; Year 4 = 320; Year 5 = 344

3. Between the end of year 2 and the end of year 3, the number of eating establishments grew at a rate of _______ compounded annually.

A) 5.2%

B) 6.7%

C) 7.6%

D) 8.2%

E) 9.3%

4. An account was opened with an investment of $2,000 10 years ago. The ending balance in the account is $3,500. If interest was compounded annually, what rate was earned on the account?

A) 2.66%

B) 3.22%

C) 3.95%

D) 4.81%

E) 5.76%

5. You received a $1 savings account earning 6% on your 1st birthday. How much will you have in the account on your 30th birthday if you don't withdraw any money before then?

A) $3.56

B) $4.90

C) $5.42

D) $5.90

E) $6.13

6. Moe purchases a $50 annual perpetuity for which payments begin in one year. Larry purchases a $50 annual perpetuity for which payments begin immediately. If a 12.5% interest rate is appropriate for both cash flow streams, which of the following statements is true?

A) Moe's perpetuity is worth $50 more than Larry's.

B) Larry's perpetuity is worth $50 more than Moe's.

C) The perpetuities are of equal value today.

D) Larry's perpetuity is worth $44.44 more than Moe's.

E) Moe's perpetuity is worth $44.44 more than Larry's.

7. You notice a local consumer finance company is offering 24% APR loans, but compounds interest continuously. What is the EAR?

A) 24.00%

B) 27.12%

C) 33.61%

D) 12.00%

E) 18.71%

8. You have $100,000 to invest. Your bank offers one-year certificates of deposit with a stated rate of 3.50% compounded quarterly. What rate compounded semiannually would provide you with the same amount of money at the end of one year?

A) 3.485%

B) 3.500%

C) 3.505%

D) 3.510%

E) 3.515%

9. J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what is the present value of the bond's face value?

A) $ 235.41

B) $ 341.15

C) $ 815.56

D) $1,000.00

E) $1,050.97

10. Suppose you purchase a zero coupon bond with face value $1,000, maturing in 25 years, for $180. What is the implicit interest, in dollars, in the first year of the bond's life?

A) $ 2.86

B) $ 9.84

C) $12.78

D) $19.27

E) $30.00

11. Define what is meant by interest rate risk. Assume you are the manager of a $100 million portfolio of corporate bonds and you believe interest rates will fall. What adjustments should you make to your portfolio based on your beliefs?

12. Whitesell Athletic Corporation's bonds have a face value of $1,000 and a 9% coupon paid semiannually; the bonds mature in 8 years. What current yield would be reported in The Wall Street Journal if the yield to maturity is 7%?

A) 4%

B) 5%

C) 6%

D) 7%

E) 8%

13. Bond A has a coupon rate of 8% and a yield to maturity of 8%. Bond B has a coupon rate of 5% and a yield to maturity of 5%. If Bond A has 8 years to maturity, then Bond B:

A) Has 5 years to maturity.

B) Has more than 5, but less than 8 years to maturity.

C) Has 8 years to maturity.

D) Has more than 8 years to maturity.

E) Any of the above might be correct.

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#### Solution Preview

PLEASE CHOOSE YOUR ANSWER AND EXPLAIN BRIEFLY WHY YOU MADE THAT CHOICE.

1. Suppose you have the 2001 income statement for a firm, along with the 12/31/2000 and 12/31/2001 balance sheets. How would you calculate net capital spending?

A) Ending net fixed assets (2001) minus beginning net fixed assets (2000) plus 2001 depreciation

B) Beginning net fixed assets (2000) minus ending net fixed assets (2001) plus 2001 depreciation

C) Beginning net fixed assets (2000) plus ending net fixed assets (2001) minus 2001 depreciation

D) Ending net fixed assets (2001) minus beginning net fixed assets (2000) plus 2001 taxes paid

E) Ending net fixed assets (2001) plus beginning net fixed assets (2000) minus 2001 taxes paid

Answer A is correct

Use the following to answer questions 1a and 1b:

1-a. What is earnings before interest and taxes for 2001?

A) $ 30

B) $ 45

C) $ 60

D) $ 75

E) $120

= Sales - COGS - Depreciation= 320-200-45=75

1-b. What is cash flow to creditors for 2001?

A) $35

B) $25

C) $15

D) $ 5

E) -$15

Increase in COGS=25

Decrease in current liability=10

Cash flow =-(25-10)=-15

Answer C is correct

2. You have the following data for a company. What is the return on assets (ROA)? Return on equity = 15%; Earnings before taxes = $50,000; Total asset turnover = 1.2; Profit margin = 7.5%; Tax rate = 35%.

A) 9%

B) 8%

C) 7%

D) 6%

E) 5%

Sales= 50,000/7.5%= 666,666

Sales / Assets turnover= Assets=666,666/1.2=555,555

ROA= 50000/555,555=9 %

Answer A is correct. ...

#### Solution Summary

The solution provides answers and explanations on multiple choice questions on income statement, Ending net fixed assets, earnings before interest and taxes, cash flow to creditors, return on assets, compounding, interest rates, perpetuity, APR, EAR, present value of the bond's face value, zero coupon bond, implicit interest rate, interest rate risk, current yield, years to maturity.

Multiple Choice questions on TVM (Time Value of Money)

Question 1. On March 5th, a couple took out a 90-day loan for $450 at 9% interest. On March 29th, they made a partial payment of $150. After making the payment, how much did they still owe?

a. $300.00

b. $300.90

c. $301.80

d. $302.70

Question 2: On January 10th, Park & Jason, Inc. took out a 3-month , 8% note for $3,000. On February 24th, they paid $1,000 towards the debt. How much did they owe on April 10th when the note can due?

a. $2,000.33

b. $2,050.30

c. $2,033.33

d. $2,056.25

Question 3: On June 1st, a school teacher signed a 2-month note for $600 at 12% to pay for a vacation. On July 1st, he paid $300 on the loan, and July 31st, he paid off the loan. What is the total interest he paid on the loan?

a. $9.06

b. $9.15

c. $12.00

d. $12.20

Question 4 : Charlie Consumer's credit card balance on April 1st was $40. On April 7th, he made a $10 payment and on April 25th he charged a $25 item. If his credit card company charges a finance charge of 2% on the average daily balance, what will be his balance on May 1st when he receives his next statement?

a. $55.83

b. $55.19

c. $55.65

d. $55.37

Question 5 : Ellen Nancy borrowed $500 at 12% simple interest, to be repaid in 8 equal monthly installments of $70. If she pays off the loan when she makes her 4th payment, how much will she save in finance charges under the rule of 78s?

a. $17.19

b. $21.43

c. $30.00

d. $16.67

Question 6: Which of the following investments will produce the largest interest?

a. $100 a quarter for 5 years at 8% compounded quarterly

b. $1,000 at 7% simple interest for 6 years

c. $1,000 at 6% interest compounded annually for 4 years

d. $1,000 at 6% interest compounded quarterly for 4 years

Question 7 : If an employee deposits $20 at the end of each month into his company's plan which pays 6% interest compounded monthly, how much will he have in the account at the end of 5 years?

a. $101.01

b. $1,301.01

c. $1,395.40

d. $10,662.56

Question 8: Find the present value of an annuity with payments of $40 a quarter for 10 years, if interest rates are 12% compounded quarterly.

a. $983.64

b. $990.49

c. $925.91

d. $924.59

Question 9: A young couple takes out a $80,000 mortgage to buy a new condominium. They finance the loan at 7% compounded quarterly for 20 years. To the nearest $10, how much interest will they pay over the 20-year life of the loan?

a. $69,250.00

b. $42,750.00

c. $15,510.00

d. $40,970.00

Question 10: Megatown, USA issued 10-year bonds totaling $2,500,000 for construction of new service roads and entrance ramps onto the freeway. The town set up a sinking fund at 12% compounded quarterly. What was the quarterly payment into this fund?

a. $34,520.00

b. $33,155.00

c. $34,250.00

d. $33,515.00

Please see the attached file for complete description of the questions.

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