F2. 1) A bank's one-year certificate of deposit will pay a specific fixed amount at the year-end. This means that the certificate will sell at a lower price if the interest is compounded semi-annually rather than annually. a) True b) False
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F2.
1) A bank's one-year certificate of deposit will pay a specific fixed amount at the year-end. This means that the certificate will sell at a lower price if the interest is compounded semi-annually rather than annually.
a) True
b) False
2) A project with zero
a) True
b) False
3)A $40,000 consumer loan is to be paid off with monthly payments of $1,150.72. What monthly interest rate is to be paid?
a) 1.0%
b) 1.5%
c) 2.0%
d) 2.2%
e) None of the above
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- Do the following present value problems. You must set up all present value problems before calculation. Merely writing down the answer (even if it is correct) is an automatic zero. You must show your work.a. Suppose we have a four year fixed-payment loan with $900 payments made at the end of each year. Given a market interest rate of 7 percent, how much was initially borrowed?b. Suppose you were considering purchasing a $6300 machine today that would generate additionalnet profit of $2500 booked at the end of each year. Assuming you need a 10 percent annual return to justify the investment, would the investment be worth doing if you had only three years of payouts? Would your answer change if you only needed a 9 percent annual return on your investment ? Why or why not? You must use present value to demonstrate your answer, and show your work.c. Consider two zero coupon bonds in which you receive $100 at the maturity date, one maturing in 3 years and one maturing in 5 years.…Which of the following statements is CORRECT? An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.Which of the following statements is CORRECT? Question 2 options: a) The proportion of the payment that goes toward interest on a fully amortized loan increases over time. b) An investment that has a nomiral rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. c) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. d) The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. e) if a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.
- Consider a loan repayment plan described by the following initial value problem, where the amount borrowed is B(0) = $40,000, the monthly payments are $600, and B(t) is the unpaid balance of the loan. Use the initial value problem to answer parts a through c. B' (+) =0.03B - 600, B(0) = 40,000 a) Find the solution of the initial value problem and explain why B is an increasing solution. B(t) = Why is B an increasing function? O A. The function is increasing because it is an exponential function with a positive coefficient and a negative exponent. O B. The function is increasing because it is an exponential function with a positive coefficient and a positive exponent. O C. The function is increasing because it is an exponential function with a positive exponent. O D. The function is increasing because it is an exponential function with a positive coefficient. b) What is the most that you can borrow under the terms of this loan without going further into debt each month? The…Q3: Which one of the following two cases would you prefer as more profitable investment and why? Case 1: Deposit £5000 for two years in a saving account that pays simple interest at rate of 6% per annum. No withdrawal during the investment period. Case 2: Deposit £5000 for one year in a savings account that pays simple interest at rate of 6% per annum. Then, withdraw the money with interest and deposit into another account paying simple interest at 7.5% for one year. Case 1 because of higher return of £6600 Case 1 because of higher return of £5697.5 Case 2 because of higher return of £5697.5 Case 2 because of higher return of £6600Consider two 1-year loans with a principal of $1 million and a default probability of 2% each. Assume that if one loan defaults, the other does not. Assume that in the event of default, the loan leads to a loss that can take any value between $0 and $1 million with equal probability, i.e., the probability that the loss is higher than $x million is 1-x. If a loan does not default, it yields a profit equal to $0.02 million. a) Compute the 1-year 99% Value at Risk (VaR) and Expected Shortfall (ES) of a single loan. b) Compute the 1-year 99% VaR and ES for the portfolio of both loans. c) Does the VaR and the ES satisfy the subadditivity property in this case?
- (3) Today you have paid $275 for an investment that pays $100 in one year, $500 in two years,and $X in 4 years. Assuming the market interest rate is 100% and the net present value of theinvestment is zero, what must be true about X?(a) X is greater than $2,500(b) X is greater than or equal to $2,000 but less than $2,500(c) X is greater than or equal to $1,500 but less than $2,000(d) X is greater than $1,200 but less than $1,500(e) X is less than or equal to $1,200A company borrows $4 to finance a project. It has two choices when beginning the project. The first option has potential payoff of either $2 or $8 (both equally likely). The second option has potential payoffs of $0 or $16 (both equally likely). The lender would prefer the _____ option because the expected value of the first option is option is and the expected value of the second first; $3; $2 first; $8; $5 second; $5; $8 second; $16; $4Consider a project lasting one year only. The initial outlay is $1,000 and the expected inflow is $1,290. The opportunity cost of capital is r = 0.29. The borrowing rate is rD calculations. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "O" wherever required.) 0.21. (Do not round intermediate 0.08, and the tax shield per dollar of interest is Tc a. What is the project's base-case NPV? Base-case NPV b. What is its APV if the firm borrows 39% of the project's required investment? Adjusted present value
- If the rate of interest that your investment can earn on a 2-year investment is zero, which of the following statements is NOT CORRECT? * a. All of the statements are correct. b. The payment for the use of your money for two years is zero. c. The future value of your investment is higher than your present value at the end of the investment period. d. You will receive the same amount you invested at the beginning of the 2-year period at the conclusion or maturity of the investment.Consider two 1-year loans with a principal of $1 million and a default probability of 2% each. Assume that if one loan defaults, the other does not. Assume that in the event of default, the loan leads to a loss that can take any value between $0 and $1 million with equal probability, i.e., the probability that the loss is higher than $ ? million is 1 − ?. If a loan does not default, it yields a profit equal to $0.02 million. a) Compute the 1-year 99% Value at Risk (VaR) and Expected Shortfall (ES) of a single loan.Assess the following statements: Simple interest calculations assume the interest earned is never reinvested. The real interest rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption. Earning a 5% interest rate with annual compounding is better than earning a 4.95% interest rate with semiannual compounding. For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows and the future value of the same annuity will be greater than the sum of the cash flows. a. Three statements are incorrect. b. Two statements are incorrect. c. Only one statement is incorrect. d. All statements are correct.