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Final

# ADMS 3530 Final: 3530 Final Tutorial Questions.SU19 (1)Exam

Department
Course Code
Professor
Alagurajah
Study Guide
Final

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ADMS 3530 Final Exam Tutorial Notes & Practice Problems (Example)
TVM- Ch.5
PV & FV: SINGLE CASH FLOWS
Future Value: FV = PV × (1 + r)n
Present Value: PV = Future Value
(1 + r)n
PV & FV: MULTIPLE CASH FLOWS
Example 1: Multiple Cash Flows
In two years from today, the following cash flows will have a future value
of \$3032.32: \$200 today, \$Y at the end of one year, and \$2,400 at the end of two
years. The annual interest rate is 4%. What is Y?
A) \$330.00
B) \$400.00
C) \$416.00
D) \$432.64
E) \$167.55
PERPETUITIES & ANNUITIES
Ordinary (regular) Annuity & Ordinary Perpetuity Cash flows start at end of first
time period
Perpetuity Due & Annuity Due Cash Flows start immediately
PV Perpetuity (ordinary) = C
r
PV Perpetuity due = PV Ordinary Perpetuity x (1 +r)
Basic Annuity Formulas:
PVannuity = PVA = C x PVAF (note: C = PMT)
FV annuity = FVA = C x FVAF (future value annuity factor)
Annuity Due:
PV (Annuity Due) = PV(Simple Annuity) × (1+r)
FV (Annuity Due) = FV (Simple Annuity) × (1+r)
Example 2: Delayed Annuity
What is the present value of a four-year annuity of \$100 per year
that begins two years from today if the discount rate is 9 percent?
A) \$297.22
B) \$323.86
C) \$356.85
D) \$388.97
E) \$451.64

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EFFECTIVE ANNUAL INTEREST RATES (EAR) see Lecture 3 (TVM) Notes
Two Options:
EAR = Compounded rate
EAR = (1 + im)m -1
APR = Finding nominal rate using simple interest
APR = im x m
Note:
EAR = APR with annual compounding
EAR > APR when interest in calculated more than once/yr
Example 3: EAR
You are expected to pay \$1,883.33 per month on a one-year loan with a
principal of \$20,000. What is the EAR of this loan?
A) 13.00%
B) 13.80%
C) 23.19%
D) 25.82%
E) 16.55%
Example 4: Mortgages: You want to buy a house that costs \$400,000. You make a 20% down
payment and finance the rest with a 25 year mortgage. The mortgage has a five year renewal
term for which the annual mortgage rate is 6.25% compounded semi-annually. What will the
remaining principal of the loan be at the end of the 5-year term?
A) \$185,780.
B) \$196,670.
C) \$245,450.
D) \$288,480.
E) \$400,000

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BONDS
Terminology
Par Value
Maturity Date
Coupons
Discount Rate
Also referred to as market interest rate ,or the current interest rate that the market is
demanding of similar securities Also known as its yield to maturity.
* Do not mix-up COUPON RATE and MARKET INTEREST RATE
They are usually different.
If they are the same, (i.e. coupon rate = market interest rate), then bond will
sell at par value or \$1000)
Valuation of Bonds
Current Price = PV bond payments = PV (Coupons) + PV (Face Value)
3 TYPES OF BOND PROBLEMS:
1. Pricing Problems:
2. Return Problems:
3. Combination Problems
First asked to find a bond price at a point in time and then calculate a return if you hold it to
maturity or another point in time.
Example 5: Bonds
You bought a bond with a 7% annual coupon rate at its par value of \$1,000 three years ago.
The bond had an original maturity of 10 years. Today, the yield to maturity of the bond has
increased to 8% annually. The bond pays coupons semi-annually. Assume coupons are not
reinvested.
a) What is the current yield of the bond today?
A) 8.0%
B) 7.39%
C) 7.09%
D) 8.39%
E) 5.54%
5B. A government bond carries a 6% coupon rate, pays semi-annual coupons, and has
a \$1,000 face value. If you purchase it today at \$1,015 and expect to sell it 4 years from
now at \$1,040, what would be your annual rate of return if the coupons are reinvested at
4% APR semi-annually compounded?
A)
3.1654%
B)
6.3309%
C)
6.9579%
D)
27.8314%
E)
16.5464%