Exam 5: Interest Rates

Consider an investment that pays $1000 certain at the end of each of the next four years.If the investment costs $3500 and has an NPV of $74.26,then the four-year risk-free interest rate is closest to:

Use the table for the question(s)below. Suppose you have the following Loans/Investments -If your income tax rate is 30%,then the after-tax EAR for your home equity loan is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following investment alternatives: -The highest effective rate of return you could earn on any of these investments is closest to:

Use the following information to answer the question(s)below: Suppose the term structure of risk-free interest rates is given as: Term 1 year 2 years 3 years 5 years 10 years Rate 2.25% 2.80% 3.20% 4.10% 6.30% -The present value of an investment that pays $1000 in two years and $5000 in ten years for certain is closest to:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below: Suppose the term structure of risk-free interest rates is given as: Term 1 year 2 years 3 years 5 years 10 years Rate 2.25% 2.80% 3.20% 4.10% 6.30% -The present value of an investment that pays $2000 in one year and $3000 in three years for certain is closest to:

Use the information for the question(s)below. You are purchasing a new home and need to borrow $250,000 from a mortgage lender.The mortgage lender quotes you a rate of 6.25% APR for a 30-year fixed rate mortgage.The mortgage lender also tells you that if you are willing to pay 2 points,they can offer you a lower rate of 6.0% APR for a 30-year fixed rate mortgage.One point is equal to 1% of the loan value.So if you take the lower rate and pay the points you will need to borrow an additional $5000 to cover points you are paying the lender. -Assuming you don't pay the points and borrow from the mortgage lender at 6.25%,then your monthly mortgage payment (with payments made at the end of the month)will be closest to:

Use the information for the question(s)below. Your firm needs to invest in a new delivery truck.The life expectancy of the delivery truck is five years.You can purchase a new delivery truck for an upfront cost of $200,000,or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month).Your firm can borrow at 6% APR with quarterly compounding. -Should you purchase the delivery truck or lease it? Why?

Use the information for the question(s)below. Your firm needs to invest in a new delivery truck.The life expectancy of the delivery truck is five years.You can purchase a new delivery truck for an upfront cost of $200,000,or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month).Your firm can borrow at 6% APR with quarterly compounding. -The effective annual rate for a credit card that charges a 19.9% APR compounded daily is closest to:

Use the following information to answer the question(s)below. Dagny Taggart has just purchased a home and taken out a $400,000 mortgage.The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. -The total amount of interest that Dagny will pay during the first month of her mortgage is closest to:

You are in the process of purchasing a new automobile that will cost you $25,000.The dealership is offering you either a $1000 rebate (applied toward the purchase price)or 3.9% financing for 60 months (with payments made at the end of the month).You have been pre-approved for an auto loan through your local credit union at an interest rate of 7.5% for 60 months.Should you take the $1000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3.9% APR?

If an investment providing a nominal return of 12.25% only offers a real rate of return of 5.70%,then the inflation rate is closest to:

Use the information for the question(s)below. Your firm needs to invest in a new delivery truck.The life expectancy of the delivery truck is five years.You can purchase a new delivery truck for an upfront cost of $200,000,or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month).Your firm can borrow at 6% APR with quarterly compounding. -The effective monthly discount rate that you should use to evaluate the truck lease is closest to:

If the current inflation rate is 5%,then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to:

Use the information for the question(s)below. You are in the process of purchasing a new automobile that will cost you $27,500.The dealership is offering you either a $2500 rebate (applied toward the purchase price)or 1.9% financing for 48 months (with payments made at the end of the month).You have been pre-approved for an auto loan through your local credit union at an interest rate of 6.5% for 48 months. -If you take the $2500 rebate and finance your new car through your credit union your monthly payments will be closest to:

Use the table for the question(s)below. Consider the following investment alternatives: -Which alternative offers you the highest effective rate of return?

Which of the following equations is INCORRECT?

Wyatt Oil is considering drilling a new oil well that is initially expected to produce oil at a rate of 10 million barrels per year.Wyatt has a long-term contract that allows them to sell the oil at a profit of $2.50 per barrel.The cost of the drilling rig is $175,000,000.If the rate of oil production from the rig declines by 3% over the year and the discount rate is 9% per year (EAR),then using continuous compounding,the NPV of this new oil well is closest to: