1. Effective Annual Rate (EAR) for the following cases: (10 points)

1. Annual Percentage Rate (APR) 12%, monthly compounding
2. APR 10%, daily compounding

2. You borrow $500,000 from a bank to purchase a house. Here is the basic information on the mortgage: 30 years, monthly payment, APR: 3.5%. (10 points)

1. What is the monthly payment?
2. At the end of the fifth year (60^th month), what is the remaining balance of the mortgage?

3. An investment plan costs $50,000 today but it will generate cash flows $10,000 for 10 years. What is the rate of return for the investment plan? (5 points)

4. If you deposit $1000 each month into your retirement account for 30 years, what is the future value at the end of 30^th year given that the retirement account grows at 6% per year? (5 points)

5. A bond has 10% coupon rate (coupon paid semiannually) and it has 10 years left to maturity. The face value is $1000. If the bond currently sold for $1100. (15 points)

1. What is the yield to maturity?
2. If suddenly the interest rate decreases 2%, what is the new bond price? What is the percentage change of bond price?

6. A bond has 8% coupon rate (coupon paid semiannually) and it has 8 years left to maturity. The face value is $1000. If the yield to maturity is 10%, what is the bond price? (10 points)

7. A treasury bond pays 3% per year and the inflation is 2% per year. What is the exact real rate? (5 points)

8. A preferred stock pays $1 dividend per year and the current require rate is 5%. What is the fair value of the preferred stock? (5 points)

9. A common stock just paid $1 dividend. The expect growth rate is 3% per year. Suppose the required rate of return is 8%. What is the fair value of the stock? (10 points)

10. The stock price of Alps Co. is $67. Investors require a return of 5 percent on similar stocks. If the company plans to pay a dividend of $4.25 next year, what growth rate is expected for the companys stock price? (10 points)

11. A project requires initial investment of $70,000, and it could generate cash flows in the following: $10,000 at year 1, $30,000 at year 2, and $40,000 at year 3, and 20,000 at year 4. If the required rate of return for the project is 12%, what is the net present value? What is the internal rate of return? Do you accept or reject the project? (15 points)