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EBF 101 - Spring 2016 Professor Slavina Instructions: Please answer ALL questions. Each question is worth 5.5. To get full credit for each question, please write out the formula you will use and label all the variables. 1) The Financial Partners company is considering selecting Project X. The company expects the project will produce a one-time benefit of $850,000 two years from now. The interest rate at a local bank is 9% per year. How much would need to be invested in the bank now to obtain the same benefit? 2) Suppose you placed $100 in an account that pays 9.6% interest, compounded monthly. How long will it take for your account to grow to $500? 3) You want to buy a car in seven years. The car is currently selling for $50,000, and the price will increase at a compound rate of 10% per year. You can presently invest in high-yield bonds earning a compound annual rate 14% per year. How much must you invest at the end of each of the next seven years to be able to purchase your dream car in seven years? 4) The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly is? 5) Bella has planned to start her college education four years from now. To pay for her college education, she has decided to save $1,000 each quarter for the next four years in a bank account paying 12 percent interest. How much will she have at the end of the fourth year? 6) Thomas would like to send his parents on a cruise for their 25th wedding anniversary. He expects the cruise will cost $15,000 and he has 5 years to accumulate this money. How much must Stephen deposit annually in an account paying 10 percent interest in order to have enough money to send his parents on the cruise? 7) Which loan would you prefer to take: A) 8% compounded annually or B) 7.85% compounded quarterly? (Choose option A or B, show math and explain why). 8) You are considering an investment in a one-year government debt security with a yield of 4.5 percent or a highly liquid corporate debt security with a yield of 7.25 percent. The expected inflation rate for the next year is expected to be 3 percent. a) What would be your real rate earned on either of the two investments? b) What would be the default risk premium on the corporate debt security? 9) A Treasury note with a maturity of four years carries a nominal rate of interest of 11.5 percent. In contrast, an 8-year Treasury bond has a yield of 7.5 percent. a) If inflation is expected to average 6 percent over the first four years, what is the expected real rate of interest? b) If the inflation rate is expected to be 4.5 percent for the first year, calculate the average annual rate of inflation for years two through four. 10) The real rate is 2.5%. Inflation is expected to be 3.25% this year and 1.5% during the next 2 years. Assume the maturity risk premium is 0. What is the yield on 3-year Treasury securities