Please give detailed explanations of your answers to each question.

1. The minimum rate of return that an investor must receive to invest in a project is most likely known as the: A. the required rate of return. B. real risk-free interest rate. C. inflation rate. 2. Which of the following is least likely to be an accurate interpretation of interest rates? A. The rate needed to calculate the present value. B. Opportunity cost. C. The maximum rate of return an investor must receive to accept an investment. 3. Given below is information about a security whose nominal interest rate is 15%: The real risk-free rate of return is 3.5% The default risk premium is 3% The maturity risk premium 4% The liquidity risk premium is 2% An investor wants to determine the inflation premium in the securitys return. The inflation premium is closest to: A. 2.5%. B. 4.0%. C. 9.0%. 4. Two bonds, a U.S. Treasury bond has a yield to maturity of 5 per cent, while a bond issued by an industrial corporation, has a yield to maturity of 7 per cent. The two bonds are otherwise identical i.e. they have the same maturity and are option-free. The most likely explanation for the difference in yields of the two bonds is: A. Default risk premium. B. Inflation premium. C. Real risk-free interest rate. 5. The maturity premium can be best described as compensation to investors for the: 2 A. risk of loss relative to an investments fair value if the investment needs to be converted A. to cash quickly. B. increased sensitivity of the market value of debt to a change in market interest rates as C. maturity is extended. D. the possibility that the borrower will fail to make a promised payment at the contracted time E. and in the contracted amount. 6. Liquidity premium can be best described as compensation to investors for: A. inability to sell a security at its fair market value. B. locking funds for longer durations. C. a risk that investments value may change over time. 7. Camilla wishes to compute the effective annual rate of a financial instrument with a stated annual rate of 22% and compounded every quarter? Which of the following is most likely to be closest to the effective annual rate? A. 23%. B. 24%. C. 25%. 8. The nominal annual interest rate on a mortgage is 7%. The effective annual rate on that mortgage is 7.18%. The frequency of compounding is most likely: A. semi-annual. B. quarterly. C. monthly. 9. If the stated annual interest rate is 11% and the frequency of compounding is daily, the effective annual rate is closest to: A. 11.00%. B. 11.57%. C. 11.63%. 10. An investment earns an annual interest rate of 12 per cent compounded quarterly. What is the effective annual rate? A. 3.00%. B. 12.00%. 3 C. 12.55%. 11. Which of the following continuously compounded rates corresponds to an effective annual rate of 7.45 per cent? A. 7.19%. B. 7.47%. C. 7.73%. 12. Canadian Foods recorded an operating profit of $2.568 million and $5.229 million for 2008 and 2012 respectively. What was the compounded annual rate of growth of Canadian Foods operating profits during the 2008-2012 period? A. 16.30%. B. 18.50%. C. 19.50%. 13. An investor deposits 1,000 into an account that pays continuously compounded interest of 9% (nominal annual rate). The value of the account at the end of six years is closest to: A. 1,677. B. 1,712. C. 1,716. 14. Your client invests $2 million in security that matures in 4 years and pays a 7.5 per cent annual interest rate compounded annually. Assuming no interim cash flows, which of the following will most likely be the value of the investment at maturity? A. $2.150 million. B. $2.600 million. C. $2.671 million. 15. Your client deposits $5 million in a savings account that pays 5 per cent per year compounded quarterly. What will be the value of this deposit after 2.5 years? A. $5.625 million. B. $5.649 million. C. $5.661 million. 16. Grim Smith plans to invest 12 million, three years from now. The rate of return has been estimated at 8 per cent per year. What is the future value of this investment 11 years from 4 now? A. 22.21 million. B. 27.98 million. C. 35.25 million. 17. Which of the following is most likely to increase as the frequency of compounding increases? A. Interest rate. B. Present value. C. Future value. 18. How long will it take an investment of $2,500 to grow three times in value to $7,500? Assume that the interest rate is 6 per cent per year compounded annually. A. 11.9 years. B. 18.9 years. C. 21.3 years. 19. Evan Hubbard estimates he needs $100,000 to travel around the world. He plans to deposit $800 every month starting one month from today to meet this goal. The interest rate is 7 per cent compounded monthly. How many months will it take for Hubbard to achieve his goal? A. 95 months. B. 225 months. C. 250 months. 20. A security pays $2500 at the start of each quarter for 3 years. Given that the annual discount rate compounded quarterly is 8%, which of the following is most likely to be the worth of the security today? A. $18,840. B. $26,438. C. $26,967. 21. Ms Clara Johnson is buying a house. She expects her budget to allow a monthly payment of $1500 on a 25-year mortgage with an annual interest rate of 6.8 per cent. If Johnson makes a 10 per cent down payment, the most she can pay for the house is closest to: A. $216,116. 5 B. $240,129. C. $264,706. 22. Sandra Archer is planning for her retirement. She is 35 years old and expects to retire in the next 40 years. She expects to live for another 25 years after her retirement. Her current annual expenditures are $54,000 and she expects them to increase at a rate of 3%, the rate of inflation until she retires. Upon retiring, her end-of-year expenditures will be equal to her consumption expenditure at age 75. If the minimum amount that she can accumulate by age 75 is $2 million, what is the minimum expected rate of return she must earn on her investment to maintain her consumption expenditure throughout her expected life after retirement? A. 7.29%. B. 7.58%. C. 7.87%. 23. Mr Das Gupta is planning to save for his daughters college tuition fund. His daughter is currently 11 years old and is expected to start college after 6 years. The expected annual fee for a four-year program is $45,000. Assuming an expected rate of return on investment of 5%, the minimum amount that he must accumulate over the next 6 years to fund his daughters college tuition fund is closest to: A. $160,000. B. $170,000. C. $180,000. 24. Sally Smith is a pension fund manager. According to her estimates, retirees will be paid benefits worth $0.75 million per year, starting 12 years from now. There will be a total of 20 payments. Given a discount rate of 8 per cent, the present value of the payments today is closest to: A. $2,924,191. B. $3,158,126. C. $7,363,610. 25. Bill Graham is planning to buy a security that pays a dividend of $100 per year indefinitely, with the first payment to be received at t = 4. Given that the required rate of return is 10 percent per year compounded annually, how much should Graham pay today for the security? A. $683. B. $751. C. $1,000.