# M&a Practice Question

Topics: Money, Time value of money, Finance Pages: 6 (901 words) Published: December 7, 2010
m&
Practice Questions: Time Value of Money (TVM)
& Its Applications in Investments

1. Jose now has \$500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding? a.\$591.09
b.\$622.20
c.\$654.95
d.\$689.42
e.\$723.89
N6
I/YR5.5%
PV\$500
PMT\$0
FV\$689.42

2. How much would \$5,000 due in 25 years be worth today if the discount rate were 5.5%? a.\$1,067.95
b.\$1,124.16
c.\$1,183.33
d.\$1,245.61
e.\$1,311.17

N25
I/YR5.5%
PMT\$0
FV\$5,000
PV\$1,311.17

3. Suppose the U.S. Treasury offers to sell you a bond for \$747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for \$1,000. What interest rate would you earn if you bought this bond at the offer price? a.4.37%

b.4.86%
c.5.40%
d.6.00%
e.6.60%

N5
PV\$747.25
PMT\$0
FV\$1,000.00
I/YR6.00%

4. You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Years:01234
|||||
CFs:\$0\$1,000\$2,000\$2,000\$2,000

a.\$5,987
b.\$6,286
c.\$6,600
d.\$6,930
e.\$7,277

I/YR = 6.0%

01234
CFs:\$0\$1,000\$2,000\$2,000\$2,000
PV of CFs:\$0\$943\$1,780\$1,679\$1,584

PV = \$5,987Found using the Excel NPV function.
PV = \$5,987Found by summing individual PVs.
PV = \$5,987Found using the calculator NPV key.

5. At a rate of 6.5%, what is the future value of the following cash flow stream?

Years:01234
|||||
CFs:\$0\$75\$225\$0\$300

a.\$526.01
b.\$553.69
c.\$582.83
d.\$613.51
e.\$645.80

I/YR = 6.5%

01234
CFs:\$0\$75\$225\$0\$300
FV of CFs:\$0\$91\$255\$0\$300

FV = \$645.80Found by summing individual FVs.
FV = \$645.80Found with the NFV key in some calculators. FV = \$645.80Found with a calculator by first finding the PV of the stream, then finding the FV of that PV.

PV of the stream:\$501.99
FV of the PV:\$645.80

6. What’s the future value of \$1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually? a.\$1,819
b.\$1,915
c.\$2,016
d.\$2,117
e.\$2,223

Years5
Periods/Yr2
Nom. I/YR6.0%

N = Periods10
PMT\$0
I = I/Period3.0%
PV = \$1,500 Could be found using a calculator, an equation, or Excel. FV = \$2,016 Note that we must first convert to periods and rate per period

7. An investor plans to buy a common stock and hold it for two years. The investor expects to receive \$1.5 in dividend a year and \$26 from the sales of the stock at the end of year 2. If the investor wants a 15% return (compound annually), the maximum price the investor should pay for the stock today is roughly: A).\$24

B).\$28
C).\$22
D).\$32
E).\$26

C).\$22 (n=2, pmt = 1.5, fv = 26, I = 15%, PV = ?)

8. Morin Company's bonds mature in 8 years, have a par value of \$1,000, and make an annual coupon interest payment of \$65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price? a.\$903.04

b.\$925.62
c.\$948.76
d.\$972.48
e.\$996.79

N8
I/YR8.2%
PMT\$65
FV\$1,000
PV\$903.04

9. Sadik Inc.'s bonds currently sell for \$1,180 and have a par value of \$1,000. They pay a \$105 annual coupon and have a 15-year maturity, but they can be called in 5 years at \$1,100. What is their yield to call (YTC)? a.6.63%

b.6.98%
c.7.35%
d.7.74%
e.8.12%

N5
PV\$1,180
PMT\$105
FV\$1,100
I/YR = YTC7.74%

10. Assume that you are considering the purchase of a...