The modified duration of a ten-year zero-coupon bond with an annual effective yield rate of i is 9.26 years. Based on an annual effective interest rate of i, the Macaulay duration of a ten-year annuity- immediate with level annual payments is D.

Calculate D.

• 4.05
• 4.37
• 4.51
• 4.87
• 4.96

A company's liabilities are 20,000 today and 100,000 five years from today. The Macaulay duration of the company's liabilities with respect to the market annual effective yield rate is 3.70 years.

Calculate the modified duration of the company's liabilities, in years.

• 3.26
• 3.31
• 3.52
• 3.65
• 4

Eric deposits 12 into a fund at time 0 and an additional 12 later into the same fund at time 10. The fund credits interest at an annual effective rate of i. Interest is payable annually and reinvested at an annual effective rate of 0.75i. At time 20, the accumulated amount of the reinvested interest payments is equal to 64.

Calculate i, i > 0.

• 0.092
• 0.096
• 0.10
• 0.104
• 0.11

References

Hlynka, Myron. "University of Windsor Old Tests 62-392 Theory of Interest". web2.uwindsor.ca. Retrieved November 23, 2023.

An investor makes a payment of $100 immediately and a payment of $132 at the end of two years in exchange for a payment of $230 at the end of one year. Find the yield rate i.

• 5%
• 10%
• 15%
• 20%
• 10% or 20%

References

Hlynka, Myron. "University of Windsor Old Tests 62-392 Theory of Interest". web2.uwindsor.ca. Retrieved November 23, 2023.

Maxine invests 1000 at the end of each year for 5 years at an effective rate of .10 per year, with interest payable annually. She reinvests the interest each year at rate .08 per year.

Find the accumulated value at the end of 5 years.

• 5867
• 6000
• 6084
• 6105
• 6150

References

Hlynka, Myron. "University of Windsor Old Tests 62-392 Theory of Interest". web2.uwindsor.ca. Retrieved November 23, 2023.

You have just inherited an office building. You expect the annual rental income (net of maintenance and other cost) for the building to be $100,000 for the next year and to increase at 5% per year indefinitely. A expanding internet company offers to rent the building at a fixed annual rent for 5 years. After year 5, you could re-negotiate or rent the building to another tenant.

What is the minimum acceptable fixed rental payments for this five-year agreement? Use a discount rate of 12%.

• 105,000
• 107,100
• 109,300
• 113,300
• 115,800

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.

Two dealers compete to sell you a new Hummer with a list price of $45,000. Dealer C offers to sell it for $40,000 cash. Dealer F offers “0-percent financing:” 48 monthly payments of $937.50. (48x937.50=45,000)

You can finance purchase by withdrawals from a money market fund yielding 2% per year. Which of the following statements is true?

• Financing option costs less because the present value of the payments is less than $40,000
• Financing option costs more because the present value of the payments exceeds $43,000
• Financing option costs more because the present value of the payments exceeds $45,000
• Financing option costs less because the present value of the payments is less than $38,000
• Both options are equally attractive

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 20, 2023.

Your cousin is entering medical school next fall and asks you for financial help. He needs $65,000 each year for the first two years. After that, he is in residency for two years and will be able to pay you back $10,000 each year. Then he graduates and becomes a fully qualified doctor, and will be able to pay you $40,000 each year. He promises to pay you $40,000 for 5 years after he graduates.

Assuming a discount rate of 5%, determine the net present value associated with this loan.

• 36,500
• 37,000
• 37,500
• 38,000
• 38,500

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.

You are considering the purchase of a new car, the reborn VW Beetle, and you have been offered two different deals from two different dealers. Dealer A offers to sell you the car for $20,000, but allows you to put down $2,000 and pay back $18,000 over 36 months (fixed payment each month) at a rate of 8% compounded monthly. Dealer B offers to sell you the car for $19,500 but requires a down payment of $4,000 with repayment of the remaining $15,500 over 36 months at 10% compounded monthly.

Which of the following statements is true?

• If the annual discount rate, compounded monthly, is above 8.5%, then deal A is better than deal B
• If the annual discount rate, compounded monthly, is above 9.5%, then deal A is better than deal B
• If the annual discount rate, compounded monthly, is below 9%, then deal A is better than deal B
• Both deals are equally good regardless of the discount rate
• Deal A is always better than deal B

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.

You are given the following prices of US Treasury Strips (discount or zero coupon bonds):

Now, suppose you are offered a project which returns the following cashflows:

1. $300m at the end of year 1
2. $210m at the end of year 2
3. $400m at the end of year 3

The project costs $600m today. Calculate the NPV of the project using the spot rates computed above.

• $0
• $75
• $150
• $225
• $250

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.