1. What is the present value of an annuity of $120 received at the end of each year for 11 years?
Assume a discount rate of 7%. The first payment will be received one year from today (round
to nearest $1).
2. You bought a racehorse that has had a winning streak for six years, bringing in $250,000 at
the end of each year before dying of a heart attack. If you paid $1,155,720 for the horse 4
years ago, what was your annual return over this 4-year period?
3. How much money do I need to place into a bank account that pays a 1.08% rate in order to
have $500 at the end of 7 years?
4. Your daughter is born today and you want her to be a millionaire by the time she is 40 years
old. You open an investment account that promises to pay 11.5% per year. How much money
must you deposit today so your daughter will have $1,000,000 by her 35th birthday?
5. If you want to have $3,575 in 29 months, how much money must you put in a savings account
today? Assume that the savings account pays 12% and it is compounded monthly (round to
6. U.S. Savings Bonds are sold at a discount. The face value of the bond represents its value on
its future maturity date. Therefore:
a. The current price of a $50 face value bond that matures in 10 years will be greater than
the current price of a $50 face value bond that matures in 5 years.
b. The current prices of all $50 face value bonds will be the same, regardless of their
maturity dates because they will all be worth $50 in the future.
c. The current price of a $50 face value bond will be higher if interest rates increase.
d. The current price of a $50 face value bond that matures in 10 years will be less than the
current price of a $50 face value bond that matures on 5 years.
7. You are considering a sales job that pays you on a commission basis or a salaried position that
pays you $50,000 per year. Historical data suggests the following probability distribution for
your commission income. Which job has the higher expected income?
a. The salary of $50,000 is less than the expected commission of $50,050.
b. The salary of $50,000 is less than the expected commission of $52,720.
c. The salary of $50,000 is greater than the expected commission of $49,630.
d. The salary of $50,000 is greater than the expected commission of $48,400.
8. Beginning with an investment in one company’s securities, as we add securities of other
companies to our portfolio, which type of risk declines?
a. unsystematic risk
b. market risk
c. systematic risk
d. non-diversifiable risk
10. Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of
1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the
market risk premium remains constant, then:
a. the required returns on stocks A and B will not change
b. the required returns on stocks A and B will both increase by the same amount
c. the required return on stock A will increase more than the required return on stock B
d. the required return on stock B will increase more than the required return on stock A
11. Suppose interest rates have been at historically low levels the past two years. A reasonable
strategy for bond investors during this time period would be to:
a. buy only junk bonds which have higher interest rates
b. invest in long-term bonds to reduce interest rate risk
c. invest in short-term bonds to reduce interest rate risk
d. invest in long-term bonds to lock in a bond position for when interest rates increase in the