Practice Midterm 1

NAME: _______________________________________________________

SECTION: 01(8:00am) 02(9:30am) 03(11:00am)

1) The exam is worth 100 points. Please complete all questions.

2) You are allowed one 8.5”x11” (letter) sheet of paper with anything on it (front and back)
and also one calculator. NO sharing of “cheat” sheets or calculators is allowed.

3) Please write all answers in the separate ANSWER SHEET. No credit will be given for answers
or work written on scratch paper.

4) For the problems, place a box or a circle around your final answer.

5) If you are unsure of any element of a question, or believe the question is vague, please
make an assumption, write down your assumption, and continue to solve the question.

6) No partial credit will be given for the Part I multiple-choice questions.

7) Partial credit is possible for the Part II problems. Full credit will not be given unless you
show your work.

8) Feel free to use your calculator to solve problems. If you use your calculator, you must list
the inputs (ex. PV = , FV =, etc.) in order to receive credit.

I have read the instructions above, understand the Georgetown Honor Code, and attest that I
have neither given nor received aid in this exam. All work reflects my own.

SIGNATURE: _____________________________________________________________

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PART I: MULTIPLE-CHOICE (There may be more than one correct answer)

1) Time value of money implies:

2) Andy deposited $3,000 this morning into an account that pays 5 percent interest,
compounded annually. Barb also deposited $3,000 this morning into an account that pays 5
percent interest, compounded annually. Andy will withdraw his interest earnings and spend it
as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which
one of the following statements is true?
a) Barb will earn more interest the first year than Andy will.
b) Andy will earn more interest in year three than Barb will.
c) Barb will earn interest on interest.
d) After five years, Andy and Barb will both have earned the same amount of interest.
e) Andy will earn compound interest.

3) Which one of the following compounding periods will yield the smallest present value given
a stated future value and annual percentage rate?
a) annual
b) semi-annual
c) monthly
d) daily
e) continuous

4) Which one of the following has the largest future value if $1000 is invested today?
a) four years, with a simple annual interest rate of 10%
b) six years, with a simple annual interest rate of 8%
c) eight years, with a simple annual interest rate of 12%
d) seven years, with a compound annual interest rate of 11%
e) five years, with a compound annual interest rate of 9%

5) A monthly interest rate is typically multiplied by twelve and quoted as an annual rate. This
annual rate would be an example of which one of the following rates?
a) effective annual rate
b) annual percentage rate
c) periodic interest rate
d) compound interest rate
e) daily interest rate

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6) You are going to loan a friend $550 for one year at a 6 percent rate of interest, compounded
annually. How much additional interest could you have earned if you had compounded the
rate continuously rather than annually?
a) $0.84
b) $0.99
c) $1.01
d) $1.23
e) $1.28

7) The semiannual, 8-year bonds are selling at par and have an effective annual rate of 8.6285
percent. What is the amount of each interest payment if the face value of the bonds is
$1,000?
a) $41.50
b) $42.25
c) $43.15
d) $85.00
e) $86.29

8) Consider a mortgage loan of $200,000 with an APR of 6%, to be amortized over thirty years
with monthly payments. Out of the first month’s mortgage payment, _______ goes toward
principal repayment and _______ goes towards interest on the loan.
a) $199.10; $1,000.00
b) $1000.00; $199.10
c) $205.23; $973.51
d) $973.51; $205.23
e) $205.23; $1,000.00

9) An increase in which of the following will increase the current value of a stock according to
the dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend growth rate

a) I and II only
b) III and IV only
c) I, II, and III only
d) I, II, and IV only
e) I, II, III, and IV

10) Sessler Manufacturers made two announcements concerning its common stock today. First,
the company announced that the next annual dividend will be $1.75 a share. Secondly, all
dividends after that will decrease by 1.5 percent annually. What is the maximum amount

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 you should pay to purchase a share of this stock today if you require a 14 percent rate of
return?
a) $11.29
b) $12.64
c) $13.27
d) $14.00
e) $14.21

PART II: LONG PROBLEMS

11) Suppose that you are purchasing a home that costs $250,000. You will pay a 10% cash down
payment and mortgage the rest. Your 30-year mortgage will have a fixed annual rate (APR) of 6
percent and interest will be compounded monthly. Your monthly mortgage payment will be
$1,348.99. Your first monthly payment will include $1,125 in interest and $223.99 in principal.
For the second monthly payment, how much will be interest and how much will be principal?

12) You are looking at two savings accounts. One pays 5.25% APR with daily compounding. The
other pays 5.3% APR with semiannual compounding. Which account should you choose and
why?

13) You just received an insurance settlement offer related to an accident you had six years
ago. The offer gives you a choice of one of the following three offers:

You can earn 7.5 percent on your investments. You do not care if you personally receive the
funds or if they are paid to your heirs should you die within the settlement period.
a) What is the present value of each option?
b) Which option is the best choice and why?

14) Combined Communications is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 15 percent a year for the next 4 years and then
decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend
in the amount of $0.20 per share. What is the current value of one share of this stock if the
required rate of return is 15.5 percent?

15) When you were born, your favorite aunt promised to deposit $500 into a savings account
bearing a 5% compounded annual rate on each birthday, beginning with your first. You have
just turned 21 and want the money. However, it turns out that your aunt is sometimes
forgetful and deposited twice on each of your fifth and eleventh birthdays, but forgot to make a
deposit on your seventeenth birthday. How much is in the account right now? By how much
more or less is this than if your aunt had made the deposits correctly?