Answer Key

October 18, 2022

Practice problems Chapter 4 8 and 9

1. K ishna want to save sufficient funds to generate an annual cash flow of 40,000 a year for 25
years as retirement income.. K ishna cu rently have no retirement savings but plan to save an
equal amount each year for the next 40 years until his retirement. How much he need to save
each year if he can ea n 8% on savings?
1 POINT

A 3146.32

B 1648.25

C 3333.33

D 2889.04

E 2640.85

2. Su ya will receive a 5-year annuity of 1200 a year, with the first annuity occu ing at date 5.
What is the value of this annuity to him today at a discount rate of 9 %
1 POINT

A 3961.8

B 4209.19

C 3033.61

D 4667.58

E 3306.63

3. Your Deposit of Rs. 120,000 in a bank account has grown to 140,000 in six months. Calculate
EAR
1 POINT

A 19.62%

B 36.11 %

C 33.33%

D 16.67%
4. A stream of Cash Flows that grows at a constant rate forever is called
1 POINT

A Annuity

B Growing Annuity

C Perpetuity

D Growing Perpetuity

5. As frequency of Compounding increases future value of cash flow increases

1 POINT

T T ue

F False

6. Rama has a 5 year, 8 percent annual coupon bond with 1000 face value. K ishna has a 10
year, 8 percent annual coupon bond with 1000 face value. Both bonds cu rently has a yield to
matu ity of 8 percent. Which one of the following statements is co rect if the Market Interest
rates decreases to 7 percent
1 POINT

A Both bonds will decrease in value by 4.1%

B Rama's Bond will increase in Value by 52.10

C K ishna's Bond will increase in value by 4.61 %

D K ishna's Bond will increase in value by 6.87 percent

E Rama's Bond will increase in value by 41

7. If you are planning to save in recu ing deposit for the next 10 years. If the interest rate is 8%
per annum. How much do you have to deposit each year in order to have Rs. 12,00,000 at the
end of 10th year?
1 POINT

A 120,000

B 44,467

C 555,832

D 60,000

E 82,835
8. The market p ice of a bond increases when the
1 POINT

A Face value decreases

B Coupon Rate Increases

C Discount Rate decreases

D Par value decreases

E Coupon is paid annually rather than semi annually

9. Rs. 100 invested today will become how much in 1000 Years if rate of interest is 10%
1 POINT

A 10,000

B 1,378,061

C Too big to fit in the calculator

D 1000

10. Xiomi Issued 15 year bond Face Value=100 ten years ago at a coupon rate of 7% for Rs. 97.
The bonds make semi-Annual Payments. What must be the market p ice of the bond Today if
yield to matu ity is 9%.
1 POINT

A 92.08

B 100

C 98.02

D 102.04

11. What is the p ice of a 10 year pure discount bond paying Rs. 10,000 at matu ity if the YTM is
5% per annum and interest is compounded semi-annually
1 POINT

A 613.91

B 6102.71

C 6139.10

D 610.27
12. ITC last paid a 1.5 per share annual dividend. The company is planning 1.5, 1.75 and 1.8 per
share over the next three years respectively. After that the dividend will be a constant 2.00
per share per year. What is the market p ice of this stock if the market rate of retu n is 15 %
1 POINT

A 18.19

B 12.58

C 8.49

D 11.57

E 9.09

13. Unacademy is a a new age technology fi m. The company is planning on increasing its annual
dividend by 20 percent next year and then decreasing the growth rate to a constant of 5 %
per year. The company just paid its annual dividend of Rs. 2 per share. What is the cu rent
value of the share if the required rate of retu n is 10%
1 POINT

A 48

B 24

C 13.33

D 52.58

E 50.4

14. ACC is about to pay a dividend of Rs 60 in the next year. The dividends are expected to grow
at a constant rate of 5 % per year per year. If investors require a 12% rate of retu n on the
stock. what will be the p ice of the stock four years from now?
1 POINT

A 826

B 950

C 300

D 400

E 1042

15. Vishwanath received $7,500 today and will receive another $5,000 two years from today. He
will invest these funds when he receives them and expects to ea n a rate of retu n of 11.5
percent. What value does he expect his investments to have five years from today?
1 POINT

A 19,856.13

B 18758.43

C 20,314.00

D 19,904.34
16. M&M is growing quickly. Dividends are expected to grow at a rate of 15 % for three years and
7 % from year four onwards, forever. The company just paid dividend of Rs. 4.00. What is the
cu rent p ice of the stock if the required rate of retu n on the stock is 15%?
1 POINT

A 53.5

B 65.5

C 100

D 58

17. Assume that your job pays you only once a year for all the work done over the previous
12months and you have just received Rs.10000 as the sala y for previous 12 months. You are
planning to save 10% of your sala y from the next year onwards for next 30 years after which
you would retire. If your sala y grows by 5% eve y year, the value of savings at the end of 30
years is ________. Assume your savings would ea n a rate of 10% per year
1 POINT

A 137838

B 275676

C 15798

D 257,676

18. Micro-finance company is offe ing weekly loans such that Rs. 110 needs to be paid back for
eve y Rs.100 bo rowed? Compute the Effective annual rate being charged by the company?
Also compute the Annual percentage rate? Assume 52 weeks in a year)

1 POINT

A APR 520% and EAR is 14104 %

B APR is 120% and EAR is 214 %

C EAR is 520% and APR is 14104%

D EAR is 120% and APR is 214 %

19. Your relative has retired and has received a lump sum payment of Rs.1cr from his employer.
He has deposited the money in the bank paying 10% rate per annum. What amount can he
withdraw each month (assume that withdrawal happens at the end of a month) such that the
entire corpus is consumed in 30 years?
1 POINT

A 87,757

B 1,060,792

C 59,955

D 73,376
20. Assume that your job pays you only once a year for all the work done over the previous
12months and you have just received Rs.5000 as the sala y for previous 12 months. You are
planning to save 10% of your sala y from the next year onwards for next 30 years after which
you would retire. If your sala y grows by 5% eve y year, the value of savings at the end of 30
years is ________. Assume your savings would ea n a rate of 10% per year

1 POINT

A 137,838

B 110,270

C 175,141

D 153,827

21. You want to bo row Rs. 500,000 from the bank to buy a new car. You need to make five
annual payments to retu n the loan. The bank is charging a rate of11%. The annual payment
that you need to make is __________ (payment is made at the end of each year)

1 POINT

A 135,285

B 131,898

C 125,228

D 143,331

22. You received a dividend of $2 today, and dividends are expected to grow at 5% forever. If
the discount rate is 10%, what is the present value of this promised dividend stream?

1 POINT

A 40

B 42

C 45

D 34.67

23. A stream of cashflows that grows at a constant rate for a fixed number of pe iods is Growing
Perpetuity
1 POINT

T T ue

F False
24. The relationship between bond p ices and interest rates is directly propo tional. That is if the
interest rates move up then bond p ices also move up.
1 POINT

T T ue

F False

25. You received a dividend of $4 today, and dividends are expected to grow at 10% forever. If
the discount rate is 20%, what is the present value of this promised dividend stream?
1 POINT

A 40

B 44

C 20

D 24

26. You want to bo row Rs. 500,000 from the bank to buy a new car. You need to make five
annual payments to retu n the loan. The bank is charging a rate of10%. The annual payment
that you need to make is __________ (payment is made at the end of each year)
2 POINTS

A 131,898

B 125,000

C 141,448

D 100,000

27. Byjus is growing quickly. Dividends are expected to grow at 25 % for the next 5 years and 15
% from year 6 onwards. The company just paid a dividend of Rs. 10. If the discount rate is
25%, what is the cu rent share p ice of byjus.
2 POINTS

A 165

B 100

C 125

D 200
28. What is the p ice of a 10 year pure discount bond paying Rs. 1000 at matu ity if the YTM is 5%
per annum and interest is compounded annually
1 POINT

A 614

B 61.4

C 6140

D 610

29. Compute the p ice of a bond which matures in 5 years with a coupon rate of 10%. The YTM of
bond is 12%. The interest is paid annually. The face value of the bond is Rs. 1000.
2 POINTS

A 927

B 1000

C 1075

D 900

30. Find the Effective Annual Rate EAR of an 20% APR loan that is compounded monthly.

2 POINTS

A 21.94 %

B 20%

C 18.05%

D 23.05%

31. Rama Receives an EQUAL amount of 2500, payable eve y two years, for the next ten years.
The next payment is due two years from today. What is the present value of this cashflow at
discount rate of 10% ?
1 POINT

A 9,416.75

B 10,466,67

C 7,314.96

D 8949.60
32. A Growing Perpetuity is cu rently valued 5000. The next year cashflow will be 425 and the
discount rate is 9%. What is the rate of growth?
1 POINT

A 2.8%

B 0.5%

C 1%

D 2%

E Cannot be Dete mined

33. Your neighbo ing Pawn Shop offers you "Four for five or I knock your doo ". This means you
get Rs. 4 Today and repay Rs. 5 when you get your Paycheck in one month. What is the
Effective Annual Rate EAR
1 POINT

A 1335.2%

B 1455.2%

C 25%

D 300%

34. The Regulato y Body in India pe taining to the public issue of shares is
1 POINT

A RBI

B SEBI

C SEC

D IRDA

35. All else remaining the same, A coupon bond that is selling at a discount, must have
1 POINT

A A coupon rate that is equal to Yield to Matu ity

B A Market P ice that is more than par value

C Semi-Annual Interest Payments

D Yield to Matu ity that is less than the coupon rate

E A Coupon Rate that is less than the Yield to Matu ity

36. Burger King has issued a Rs. 1000 Face value bond matu ing after 3 years at a coupon of 8%
payable semi-Annually. If the YTM is 16 % then the p ice of the bond is?
1 POINT

A 820

B 815

C 1220

D 1210

37. What is the p ice of a 10-year pure discount bond paying Rs. 1000 at matu ity if the YTM is
6% and interest is compounded semi-annually?
1 POINT

A 1000

B 554

C 558

D 614

38. ABC Limited issues debentures of face value 100 bea ing a coupon rate of 10% payable
annually with a matu ity of 6 years. Three years have passed since the debentures were
issued. If the debentures are redeemed at a premium of Rs. 5 to the face value at matu ity
then compute the p ice of the bond if yield to matu ity is 10%
1 POINT

A 100.00

B 103.76

C 97.40

D 102.82

E 98.60

39. Your Company is going to pay 0.3, 0.50 and 0.80 a share over the next three years
respectively. After that the company has stated that the annual dividend will be 1.25 per
share indefinitely. What is the stock wo th today if the discount rate is 13.5 %.
1 POINT

A 7.53

B 5.06

C 6.78

D 9.48

E 8.02
40. A constant stream of cash flows for a finite time pe iod is called
1 POINT

A Annuity

B Growing Annuity

C Perpetuity

D Growing Perpetuity

41. As Frequency of Compounding increases future value of cash flows decreases

1 POINT

T T ue

F False

42. If you were to invest 10,000 eve y year for 10 years. What is the future value if interest rate
is 5%.
1 POINT

A 77,217

B 125,779

C 84,333

D 115,769

43. Rs. 1743 invested today will become how much in 100 Years if rate of interest is 10%
1 POINT

A 4,520

B 24,019,607

C 24,19,607

D Too Large to fit into the Calculator

44. TESCO recently paid Rs. 110 as its annual dividend. Future dividends are projected at 110, 105
and 100 over the next three years, respectively. After that the dividend is expected to
decrease by 2 percent annually forever. What is one share of this stock wo th if the required
rate of retu n is 15 %.
1 POINT

A 619.85

B 559.50

C 817.27

D 570.13
45. HDFC is about to pay a dividend of Rs. 60 next year. The dividends are expected to grow at a
constant rate of 5 % per year indefinitely. If investors require a retu n of 12% then what will be
the p ice of the stock
1 POINT

A 857

B 900

C 801

D 920

46. You Bo row 200,000 to buy a house. The interest rate is 6.00 % per annum. You are going to
repay the loan amount over 30 years in monthly instalments. If you repay the loan as per the
agreement What is the total interest you will pay?
1 POINT

A 231,676

B 207,764

C 211,084

D 186,580

47. Byjus is growing quickly. Dividends are expected to grow at 25 % for the next 5 years and 15
% from year 6 onwards. The company just paid a dividend of Rs. 10. If the discount rate is
30%, what is the cu rent share p ice of byjus.
1 POINT

A 107.53

B 100

C 120.35

D 84.63

48. A 12-year, 5 percent coupon bond pays interest annually. The bond has a face value of
$1,000. What is the percentage change in the p ice of this bond if the market yield ises to 6
percent from the cu rent level of 5 percent?
1 POINT

A 8.38%

B 8.38%

C 4.26%

D 9.1%

E 9.1%