Multiple Choice Answers

You plan to invest an amount of money in five-year certificate of deposit (CD) at your bank. The stated interest rate applied to the CD is 12 percent, compounded monthly. How much must you invest if you want the balance in the CD account to be $8,500 in five years?
A. $4,678.82
B. $4,823.13
C. $13,600.00
D. $14,979.90
E. $7,589.29

You want to buy a Nissan 350Z on your 27th birthday. You have priced these cars and found that they currently sell for $30,000. You believe that the price will increase by 5 percent per year until you are ready to buy. You can presently invest to earn 14 percent. If you just turned 20 years old, how much must you invest at the end of each of the next 7 years to be able to purchase the Nissan in 7 years?
A. $4,945.57
B. $3,933.93
C. $7,714.72
D. $3,450.82
E. $6,030.43

Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 2-year Treasury bond is 10.5 percent and the rate on a 1-year Treasury bond is 12 percent, what rate of interest should you expect on a 1-year Treasury bond one year from now?
A. 9.0%
B. 9.5%
C. 10.0%
D. 10.5%
E. 11.0%

Which of the following statements is correct?
A. For the most part, our federal tax rates are progressive, because higher incomes are taxed at higher average rates.
B. Bonds issued by a municipality such as the city of Miami would carry a lower interest rate than bonds with the same risk and maturity issued by a private corporation such as Florida Power & Light.
C. Our federal tax laws tend to encourage corporations to finance with debt rather than with equity securities.
D. Our federal tax laws encourage the managers of corporations with surplus cash to invest it in stocks rather than in bonds. However, other factors may offset tax considerations.
E. All of the above statements are true.

Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.)
A. 12.0%
B. 16.0%
C. 13.5%
D. 10.5%
E. 14.0%