ou notice the following APR rates offered by your local banks. All are FDIC insu
ID: 2799776 • Letter: O
Question
ou notice the following APR rates offered by your local banks. All are FDIC insured, which is offering you the highest return? Bank APR% 5.000% 4.925% 4.900% 4.850% Annually Semi-annually Monthly Daily a) Bank A b) Bank B c) Bank C d) Bank D 3) Sweet Treats common stock is currently priced at $18.53 a share. The company just paid $1.25 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. Based on the Gordon (or Constant) Growth Model what is this firm's cost of equity (i.e. discount rate expected by investors) a) 6.03% b) 6.18% c) 8.47% d) 9.41% e) 9.82% Suppose that you wish to buy a new Honda Accord which costs $24,995. If you put down 10% cash and finance the rest at 3% APR for the next 60 months, paid at the end of each month, what will your monthly payments be? 4) a) $404.21 b) $449.13 c) $812.83 PagExplanation / Answer
2) Bank C
Effective Annualized Rate (EAR) = (1 + APR/n)^n - 1
For Bank A, EAR = 5%, for Bank B, EAR = (1 + 4.925%/2)^2 - 1 = 4.99%
For Bank C, EAR = (1 + 4.9%/12)^12 - 1 = 5.01%, For Bank D, EAR = (1 + 4.85% / 365)^365 - 1 = 4.97%
3) 9.41%
Cost of equity, r = D0 x (1 + g) / P + g = 1.25 x (1 + 2.5%) / 18.53 + 2.5% = 9.41%
4) 404.21
On a financial calculator N = 60, I/Y = 3%/12, PV = 24,995 x 90%, FV = 0 => Compute PMT = $404.21
5) 403.21
Compute PMT with BEGIN mode on a calculator
6) b is correct
As Bond B has higher duration, the change in its price will be higher than that of Bond A.
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