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Fin 1610 Mid-term test (Fall 2008): Total 9 pages Please answer all questions.

The following formulas may be needed. (1 + i ) n 1 1 (1 + i ) n n NW = A - L; FV = PV(1 + i ) . FV = PMT . PV = PMT . i i Liquid Assets to Take - Home Pay Ratio = Liquid Assets/ Take - Home Pay Liquidity Ratio = Liquid Assets/Cur rent Liabilitie s Debt Ratio = Total Liabilitie s/Total Assets Debt Service Coverage Ratio = Take - Home Pay/Debt Service Charges Bond value: 1 - (1 + r) -n Par value C C C Par value V0 = + +L + + =C . + n 1 + r (1 + r ) 2 r (1 + r ) n (1 + r ) n (1 + r ) Part A: Please show all steps for full credits in the following three questions. 1. Jessie and William are getting married. They are trying to buy a flat of $5,000,000. They have saved $250,000 as down-payment. They love each other so much that they want to get married as soon as possible. Sharon is the manger of HKBU bank, one of the top banks in the world. Sharon gives Jessie two plans of mortgage of $4,750,000. She can take a super- low annual interest rate of 2.8% with 1.5% fee (on $4,750,000) added to the mortgage in Plan A. She can also take the regular interest rate of 3.2% without fee in Plan B. The mortgage is paid and compounded monthly for 30 years. a. Please help Jessie and William to decide which mortgage plan is better financially. (10 marks) b. Suppose Jessie wants to have baby very soon (the earliest one year from today). She wants to sell this flat and move to a larger one after the baby is born. Which plan will be favored more by this possibility? Only the effect of this possibility is considered in the question. Please explain. (4 marks) Please answer question 5 in less than 60 words. 5. Alex is trying to persuade Belle to put $5Millions in the Principal-preserved Fund for 5 years. The fund will guarantee Belle to have at least $5 millions at the end of 5 years. If the stock market of Hong Kong goes up during these 5 years, she will get more money. The way the fund works is to invest $3.4 millions in 5-year zerocoupon bonds issued by Handsome Man Limited. At the end of five years (maturity), the fund will get exactly $5 millions (the par value of each bond multiplied by the number of bonds). Belle will not lose any money. The fund will put $1.6 millions into some investment which will increase in value if the stock market of Hong Kong goes up. These will be Belles extra return. Belle will pay The Principal-preserved fund a fixed commission (1%) for managing the money. Belle does not care about the opportunity cost of her $ 5 millions if no interest is paid. She does not care about the 1% commission. The only thing that she wants to make sure is the principal. She must get back at least $5 millions at the end of years. Alex assures Belle that she will have at least $5 millions for sure. Please help Belle to evaluate Alexs comment. (8 marks) Part B (20 questions of 2.5 marks each) : Please put your answers in the answer sheet readable by computer. Remember to write down the date and student number. 1. Tina's records show cash balance of $2,000 while the bank statement shows a balance of $1,800. The difference is most likely explained by 1

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a. unrecorded interest earned on the account. b. deposits made after the statement period. c. checks not cleared during the statement period. d. a statement period less than one month. An annuity is a. a sum received in the future. b. a sum earned in the future but received now. c. a series of unequal payments. d. a series of equal payments. A grace period on revolving charge accounts a. can eliminate all interest charges if the loan balance is fully paid each month. b. is equal to the time between when an installment payment is missed and the remaining balance on the loan becomes due. c. is the same for all credit cards issued by different companies. d. is usually equal to two billing periods. e. must be one month by law. The annual cost of going to university is about $60,000 per year now. With an annual inflation rate of 5%, the annual cost of going to university 20 years from now will be closest to: a. $ 159,000. b. $ 169,000. c. $ 179,000. d. $ 189,000. e. $ 199,000. Which of the following checks does not guarantee payment? a. A traveler's check b. A certified check c. A cashier's check d. A personal check with a restrictive endorsement Not included in this years test With a debit card, a. you can charge payments in excess of your line of credit. b. your purchases are not limited by the amount in your bank deposit. c. your purchases are immediately deducted from your bank deposit. d. your purchases are deducted from your bank deposit after a grace period. Alex said that all the following assets are liquid assets. A: Stocks of large companies which you have no trouble in buying and selling B: Stocks of small companies which you have trouble in buying and selling C: Cash in saving accounts D: Cash in checking accounts E: Cash in your pocket Which of the following statement is most likely to be correct? a. All are liquid assets. b. All except A are liquid assets. c. All except B are liquid assets. d. All except A and B are liquid assets. e. All except E are liquid assets. A positive contribution to savings can a. increase both assets and net worth.

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b. increase both assets and liabilities. c. increase net worth only. d. increase assets or liabilities only. Abbey had the following information about her charge activities in April: Beginning balance $900 April 10: purchase Twins concert ticket $400 April 20: make monthly payment $800 APR shown on the statement for April 30% Under the average daily balance method including current purchases, Abbey's interest for April will be closest to: a. $ 22.2. b. $ 24.2. c. $ 26.2. d. $ 28.2. e. $ 30.2. Joe is making $40,000 a month. The bank limits the monthly payment of a mortgage to 50% of the monthly income. Suppose the nominal rate of a 30-year mortgage is 6% with monthly payment and monthly compounding. The maximum amount of mortgage that Joe can get from the bank is closest to: a. $3,340,000. b. $3,440,000. c. $3,540,000. d. $3,640,000. Jane has a debt ratio of 0.25, which tells us that Jane a. is insolvent since the ratio is less than 1.0. b. could have $10,000 in total assets and $7,500 in net worth. c. has 25% of his income allocated to reducing debt. d. might have $2,500 in liquid assets and $10,000 in current debts. The following two items are from Marcia White's "Dining Out" expense category: (1) January monthly variance = $25 (favorable); (2) February cumulative variance = -$10 (unfavorable). If Marcia budgeted $85 a month for this activity, we know that she a. spent $60 in January and $95 in February. b. spent $60 in January and $120 in February. c. can bring the activity back within budget by spending $85 in March. d. has not budgeted properly. Which of the following items would not appear on income statement? a. Jewelry b. Credit card payments c. Rent expense d. Dividends e. Scholarships Which of the following is not a disadvantage of using credit? a. You will have less flexibility with future budgets. b. Credit may lead to overspending. c. There are costs associated with credit. d. When credit is used to purchase an item, your net worth falls by the amount borrowed. Three years ago, Nicole bought a custom- made bookcase to fit in the corner of her apartment. She paid $1,000 for it. To replace it today would cost $1,500; however,

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if she had to sell it, she believes she could get only $700. The appropriate balance sheet amount for the bookcase is a. $1,000. b. $1,500. c. $ 700. d. $1,200. The cumulative variances in incomes and expenses through November of Mikes budget are $8,000 and ($1000), respectively. The budgeted monthly income is $15,000 and the budgeted monthly expense is $12,000. The variances in incomes and expenses in December of Mikes budget are $1,000 and ($3,000), respectively Assume the budget is the same for all months. The actual saving for the whole year is closest to: a. $40,000 b. $41,000 c. $42,000 d. $43,000 e. $44,000

Fin 1610 Mid-term test (Spring 2008): Total 9 pages Part A: Please show all steps for full credits in the following three questions. 1. Yan Yan and David are getting married. They are trying to buy a flat of $5,000,000. They have saved $250,000 as down-payment. They love each other so much that they want to get married as soon as possible. Joyce is the manger of HKBU bank, one of the top banks in the world. Joyce gives Yan Yan two choices of mortgage. She can take a super- low annual interest rate of 2.8% with 1.5 points or take the regular interest rate of 3.2% without point. The mortgage is paid and compounded monthly for 30 years. Joyce offers to put the 1.5 pints into the mortgage to save cash now and they accept it. a. Please help Yan Yan and David to decide which mortgage plan is better financially. (14 marks) b. Yan Yan and David find out that interest payments of mortgages are taxdeductible. Which plan would benefit more from the tax deductibility initially, the plan with points but lower interest or the plan with no points but higher interest rate? Only the effect of tax deductibility is considered in the question. Please explain. (4 marks) c. Suppose Yan Yan wants to have baby very soon (the earliest one year from today). She wants to sell this flat and move to a larger one after the baby is born. Which plan will be favored more by this possibility? Only the effect of this possibility is considered in the question. Please explain. (4 marks) d. Yan Yan and David find out that they have to buy insurance if they borrow more than 70% of the flat price. They can pay the insurance premium in a lump sum (3.98% of the original principal balance). Alternatively, they can pay the insurance every year until the balance of the mortgage is less than 70% of the flat price. The premium is 1.9% for first year and 0.73% (also of the original principal balance) for renewal. Suppose they expect to have baby and sell the flat very soon. Which insurance plan (lump sum or yearly payments) will be favored more by this possibility? Only the effect of this possibility is considered in the question. Please explain. (4 marks) 2. Allan is considering whether he should rent or buy a flat after graduating from HKBU. He goes through the analysis the same way he was taught in FIN 1610.

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Basically, if he rents, he will invest the down-payment and savings each month from the lower rent in comparison to the higher mortgage payments. He calculates the future values of his investment at a future date. Then he compares that with the amount of money he will get after selling the house, of which the price will increase at the estimated appreciation rate, and paying back the remaining mortgage. He finds out that buying a flat will give him more money. a. Alex notices that the expected return of investing is higher that the appreciation rate of the flat price. He cannot understand why Allan should put money in a flat with lower expected return than the investment. He asks Michael, an expert in financial planning. Michael gives Alex two reasons. Please explain the two reasons without using any mathematics in 60 words or less. (8 marks) b. Suppose Allan wants to save money but has difficulty. He just spends every dime he has. Which plan (buying or renting) is better? (4 marks) Not included in this years test

Part B (20 questions of 2.5 marks each): Please put your answers in the answer sheet readable by computer. Remember to write down the date and student number. 1. Tina's records show cash balance of $2,000 while the bank statement shows a balance of $1,800. The difference is most likely explained by a. unrecorded interest earned on the account. b. deposits made after the statement period. c. checks not cleared during the statement period. d. a statement period less than one month. Adding together all 12-month cumulative income and expense variances should equal a. zero. b. actual savings (or dissavings). c. planned savings (or dissavings). d. the difference between planned saving and actual saving. A grace period on revolving charge accounts a. can eliminate all interest charges if the loan balance is fully paid each month. b. is equal to the time between when an installment payment is missed and the remaining balance on the loan becomes due. c. is the same for all credit cards issued by different companies. d. is usually equal to two billing periods. e. must be one month by law.

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Abbey had the following information about her charge activities in April: Beginning balance $900 April 10: purchase Twins concert ticket $400 April 20: make monthly payment $800 APR shown on the statement for April 30% Under the average daily balance method including current purchases, Abbey's interest for April will be closest to: a. $ 22.2. b. $ 24.2. c. $ 26.2. d. $ 28.2. e. $ 30.2. Not included in this years test. Which of the following checks does not guarantee payment? a. A traveler's check b. A certified check c. A cashier's check d. A personal check with a restrictive endorsement Not included in this years test. The "due on sale clause" requires a. the buyer to pay the entire amount due at closing. b. the seller to pay all of the buyers points at closing. c. repayment of the balance on the home loan when the property changes hands. d. the seller to pay all property taxes that have become due between the last tax assessment and the sale of the home. Which does not make owning a home relatively more attractive than renting? a. An increase in the rate of return on financial investments. b. An increase in your marginal tax rate. c. An increase in the expected future price of housing. d. A reduction in mortgage interest rates. e. A reduction of property tax or rates The cumulative variances in incomes and expenses through November of Mikes budget are $8,000 and ($1000), respectively. The budgeted monthly income is $15,000 and the budgeted monthly expense is $12,000. The variances in incomes and expenses in December of Mikes budget are $1,000 and ($3,000), respectively Assume the budget is the same for all months. The actual saving for the whole year is closest to: a. $30,000 b. $31,000 c. $32,000 d. $33,000 e. $34,000 Which of the following is not a characteristic of home equity loans (mortgage)? a. They may generate tax-deductible interest payments. b. Repayment may be stretched out over many years. c. The proceeds may be used to finance consumption of consumer goods. d. They carry higher interest rates than consumer loans. Which of the following loans (with same maturities) normally carries the highest interest rate?

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a. U.S. government loans. b. exchange rate bills. c. mortgage loans in Hong Kong d. personal loans in Hong Kong e. credit card loans in Hong Kong With a debit card, a. you can charge payments in excess of your line of credit. b. your purchases are not limited by the amount in your bank deposit. c. your purchases are immediately deducted from your bank deposit. d. your purchases are deducted from your bank deposit after a grace period. Alex said that all the following assets are liquid assets. A: Stocks of large companies which you have no trouble in buying and selling B: Stocks of small companies which you have trouble in buying and selling C: Cash in saving accounts D: Cash in checking accounts E: Cash in your pocket Which of the following statement is most likely to be correct? a. All are liquid assets. b. All except A are liquid assets. c. All except B are liquid assets. d. All except A and B are liquid assets. e. All except E are liquid assets. Suppose Shings increase in his incomes was below inflation rate (5%) buy the increase in his net worth was above inflation. Alex asked you why this could happen. He wrote down the following reasons as proposed explanation: A: Shing spends less. B: Shings investment has very good performance. C: Someone has given Shing a lot of money. D: One of his debts is forgiven. Which of the following statement is most likely to be correct? a. All the above can explain Alexs question. b. All the above except A can explain Alexs question. c. All the above except B can explain Alexs question. d. All the above except C can explain Alexs question. e. All the above except D can explain Alexs question. Which of the following items would not appear on income statement? a. Jewelry b. Credit card payments c. Rent expense d. Dividends e. Scholarships Three years ago, Nicole bought a custom- made bookcase to fit in the corner of her apartment. She paid $1,000 for it. To replace it today would cost $1,500; however, if she had to sell it, she believes she could get only $700. The appropriate balance sheet amount for the bookcase is a. $1,000. b. $1,500. c. $ 700.

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d. $1,200. An opportunity cost of renting a home rather than buying it is a. the price of the home. b. the monthly rent. c. potential price appreciation of the home. d. putting up with other renters' noise. 19. A positive contribution to savings can a. increase both assets and net worth. b. increase both assets and liabilities. c. increase net worth only. d. increase assets or liabilities only. 20. Jane has a debt ratio of 0.25, which tells us that Jane a. is insolvent since the ratio is less than 1.0. b. could have $10,000 in total assets and $7,500 in net worth. c. has 25% of his income allocated to reducing debt. d. might have $2,500 in liquid assets and $10,000 in current debts. Fin 1610 Mid-term test (Spring 2009): Total 9 pages 1. Karen and Roy are getting married. They are trying to determine whether to rent or to buy a flat. The current rent is about $9,000 per month for the flat they like. For simplicity, assume that they can sign a contract to lock in the same rent for four years with payment every month. In most contracts signed in Hong Kong, the first year is binding. But after the first year, the tenants can leave the flat with one months notice without any penalty. They have to pay the real-estate agent commission equal to one months rent. Alternatively, they can buy a flat. The price is about $4,000,000. They have to pay 1% of the flat price as a commission to the real-estate agent in cash. They can put down 5% of the flat price as down-payment and borrow the rest with a 30-year mortgage at a nominal annual rate of 4.8% with monthly payment. Assume flat price is expected to appreciate by 4% a year. They will invest the money they have in a mutual fund with an expected return of 8% per year. Suppose they plan to go back to the mainland four years later. They will sell the flat (they have to pay 1% of the flat price as commission again). Please help Karen and Roy to decide which plan is better financially. You have to show all your works for full credit. (10 marks) 2. Andy is a very careful person. He checks his credit card statement every month. His beginning balance (February 1) was $500 and he made a $300 payment on February 12. He also charged purchases of $200 on February 6, $100 on February 14, and $150 on February 25. The APR is 30%. Interest was charged using the average daily balance method, including current purchases. Please calculate the interest for February. (6 marks) 3. In this course, we learn about the two types of ratios to evaluate a persons financial strength and weakness. Actually this analysis also applies to corporation. Last year the global financial markets were shocked when the U.S. government was forced to help American International Group (AIG). Please first explain the two types of problems AIG faced corresponding to the two types of ratios we discussed in class and their causes. Then please describe what the U.S. government did to resolve these two problems. (18 marks) 4. Hillary wants to invest her childrens education fund in an annuity with annual investment of $36,000 for 20 years, about the time her children will go to college. She gets one proposal from Jason and one from Terri. Jason offers Hillary an interest rate of 5.5% (compounded annually). Terri offers Hillary an interest rate of 18.

5% (compounded annua lly). Hillary remembers Alexander the Great, her professor in HKBU, mentioned that investors should read the fine points. She finds out that Jason charges 3% commission for each payment in the future 25 years. Terri charges only 2% commission on each payme nt. All commissions are paid at the time of investment. Moreover, Hillary has to pay Jason now a fee equal to 3% of the total nominal amount of investment in 20 years. Hillary knows that you are students in HKBU, famous for financial analysis. Please help Hillary to choose the better investment for her. Assume the above two deals are the only alternatives Hillary has. (10 marks) 5. a. In Question number 4, suppose Hillary is allowed to stop the annuity investment any time without any penalty. She will get all her money back with the promised interest rate. Whose proposal is more attractive in comparison to the case where Hillary cannot terminate the annuity investment? Assume Hillary has no difficulty in making the promised investment and liquidity is not a concern. (5 marks) b. Assume Hillary has no difficulty in making the promised investment and liquidity is not a concern. The need to invest as well as her investment horizon remains unchanged. Please list one financial reason why Hillary may want to stop the investment in the above annuity earlier. (3 marks) 6. Please comment on what mistakes are made in the following cases from the perspective of financial planning (or the material we have discussed in class, if any). (10 marks) a. Alex plans to retire in one year. Currently, he has all his retirement money investing in the stock market. That is the only place where he can get high enough return to catch up with his brothers wealth. b. Afung, Alexs friend, is much younger than Alex. He knows a little bit about risk reduction. He plans to invest in stocks, bonds and houses of six different countries. However, growing up from a broken family, he does not trust anyone. He will do all the researches and make all the investment decisions by himself. c. FungA, another of Alexs friend, is an old man. He trusted his friends in the bank. They were very honest and nice when he first became their customers years ago. He was persuaded by the bankers to put his money in a C.D. linked to the flooding situation of China in the coming year. He does not have a need to hedge against the flooding in China and does not know much about the weather situation in China. d. Peggy declines a part-time job with very good pay but not much experience that might benefit her in her future career because it will interfere with her study in HKBU. e. Alex is going to travel to a small country in Africa. He plans to bring a cashier check issued by Small Bank, a very small bank in Hong Kong, so that he can buy things. Part B: Short questions (4 marks each) 7. Recently the case of mortgages of negative equity has increased dramatically in Hong Kong. Please explain what mortgages of negative equity are and what causes mortgages to have negative equity. Please answer in less than 60 words. 8. The following table gives the values of Alexs income, asset and liability. The inflation in 2008 was 10%. Please comment on Alexs financial situation and reconcile any seemingly contradiction. He did not get any gift of substantial value in 2008.

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2007 2008 Annual income $200,000 $210,000 Assets at year end $3,000,000 $8,300,000 Liabilities at year end $1,000,000 $6,000,000 Crystal put in $500,000 in a 3-year fixed rate (5%) deposit in a bank yesterday. Today she finds that she needs the money for an emergency. The bank tells her that she cannot withdraw money from the bank since the certificate is 3-year. But they are kind enough to arrange someone who is willing to pay a fair price to buy this 3year C.D from her. Suppose the interest rate on a new 3-year C.D. is now 7%. Crystal gets a fair price for her 3-year certificate deposit. Should the fair price be higher or lower than $500,000? Please explain the intuition (without any mathematics) in less than 60 words. Ignore any commission. Janet is in a similar situation as Crystal in Question 10, except that her C.D. is a 10-year C.D. Should the fair price of Janets C.D. be higher or lower than that of Crystals C.D.? Please explain the intuition in less than 60 words (without any mathematics). Iris is a professional investor in real estate. She has good insight to buy flat at a very low price and sell it in a short period of time for a profit. The key of her success is the timing. She has to buy and sell the flat in a very short period of time before the housing market changes. Now she is considering to using the mortgage insurance to boost up her buying power. The bank asks her whether she wants to pay the insurance in a single payment or annually at renewal. Please help Iris to decide which scheme will best fit her situation and why.

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