Exam 2
1000
10 year bond, CR=10%, coupon paid annually, current interest rate 10%, what is the bond price?
1064. 18
10 year bond, CR=10%, coupon paid annually, current interest rate 9%, what is the bond price?
941
: 10 year bond, CR=10%, coupon paid annually, current interest rate 11%, what is the bond price?
Bonds
A bond is a long term contract between a borrower and lenders where the borrower agrees to make payments of interest and the principal on specific dates
True
An annuity is a series of equal payments made at fixed equal-length intervals for a specified number of periods
PV
Bond price (value)
True
Both the timing and the amount of cash flows that come from an investment determine its desirability
Annuity due
By definition, what type of annuity best describes payments such as rent and magazines subscriptions (assuming the costs do not change over time)?
12.38%
CR =10%, coupon paid annually, 20-year bond remaining life is 9 years, bond price = 875, find Yield to maturity
1021.33
CR =6%, i = 5.4%, 4-year bond, bond price?
annual coupon
CR x par value
True
Compounding is the process of converting today's values, which are termed present value, to future value.
Bond Borrowers
Corporations Government government agents
a. $5,526 b. $784 c. $1,400 d. $1,469 - correct answer
Determine how much $1,000 deposited in a savings account paying 8% compounded annually will be worth after 5 years.
Daily compounding
Everything else equal, which of the following conditions will result in the lowest present value of an amount to be received in the future?
Present value of an annuity
Finding the discounted value of $1,000 to be received at the end of each of the next five years requires calculating the
Present Value
Holding all other variables constant, an increase in the interest rate will cause to decrease.
Annuity payment Rate of interest Number of periods All of the above are correct
Holding all other variables constant, an increase in the will increase the future value of an annuity.
a. $909.09 b. $900.00 c. $907.00 - correct answer d. $950.00
How much must be invested today to have $1,000 in two years if the interest rate is 5%?
a. $240.42 b. $263.80 - correct answer c. $300.20 d. $315.38 e. $346.87
If a 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment?
In bonds, the expected cash flows are predictable.
Interest payments are fixed, occurring at regular intervals. Principal is returned along with the last interest payment. Bond value (price) = PV (coupon payments) +PV (the par value)
nominal rate
Interest rates are quoted by stating the followed by the compounding period.
Subordinated debenture
Lower in priority than senior debt
a. higher, higher b. lower, higher c. higher, lower - correct answer d. lower, lower
More frequent compounding results in future values and present values than less frequent compounding at the same nominal interest rate.
the annual nominal rate of interest the number of compounding intervals per year
The annual effective rate of interest is a function of
True
The difference between an ordinary annuity and an annuity due is that each of the payments of the annuity due earns interest for one additional year (period).
False
The effective annual rate is always greater that the simple rate as a result of compounding effects.
the smaller the present value of a future sum of money
The higher the rate of interest
False
The lower the interest rate, the less money you have to put in the bank today have a given amount at some point in the future.
greater the effective interest rate
The more frequent the compounding the
ordinary annuity
The payment or receipt of equal amounts, at the end of a series of equal periods, for a specified amount of time is called a(n)
- The sum which if deposited today will grow into the future amount. - Referred to as the discounted value of the future amount. - always smaller than the future amount, for positive interest rates. - All of the above are correct
The present value of a future amount is
- Is equal to the sum of the present values of each period's cash flow - has a future value (as an amount) equal to the future value of the annuity - has a future value (as an amount) equal to the sum of the annuity's cash flow - All of the above are correct
The present value of an annuity
a sum of money in hand today is worth more than the sum of money in the future & a sum of money in the future is worth less than the sum in hand today
The principle behind time value of money is based on the fact that:
discounting
The process of finding present values is frequently called
False
The time value of money means that a dollar today is worth less than a dollar at any time in the future
equal to 10 percent
What is the effective annual return (EAR) for an investment that pays 10 percent compounded annually?
perpetuity
What is the term used to describe an annuity with an infinite life?
a. 13% b. 14% c. 15% - correct answer d. 16%
Which of the following interest rates will come closest to doubling invested money in five years?
end-of-period payments
Which of the following phases would not we utilized if the payments were an annuity due?
- an increase in the interest rate - an increase in the amount - an increase in the time until future value is received - all of the above are correct
Which of the following would increase the future value of an account?
a. 8.65% b. 26.00% c. 8.00% - correct answer d. 6.87%
Your bank balance is exactly $10,000. Three years ago you deposited $7,938 and have not touched the account since. What annually compounded rate of interest has the bank been paying?
a. $6,050 b. $0 c. $312 - Correct answer d. $220
Your local bank offers 4-year certificates of deposit (CDs) 12% compounded quarterly. How much additional interest will you earn over 4 years on a $10,000 CD that is compounded quarterly, compared with one that is compounded annually?
secured bonds
bonds backed up by the value of specific assets, e.g. mortgage bonds
Zero coupon bonds
bonds that pays no annual interest, but is sold at a discount below the par value
security values
equal to the present value of its expected cash flows.
time value money
is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
indenture
legal binding agreements between the borrowing company and its bondholders
convenants
lists what the borrowing company can do and cannot do.
N
number of periods
FV
par value
PMT
period coupon payment
I/Y
period rate (% number)
par value
the principal, by default 1000
debenture
unsecured bonds with a higher interest rate