F300 Exam 2

The question "How much will I have in my account at a specific point in the future, given a specific interest rate?" is best answered by which form of the TVM equation?

FV = PV × (1 + r)^n

The frequency of default on a home loan is ________ the frequency of default on a credit card.

much lower than

The ________ is the market of first sale in which companies first sell their authorized shares to the public.

Primary Market

The ________ is a market derived interest rate used to discount the future cash flows of the bond.

Yield to maturity

Bonds are different from stocks because ________.

bonds promise fixed payments for the length of their maturity

A company selling a bond is ________ money.

borrowing

30-year corporate bond yield > 30-year T-bond yield

Credit card rates > auto loan rates

Which of the following actions will DECREASE the present value of an investment?

Decrease FV

The Department of the Treasury offers three types of "bonds" for sale: Treasury bills, Treasury munis, and Treasury bonds.

False

Treasury notes and bonds are zero-coupon bonds that sell at a discount while Treasury bills have coupon payments.

False

When interest rates are stated or given for loan repayments, it is not assumed that they are annual percentage rates (APRs) unless specifically stated otherwise.

False

When solving for a present value, the interest rate is commonly referred to as the compound rate, but when solving for the future value, the interest rate is called the discount rate.

False

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

Fixed-income

Which of the statements below is NOT correct?

If two investments have the same expected return, the investment with the greater risk is preferred.

the phrase "price to rent money" is sometimes used to refer to ________.

Interest Rates

Your company is about to issue new bonds. The investment bank managers recommend issuing the bonds with a coupon rate of 5.0% when comparable bonds have a yield to maturity of the same 5.0%. You already know the initial market price of these bonds. What is it?

1000

In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds, which of the below statements is FALSE?

A stock's final sale is fixed in time on its maturity date.

Which of the following actions will INCREASE the present value of an investment?

All above, Decrease FV, R / increase n

See the details on the two bonds below. Which one has the lowest price? Bond A: YTM = 3.50%; coupon = $80 Bond B: YTM = 4.25%; coupon = $40

B

Which of the following types of bonds may the issuer buy back before maturity?

Callable bond

If we want to get some idea about a/an ________ over time between two specific assets, we can compare the returns on top-rated corporate bonds and U.S. government bonds.

Default Premium

The ________ compensates the investor for the additional risk that the loan will not be repaid in full.

Default Premium

Present value calculations do which of the following?

Discount all future cash flows back to the present

The ________ are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets.

Equity Markets

The holder of preferred stock is entitled to a constant dividend ________.

Every Period

Consider the TVM equation: An increase in the present value will decrease the future value, other things remaining equal.

False

What type of loan makes interest payments throughout the life of the loan and then pays the principal and final interest payment at the maturity date?

Interest-only loan

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

Long-term Debt

Which of the statements below is TRUE?

Private companies can go public by choosing to sell stock to attract permanent financing through equity ownership of the company.

________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.

Risk

Zero-coupon U.S. Government bonds are known as ________.

STRIPS

The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States. Rank the average returns from the highest to lowest over this time period.

Small-company stocks, large-company stocks, long-term government bonds, 3-month U.S. Treasury bills

The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States. Rank the average standard deviation ( measure of risk) from the highest to lowest over this time period.

Small-company stocks, large-company stocks, long-term government bonds, 3-month U.S. Treasury bills

"Junk" bonds are a street name for ________ grade bonds.

Speculative

Both beta and standard deviation are measures of risk. Which of the statements below best describes the differences between a stock's beta and the standard deviation of its returns?

Standard deviation measures stand alone risk - the risk associated with stock returns when considered on their own. Beta measures a stock's variability relative to the variability of the overall market.

A typical US corporate bond you have been studying has a current market price of $1,094.57. What else do you already know this bond?

The coupon rate must be greater than the yield to maturity.

Which of the following investments is considered to be default risk-free?

Treasury Bills

The Rule of 72 is a rule of thumb for estimating the length of time necessary to double your money, given an interest rate.

True

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.

Yield to maturity

Stocks differ from bonds because ________.

all of the above, firms pay bond cash flows prior to paying taxes while stock cash flows are after tax the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase bond cash flows are known while stock cash flows are uncertain

The measure of systematic risk is called ________.

beta

Amortization tables are common and can be used for all but which of the following?

car loans, mortgage loans, consumer product loans

relationship between yield to maturity and coupon rate

coupon rate > YTM, price > $1,000 coupon rate < YTM, price < $1,000 coupon rate = YTM, price = $1,000

Strong-form efficient markets theory proclaims that ________.

current prices reflect the price and volume history of the stock, all publicly available information, and all private information

The typical payments on a consumer loan are made at ________.

end of each month

In the equation r = (FV/PV)^(1/n) - 1, the r is sometimes referred to as the ________.

interest, discount, growth rate all above

A basis point is ________.

one-hundredth of a percentage point

Which of the following is an example of a bond that contains an option feature?

putable, convertible and callable bonds

The question "At what rate is my money growing over time?" is best answered by which form of the TVM equation?

r = (FV/PV)^(1/n) - 1

Nominal rate

real rate + inflation rate

Preferred stock ________.

represents a preferential claim on dividends

Stocks are different from bonds because ________.

stocks, unlike bonds, represent residual ownership

Monthly interest on a loan is equal to ________.

the beginning balance times the periodic interest rate

A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates ________.

the real rate, expected inflation, and a maturity premium