FIN 3100 - EXAM 2
The phrase "price to rent money" is sometimes used to refer to ________.
interest rates
John borrows $500,000 at an annual rate of 7.62% for a 10 year term. At the end of each year interest payments of $38,100 are paid. At the maturity of the loan the principal amount is repaid, in addition to an interest payment. What type of loan is this?
interest-only
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
When real property is used as collateral for a bond, it is termed a/an ________.
mortgaged security
Which one of the following has the highest effective annual rate?
APR of 6 percent compounded daily
The "Truth in Savings Law" requires banks to advertise their rates on investments such as CDs and savings accounts as annual percentage yields (APY).
TRUE
When quoting rates on loans, the "Truth in Lending Law" requires the bank to state the rate as an APR, effectively understating the true cost of the loan when interest is computed more often than once a year.
TRUE
Which of the following is NOT true regarding the total payment in an equal payment amortization table?
The total payment for any period is equal to the principal plus interest payments for that same period, The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment, and The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate. (all true)
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE?
When interest rates go up, bond prices go up.
Which of the following is greater (answers rounded to the nearest cent)?
You would be indifferent to the three choices since they all have the same present value when using an interest rate of 10% per year.
The main variables of the time value of money (TVM) equation are ________.
present value, future value, time, interest rate, and payment
Theresa borrows $800 today in exchange for one payment of $1,000 five years from now. This is an example of a(n):
pure discount loan.
When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________.
senior debtholders
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________.
the credit rating increases, the default risk decreases, and the required rate of return decreases
The typical payments on a consumer loan are made at ________.
the end of each month
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
Present value calculations do which of the following?
Discount all future cash flows back to the present
If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the total amount of principal and interest due of $215,892.50 at the end of 10 years, what type of loan did you have?
Discount loan
Which of the following is NOT an example of ordinary annuity cash flows?
Insurance payments due at the start of the period
You are comparing two separate investments. Each one is for a period of 10 years and pays $2,500 a year. You require a 10 percent return on these investments. Investment A pays at the beginning of each year and investment B pays at the end of each year. Given this situation, which one of the following statements is accurate?
Investment A has both a higher present value and a higher future value than investment B.
A finite series of equal payments that occur at regular intervals is called a(n) .
annuity
A company selling a bond is ________ money.
borrowing
Amortization tables are useful for each of the following reasons EXCEPT ________.
All of these are useful purposes of an amortization table. (determining the principal balance due if the loan is being paid off early, determining how much of a total payment is interest and how much is principal for tax purposes, determining the regular periodic total payment)
A bond may be issued by ________.
companies, state governments, the federal government (all of the above)
The ________ is the regular interest payment of the bond.
coupon
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.
coupon rate; discount to
The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.
current yield
Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.
you will be able to buy more goods or services