Finance All Mcgraw Hill
You deposited $250 in a savings account 12 years ago. Today the balance in that account is $690. What annual rate of interest did you earn? 8.83 percent 8.75 percent 8.10 percent 7.99 percent
8.83 percent
If interest rates go down, the present value of a perpetuity will _____________. increase decrease remain unchanged
increase
How much is $100 at the end of each year forever at 10% interest worth today? $9,255.75 $7,621.09 $1,000 $8,830.14
$1,000
Today you deposit $1000 in an account paying 6% interest. At the end of years 1, 2 and 3 you will deposit $100 in that account. What is the present value of that stream of cash flows? $1.111.12 $1,376.32 $1,237.40 $1,267.30
$1,267.30
Find the future value of an annuity of $100 per year for 10 years at 10 percent per year. $1,755.25 $1,593.75 $1,437.60 $1,682.09
$1,593.75
Today you deposit $1000 in an account paying 6% interest. At the end of years 1, 2 and 3 you will deposit $100 in that account. How much will you have at the end of year 4? $1,399.44 $1,599.94 $1,527.99 $1,493.94
$1,599.94
A dollar invested today at 7.5 percent interest compounded annually will be worth _______ one year from now. $1.075 $1.75 $1.0075
$1.075
Assume you have $100 to invest today. Investing it at 5% interest compounded annually will yield _______ in 10 years, while investing it at 6% interest compounded annually will yield _______ in 10 years. $179.08; $162.89 $162.89; $179.08 $179.08; $179.08 $162.89; $175.00
$162.89; $179.08
$200 at the end of each year forever at 10% per year is worth how much today? $1,228.91 $3,294.12 $2,000.00 $7,621.09
$2,000.00
You will receive $100 in 1 year, $200 in 2 years and $300 in 3 years. If you can earn a 7.5% rate of interest, what is the present value of this stream of cash flows? (Please note that you receive nothing immediately - there is no initial payment). $507.58 $608.98 $512.33 $487.50
$507.58
You pay $1,200 for a bond and receive an annual coupon payment of $100. The current yield on the bond is _____. 7.52% 8.33% 11.14% 9.87%
8.33%
Which of the following is the correct equation for the present value of an annuity with regular payment C for t periods at interest rate r? PV = C/r PV = C/(1+r)^t - C/r PV = C[1/r - 1/r(1+r)^t] PV = C/rt
PV = C[1/r - 1/r(1+r)t]
Which of the following sell bonds? (Select all that apply) Individuals and households U.S. Treasury State and local governments Corporations
U.S. Treasury State and local governments Corporations
Joseph signs a contract with a company that will pay him $25,000. Following the principles of the time value of money, Joseph would be best off if he received payment: at the end of the project at the beginning of the project in 3 equal monthly sums
at the beginning of the project
If the bond's yield to maturity remains unchanged during the period, the bond price changes with time so that the total return on the bond is _____ the yield to maturity. greater than less than equal to
equal to
If the interest rate is greater than zero, the present value of an annuity due is always ______ an ordinary annuity. greater than equal to less than
greater than
If the interest rate is greater than zero, the present value of an annuity due is always ______ an ordinary annuity. less than greater than equal to
greater than
The banking crisis of 2007-2009 shows that investors prefer ________ in bonds; therefore, heavily traded bonds offer ________ yields. higher liquidity, higher higher liquidity, lower less liquidity, higher less liquidity, lower
higher liquidity, lower
In 2013 the CPI was about 2.5 times its level in 1981. If the price of a pack of cigarettes was $1.00 in 1981 and $5.00 in 2013, then the real price has ______ since 1981. The inflation-adjusted price today should be _______ if there had been no real growth in the price of a pack. increased; $2.50 is less than; $5.00 Rationale: increased; $2.50 increased; $5.00 Rationale: increased; $2.50 is the same as; $2.50 Rationale: increased; $2.50
increased; $2.50
Long-term bond prices are more sensitive than short-term bond prices to downturns in the economy public elections changes in company policy increases in interest rates
increases in interest rates
Because the _____ rate is uncertain, so is the _______ rate of interest offered on bonds. nominal, inflation inflation, nominal real, inflation inflation, real
inflation, real
When money is invested at compound interest, the growth rate is equal to the __________. interest rate simple rate average return on the stock market opportunity cost of capital
interest rate
Bonds rated Baa or above by Moody's or BBB or above by Standard & Poors are known as junk bonds investment grade bonds high yield bonds speculative grade bonds
investment grade bonds
The present value of an annuity due is equal to the: present value of ordinary annuity + (1 - r) present value of an ordinary annuity x (1+r) present value of an ordinary annuity x r present value of an ordinary annuity/(1+r)
present value of an ordinary annuity x (1+r)
Real-world investments often involve many payments received or paid over time. Managers refer to this as a ___________________. payment sequence stream of cash flows cash flow bonus amortized flows
stream of cash flows
The best known price index used by economists who measure inflation is ________. the Dow Jones index the purchasing managers' index (PMI) the index of leading indicators the consumer price index (CPI)
the consumer price index (CPI)
For bonds priced at face value, the rate of return is face amount of the bond divided by the market rate of interest face amount of the bond divided by the interest on the bond 10% the coupon rate
the coupon rate
The future value of an annuity that lasts n years is equal to the present value allowed to grow n years. the future value of a perpetuity. the present value allowed to grow n+1 years. the present value of a perpetuity.
the present value allowed to grow n years.
True or false: The time value of money functions that are provided by your financial calculator are also available as functions in an Excel spreadsheet. True False
true
True or false: the discount factor refers to the present value of a $1 future payment. True False
true
A company issues a $5,000 bond that matures in 5 years with a coupon rate of 6% and a current interest rate of 6%. The bond will sell for $4,998 $5,000 $5,020 $4,980
$5,000
Compound growth means that value increases after t periods by: (1 + growth rate)^t 1/growth rate x t growth ratet (1 - growth rate)^t
(1 + growth rate)^t
______ dollars refer to the actual number of dollars of the day, whereas ______ dollars refer to the amount of purchasing power. (Select all that apply) Real, nominal Current, constant Nominal, real Constant, current
Current, constant Nominal, real
True or false: the nominal interest rate can be defined as an interest rate quoted today by a financial institution on a loan or investment, such as an APR or a periodic rate. True False
True
Secured debt is tied to specific assets, called ___________.
collateral
Which type of bond generally offers the highest yield? corporate U.S. Treasury
corporate
The interest payments to the bondholder are called the face par coupon maturity
coupon
A bond's _______ is fixed, but the present value is affected by changes in the ________. coupon payment, interest rate interest rate, coupon payment
coupon payment, interest rate
Limitation or subordination of new debt is a form of a protective ___________ on existing debt.
covenant
At a rate of interest of 10% (r), the present value (PV) or $100 will ___________ as the time period (t) ________________. increase; increases decrease; decreases decrease; increases remain constant; increases
decrease; increases
Interest income is _____________ to interest rate. unrelated directly proportional inversely proportional
directly proportional
Another name for the interest rate used to calculate PV is the ______ rate. money market discount federal funds inflation
discount
A change in interest rate has the greatest effect on the present value of: distant cash flows short-term cash flows current cash flows
distant cash flows
The ________ is the rate at which invested funds will grow over the course of a year. annual percentage rate effective annual interest rate simple interest rate
effective annual interest rate
The payment made when a bond matures is called the bond's: personal value coupon value end value face value
face value
A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time. infinite random uneven fixed
fixed
The value in t years of an investment made today at interest rate r is called the ___________ of your investment. future value simple value compound value present value
future value
If interest rates fall, the rate of return on a bond will be _____ the yield to maturity. greater than less than equal to
greater than
If interest rates rise, the rate of return on a bond will be _____ the yield to maturity. equal to less than greater than
less than
When the interest rate is higher than a bond's coupon rate, the bond will be priced at: face value less than face value more than face value
less than face value
The yield to maturity assumes the bond is held to _____________________.
maturity
The time value of money concept states that a dollar today is worth _______ a dollar tomorrow. the same as more than less than
more than
A bond can also be called a (Select all that apply): leased asset note share debenture
note debenture
When a firm puts up collateral assets to back up a loan, the debt is said to be: secured a protective covenant senior collateral damage
secured
The Annual Percentage Rate (APR) on a loan or investment is properly defined as: the interest rate per period multiplied by the number of compounding periods per year the rate applied to the loan or investment balance per year the annually compounded rate of interest a rate that is changed every year by the Federal Reserve Bank
the interest rate per period multiplied by the number of compounding periods per year
Which of the following is a proper definition for the effective annual interest rate? the interest rate that is annualized using compound interest the interest rate that is annualized using simple interest the interest rate that is annualized using interval interest
the interest rate that is annualized using compound interest
A graph of the yield curve shows the bond yield to maturity on the _____ axis and the time to maturity on the _____ axis. vertical, horizontal horizontal, vertical
vertical, horizontal
A measure of return that takes account of both coupon payments and change in a bond's value over its life is a standard measure known as bond rate yield to maturity current rate of interest current yield
yield to maturity
What is the term used in finance to represent simple, standard, and common? Transparent Plain vanilla Evident Easy to understand
Plain vanilla
A bond that is priced above its face value is said to sell for face value a discount a premium
a premium
The current yield on a bond is equal to the bond rate the current interest rate annual coupon payment divided by bond price current interest rate divided by bond price
annual coupon payment divided by bond price
A series of level payments that begins immediately for a specified period of time is called a(n): corporate bond perpetuity due delayed annuity annuity due
annuity due
The present value of an annuity of $1 per period is called the ______________. interest rate annuity payment annuity factor perpetuity
annuity factor
Discounting a future value FV at interest rate r over time t is termed a ______________ calculation. discounted cash-flow present interest discounted present factor discounted interest
discounted cash-flow
A $100,000 bond quoted at 120% will sell for $120,000 $80,000 $20,000 $12,000
$120,000
$200 at the end of each year forever at 10% per year is worth how much today? $2,000.00 $7,621.09 $3,294.12 $1,228.91
$2,000.00
What is the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10% per year? $288.88 $300.00 $248.69 $269.73
$248.69
The present value of $100 paid annually at year end for 20 years at 10% per year is: $1,422.53 $1,880.09 $851.36 $2,000.00
$851.36
The present value of $100 paid annually at year end for 20 years at 10% per year is: $1,880.09 $2,000.00 $851.36 $1,422.53
$851.36
If a bank quotes a loan with an APR of 15 percent, compounded monthly, what is the periodic rate on this loan? 15 percent 1 percent 1.5 percent 1.25 percent
1.25 percent
Your neighborhood bank is offering investors a money market account that pays 3.5 percent interest on deposits. If the current annual rate of inflation is 1.2 percent, how much is the exact real rate for this account? 2.80 percent 2.30 percent 3.05 percent 2.27 percent
2.27 percent
A mortgage company is advertising a 30 year fixed rate mortgage with monthly payments and an APR of 3.0 percent. What is the effective annual interest rate of this loan? 3.10% 3.04% 2.75% 3.00%
3.04%
A dollar invested today at 7.5 percent simple annual interest will be worth _______ one year from now. $1.1556 $1.75 $1.075
$1.075
A dollar invested today at 8.0 percent simple annual interest will be worth _________ three years from now. $1.26 $1.16 $1.24
$1.24
A dollar invested today at 8.0 percent interest compounded annually will be worth _______ three years from now. $1.08 $1.1664 $1.2597
$1.2597
Which debt is paid first in the event of bankruptcy? Preferred Stock Senior Debt Subordinated Debt Junior Debt
Senior Debt
Which of the following are steps bondholders can take to minimize default risk? (Select all that apply) Seniority Protective covenants Security Buying junk bonds
Seniority Protective covenants Security
The U.S. Treasury issues ___________, which adjust nominal cash flows based on the consumer price index. TIPS SOX NPV MBS
TIPS
The _________ measures the return to investors if they buy a bond at the asked price and hold it to maturity. yield curve current yield asked yield to maturity opportunity cost of capital
asked yield to maturity
The purchaser of a bond pays the ______ price, whereas the investor who already owns the bond and sells it receives the ________ price. asked, bid asked, spread bid, asked bid, spread
asked, bid
Corporate debt depends on the value and the risk of the firm's equity liabilities cash assets
assets
The risk that a bond issuer may not pay on its bonds in known as default premium risk risk deflection risk aversion default risk
default risk
Present value is calculated using a ____________________ calculation. inverted future value discounted cash-flow straight line depreciation inverse cash-flow
discounted cash-flow
When the coupon rate of a bond is equal to the current interest rate, the bond will sell for a discount face value less than face value more than face value
face value
When the interest rate is lower than the coupon rate on a bond, the price of the bond will be: face value higher than face value less than face value
higher than face value
The interest rate on the financial calculator is expressed as a percentage. represents a dollar value. decimal. non-negative number always.
percentage.
C/r is the formula for the present value of a(n) ____. perpetuity growing annuity growing perpetuity annuity
perpetuity
Your insurance agent wants to sell you an annuity consisting of 20 equal end of year payments of $10,000 each, starting at the end of this year. Your desired rate of return for investments of this type is 7 percent. What is the most you would pay for this annuity today? $200,000 $100,000 $105,940.14 $104,950.14
$105,940.14
In 2013 the CPI was about 2.5 times its level in 1981. If the cost of one semester of college was $5000 in 1981, what should the nominal cost of a semester of college be in 2013 assuming the real price is constant? $12,000 $12,500 $10,000 $2,000
$12,500
What is the future value of $100 invested for 4 years at 10% interest? $144.00 $145.54 $140.00 $146.41
$146.41
What is the future value of a series of $2000 end of year deposits into an IRA account paying 5 percent interest, over a period of 35 years? Use your financial calculator. $189.991.91 $179,200.22 $180,640.61 $200,000.00
$180,640.61
Today you deposit $500 in an account paying 8% interest compounded annually. What will be the balance in this account 50 years from now, assuming no fees or costs are deducted and no additional deposits are made? $23,450.81 $22,257.30 $19,111.75 $28.450.33
$23,450.81
You put $100 in the bank now, $200 in the bank a year from now, and $300 in the bank in two years. How much money will you have available 3 years from now if you earn a 7.5% rate of interest? (Calculate the future value of this stream of cash flows. Refer to Example 5.6.) $622.50 $640.79 $677.85 $711.31
$677.85
If the interest rate is 10% per year, then what is the present value (PV) of $100 received one year from today? $110.00 $90.91 $90.00 $86.78
$90.91
Which of the following is the correct formula for the discount factor? (1+r) 1/(1+r) x t 1/(1+r)^t 1/(1+r)
1/(1+r)^t
Marley Corporation's bonds have four years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5%. If the price of the bond is $841.51, the yield to maturity is _____. (Use trial and error to calculate yield). 8% 12% 5% 10%
10%
If the nominal rate of interest is 10% and the rate of inflation is 3%, the real interest rate is ____. 6.3% 6.8% 7% 13%
6.8%
A bank offers a savings account with an APR of 9 percent with monthly compounding. What is the effective annual interest rate of this investment? 9.00 percent 9.38 percent 9.30 percent 9.25 percent
9.38 percent
Which of the following is a perpetuity? A constant stream of cash flows for a fixed period A growing stream of cash flows for a fixed period A constant stream of cash flows forever An undulating stream of cash flows forever
A constant stream of cash flows forever
If the interest rate (r) increases, what will happen to present value (PV) over time? PV will remain constant PV will increase PV will decline
PV will decline
The price of a bond is equal to the FV(coupon) plus FV(face value) FV(coupon) minus FV(face value) PV(coupon) minus PV(face value) PV(coupon) plus PV(face value)
PV(coupon) plus PV(face value)
In Excel, cash inflows are recognized as ______ values and cash outflows are recognized as ______ values. Interest rates should be entered as ______. negative, positive, whole numbers negative, positive, decimals positive, negative, whole numbers positive, negative, decimals
positive, negative, decimals
Conditions imposed on borrowers to protect lenders from unreasonable risk are known as secured debt collateral damage senior debt protective covenants
protective covenants
Real cash flow must be discounted by the nominal interest rate. nominal GDP. real deflation rate. real interest rate.
real interest rate.
The real interest rate can be defined as: the interest rate set by the Federal Reserve Bank through open market operations the real change in value of an investment (or real cost of a loan) after adjustment for inflation the final rate of interest applied to an investment or loan after fees have been deducted the rate of interest on an investment or loan quoted by a financial institution today
the real change in value of an investment (or real cost of a loan) after adjustment for inflation