Finance Exam 2

Which of the following about the relationship between the yield to maturity and bond prices is FALSE?

When interest rates go up, bond prices go up.

When real property is used as collateral for a bond, its is termed a/an

mortgaged security

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

The difference between the price and the par value of a zero-coupon bond represents

the accumulated interest over the life of the bond

Monthly interest on a loan is equal to ________.

the beginning balance times the monthly interest rate

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

When a bond is first issued the corporation tries to set the coupon close to the yield. Which of the following is TRUE (holding all else equal)?

A callable bond will have a higher coupon compared to a non-callable bond

Which of the following is NOT true regarding the total payment in an equal payment amortization table?

A) The total payment for any period is equal to the principal plus interest payments for that same period. B) The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment. C) The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate.

Amortization tables are useful for each of the following reasons EXCEPT ________.

A) determining the principal balance due if the loan is being paid off early B) determining how much of a total payment is interest and how much is principal for tax purposes C) determining the regular periodic total payment D) All of these are useful purposes of an amortization table.

A bond may be issued by ________.

Companies, state governments, and the federal government

The coupon payment for an annual-coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond

False

Zero-coupon bonds are priced at steep premiums.

False

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 thissituation, which one of the following statements is accurate?

Investment A has both a higher present value and a higher future value than investment B.

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?

The bank is technically renting money from you with a promise to repay that money with interest.

Which of the following are issued with the shortest time to maturity?

Treasury bills

A finite series of equal payments that occur at regular intervals is called a

annuity

A company selling a bond is ________ money.

borrowing

The _________ is the regular interest payment of the bond.

coupon

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.

current yield

________ are always unsecured bonds.

debentures

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

The actual rate paid or received after accounting for compounding is called the

effective annual rate.

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

fixed-incomes

If you take out a loan from the bank you will be charged _______

for both principal and interest

The ________ is the written contract between the bond issuer and the bondholder

indenture

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

To determine the interest paid each compounding period, take the advertised annual percentage rate and divide it by the _________ to get the appropriate periodic interest rate, often called the "period rate."

number of compounding periods per year

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

number of compounding periods per year

The number of periods for a consumer loan (n) is equal to the ________.

number of years times compounding periods per year

A basis point is ________.

one-hundredth of a percentage point

A/An ________ is a series of equal end-of-the-period cash flows.

ordinary annuity

The ________ is the face value of the bond.

par value

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.

Most U.S. corporate and government bonds choose to make ________ coupon payments

semiannual

The ________ is the return the bondholder receives on the bond if held to maturity.

yield to maturity

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

The appropriate rate to use to discount the cash flows of a bond in order to determine the current price is the ________.

yield to maturity

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