Finance exam 2

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity? 6.36 percent 6.42 percent 5.61 percent 5.74 percent 5.18 percent

5.18% N=17 I= PV= -1,022 PMT= 27.50 FV= 1,000

You own a bond that pays $64 in interest annually. The face value is $1,000 and the current market price is $1,021.61. The bond matures in 11 years. What is the yield to maturity?

6.12 percent N=11 I=? PV= 1,021.61 PMT= 64 FV= 1,000

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? a. Coupon b. Face value c. Discount d. Call premium e. Yield

a.

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? a. Coupon b. Face value c. Discount d. Yield e. Dirty price

b.

You need $25,000 today and have decided to take out a loan at 7 percent interest for five years. Which one of the following loans would be the least expensive for you? Assume all loans require monthly payments and that interest is compounded on a monthly basis. a. Interest-only loan b. Amortized loan with equal principal payments c. Amortized loan with equal loan payments d. Discount loan e. Balloon loan where 50 percent of the principal is repaid as a balloon payment

b.

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate. a. effective annual b. annual percentage c. periodic interest d. compound interest e. periodic interest

b.

Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000? a. $949.70 b. $929.42 c. $936.48 d. $902.60 e. $913.48

b. Bond price = $28.25({1 − [1/(1 + .0694/2)(7)(2)]}/(.0694/2)) + $1,000/(1 + .0694/2)(7)(2) Bond price = $929.42

You grandfather invested $16,600 years ago to provide annual payments of $700 a year to his heirs forever. What is the rate of return? a. 3.65 percent b. 4.22 percent c. 4.10 percent d. 4.25 percent e. 4.33 percent

b. r= $700/$16,600 r = .0422, or 4.22%

You are considering a project with cash flows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 7.9 percent? a. $54,877.02 b. $51,695.15 c. $55,429.08 d. $46,388.78 e. $53,566.67

b. 51,695.15 PV = $16,500/1.079 + $25,700/1.0792^2 + $18,000/1.0793^3 PV = $51,695.15

A bond's principal is repaid on the ____ date. a. coupon b. yield c. maturity d. dirty e. clean

c.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. a. a premium; less than b. a premium; equal to c. a discount; less than d. a discount; higher than e. par; less than

c.

The current yield is defined as the annual interest on a bond divided by the: a. coupon rate. b. face value. c. market price. d. call price. e. par value.

c.

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.) a. Both options are of equal value since they both provide $12,000 of income. b. Option A has the higher future value at the end of Year 3. c. Option B has a higher present value at Time 0. d. Option B is a perpetuity. e. Option A is an annuity.

c.

Some time ago, Tracie purchased two acres of land costing $67,900. Today, that land is valued at $64,800. How long has she owned this land if the price of the land has been decreasing by 1.5 percent per year? a. 3.33 years b. 2.48 years c. 3.09 years d. 2.97 years e. 2.08 years

c. 3.09 $64,800 = $67,900{[1 + ((−.015)]t}t = 3.09 years

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning at 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true? a. Barb will earn more interest in Year 1 than Andy will. b. Andy will earn more interest in Year 3 than Barb will. c. Barb will earn more interest in Year 2 than Andy. d. After five years, Andy and Barb will both have earned the same amount of interest. e. Andy will earn compound interest.

c. Barb will earn more interest in Year 2 than Andy

Renee invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest in her initial $2,000 investment. Which type of interest is she earning? a. Free interest b. Complex interest c. Simple interest d. Interest on interest e. Compound interest

c. Simple interest

Municipal bonds: a. are totally risk-free. b. generally have higher coupon rates than corporate bonds. c. pay interest that is federally tax-free. d. are rarely callable. e. are free of default risk.

c. pay interest that is federally tax-free.

A perpetuity is defined as: a. a limited number of equal payments paid in even time increments. b. payments of equal amounts that are paid irregularly but indefinitely. c. varying amounts that are paid at even intervals forever. d. unending equal payments paid at equal time intervals. e. unending equal payments paid at either equal or unequal time intervals.

d.

The Fisher effect is defined as the relationship between which of the following variables? a. Default risk premium, inflation risk premium, and real rates b. Nominal rates, real rates, and interest rate risk premium c. Interest rate risk premium, real rates, and default risk premium d. Real rates, inflation rates, and nominal rates e. Real rates, interest rate risk premium, and nominal rates

d.

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: a. coupon rate. b. face rate. c. call rate. d. yield to maturity. e. current yield.

d.

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? a. Risk-free rate b. Realized rate c. Nominal rate d. Real rate e. Current rate

d.

You own a classic car currently valued at $64,000. If the value increases by 2.5 percent annually, how much will the car be worth 15 years from now? a. $94,035.00 b. $86,008.17 c. $80,013.38 d. $92,691.08 e. $91,480.18

d.

Which one of these will increase the present value of a set amount to be received sometime in the future? a. Increase in the time until the amount is received b. Increase in the discount rate c. Decrease in the future value d. Decrease in the interest rate e. Decrease in both the future value and the number of time periods

d. Decrease in the interest rate

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct? a. The interest you earn in Year 6 will equal the interest you earn in Year 10. b. The interest amount you earn will double in value every year. c. The total amount of interest you will earn will equal $1,000 × .06 × 40. d. The present value of this investment is equal to $1,000. e. The future value of this amount is equal to $1,000 × (1 + 40).06

d. The present value of this investment is equal to $1,000

A "fallen angel" is a bond that has moved from: a. being publicly traded to being privately traded. b. being a long-term obligation to being a short-term obligation. c. being a premium bond to being a discount bond. d. senior status to junior status for liquidation purposes. e. investment grade to speculative grade.

e.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? a. Debenture b. Callable c. Floating-rate d. Junk e. Zero coupon

e.

Two annuities have equal present values and an applicable discount rate of 7.25 percent. One annuity pays $2,500 on the first day of each year for 15 years. How much does the second annuity pay each year for 15 years if it pays at the end of each year? a. $2,331.00 b. $2,266.67 c. $2,500.00 d. $2,390.50 e. $2,681.25

e. Payment End = $2,500(1.0725) Payment End = $2,681.25

Which one of the following statements correctly defines a time value of money relationship? a. Time and future values are inversely related, all else held constant. b. Interest rates and time are positively related, all else held constant. c. An increase in a positive discount rate increases the present value. d. An increase in time increases the future value given a zero rate of interest. e. Time and present value are inversely related, all else held constant.

e. Time and present value are inversely related, all else held constant

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the: a. current yield. b. effective rate. c. compound rate. d. simple rate. e. discount rate

e. discount rate