Finance Exam 2

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How are EAR and APR related?

--when M=1 (annual compounding) EAR=APR --when m>1, EAR> APR

APY

Annual Percentage Yield

Which of the following statements is FALSE?

although an APR is quoted on an annual basis, interest can be paid monthly but never daily

the most common rate quoted is the

annual percentage rate/APR

When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.

annual percentage rates

Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?

callable bond

The ________ is the regular interest payment of the bond.

coupon

The ________ is the interest rate printed on the bond.

coupon rate

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

coupon rate; discount to

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

default premium

In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.

false

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

fixed income

Which of the below is NOT a major component of interest rates?

historical interest rates

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

The ________ is the expiration date of the bond.

maturity date

The Fisher Effect involves which of the items below?

nominal rate, the real rate, and inflation

Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.

notes; bonds; bills

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 ________ is the face value of the bond.

par value

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

speculative

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

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

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

treasury bills

EAR (effective annual rate) is the

true rate of return to the lender and true cost of borrowing to the borrower

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

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

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

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


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