Finance Exam 2 Study

"Junk" bonds are a street name for ________ grade bonds. investment speculative and investment extremely speculative speculative

speculative

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates. variable-income fixed-income bully real

fixed-income

A basis point is ________. one-tenth of a percentage point one percentage point one-thousandth of a percentage point one-hundredth of a percentage point

one-hundredth of a percentage point

The ________ is the face value of the bond. par value maturity date coupon coupon rate

par value

The Fisher Effect involves which of the items below? Nominal rate, the real rate, and inflation Nominal rate, the bond rate, and inflation Nominal rate and inflation only Nominal rate and the real rate only

Nominal rate, the real rate, and inflation

Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving? 3% 6% 5% 4%

4%

Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 8.00%. What is your investment worth in one year?

$1,082.43 With PV = $1,000, APR = 8.00%, C/Y = 4, periodic interest rate = r = 0.02, we begin by taking (1 + periodic rate) to the power of C/Y. Doing this gives: (1.02)4 = 1.08243. Multiplying this number by PV gives $1,082.43. Or using a financial calculator, Present Value = -1,000, PMT =0, Rate = 8/4=2%, Periods = 4, Compounding = 4, solve for FV = $1,082.43.

Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________.

$829.73 N=20 I/Y=10 PV=? PMT=-80 FV=-1,000

The ExecUfind Corporation has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond?

$849.54

Lucy is tempted to buy 200 apples, with each one costing $2. However, she realizes that if she saves the money in a bank account she should be able to buy 240 apples. If the cost of the an apple increases by the rate of inflation, i.e. 8%, according to the Fisher equation, how much would the nominal rate (%) of the return on the bank account have to be?

28

Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par value. The firm has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds?

6.54%

Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? A) When interest rates go up, bond prices go up. B) A bond selling at a discount means that the coupon rate is less than the yield to maturity. C) When the yield to maturity and coupon rate are the same, the bond is called a par value bond. D) A bond selling at a premium means that the coupon rate is greater than the yield to maturity.

A) When interest rates go up, bond prices go up.

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. A) number of compounding periods per year B) number of compounding periods per month C) number of compounding periods for the length of an investment D) number of discounting periods for the length of an investment

A) number of compounding periods per year

Which of the following statements is FALSE? A) The APR can be referred to as a promised annual percentage rate. B) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. C) The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. D) Although an APR is quoted on an annual basis, interest can be paid quarterly.

B) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.

What is the EAR if the APR is 5% and compounding is quarterly? A) Slightly below 5.09% B) Over 5.25% C) Slightly above 5.09% D) Under 5.00%

C) Slightly above 5.09%

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

False

Which of the below is NOT a major component of interest rates? Inflation premium Historical interest rates Real rate Default premium

Historical interest rates

Which of the following are issued with the shortest time to maturity? Treasury bills Treasury stocks Treasury bonds Treasury notes

Treasury bills (Typically 1 year)

The most common shape for a yield curve is upward sloping. True False

True

The ________ is the regular interest payment of the bond. coupon coupon rate dividend par

coupon

The ________ is the interest rate printed on the bond. semiannual coupon rate coupon rate compound rate yield to maturity

coupon rate

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value. time to maturity; same price as time to maturity; discount to coupon rate; discount to coupon rate; premium over

coupon rate; discount to

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. short-term debt long-term equity short-term equity long-term debt

long-term debt

The ________ is the expiration date of the bond. coupon maturity date yield to maturity future value

maturity date

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

notes; bonds; bills (Notes and bonds are long term and bills are typically one year so no coupon)

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 ________. A) you will be able to buy more goods or services B) you will be able to buy the same amount of goods or services C) you will be able to buy fewer goods or services D) you will be able to consume fewer goods

A) you will be able to buy more goods or services

Which of the statements below is FALSE? A) Nominal interest rates are the sum of two major components: the real interest rate and expected inflation. B) The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. C) The prices of goods and services tend to decrease over time because of inflation. D) The real interest rate is the reward for waiting.

C) The prices of goods and services tend to decrease over time because of inflation.

The ________ compensates the investor for the additional risk that the loan will not be repaid in full. real rate default premium interest rate inflation premium

default premium

The ________ is a market derived interest rate used to discount the future cash flows of the bond. coupon rate semiannual coupon rate yield to maturity compound rate

yield to maturity

You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30-year payment schedule. What is the annual annuity payment under this schedule?

$11,439.96 MODE = ENDINPUT303.91-200,000?0KEYNI/YPVPMTFVCPT11,439.96

MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE? The bond market currently requires a rate (yield) less than the coupon rate. The bonds are selling at a premium to the par value. The coupon rate is greater than the yield to maturity. All of the above are true.

All of the above are true.

Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.

$80 The annual interest or coupon payment is equal to the coupon rate multiplied by the par value of the bond. Here that is (0.08) × ($1,000) = $80.

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE? A) The bank is lending money to you with a promise to repay that money with interest. B) The bank is borrowing money from you without a promise to repay that money with interest. C) The bank is technically renting money from you with a promise to repay that money with interest. D) The bank is lending money to you, but not borrowing money from you.

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

Which of the statements below is TRUE? A) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. B) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. C) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. D) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

D) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise. A) APYs B) daily rates C) effective annual rates D) annual percentage rates

D) annual percentage rates

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________. A) the credit rating increases, the default risk decreases, and the required rate of return increases B) the credit rating decreases, the default risk decreases, and the required rate of return decreases C) the credit rating increases, the default risk increases, and the required rate of return decreases D) the credit rating increases, the default risk decreases, and the required rate of return decreases

D) the credit rating increases, the default risk decreases, and the required rate of return decreases

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. coupon rate yield to maturity current yield prime rate

yield to maturity