Finance Test #2
The ________ is the expiration date of the bond.
maturity date
approximate real rate formula
nominal - inflation
Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.
notes; bonds; bills
A basis point is ________.
one-hundredth of a percentage point
Fisher's Equation
real interest rate = nominal interest rate - inflation
"Junk" bonds are a street name for ________ grade bonds.
speculative
Which of the following statements is FALSE?
Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
When interest rates are stated or given for loan repayments, it is assumed that they are_________specifically stated otherwise
Annual Percentage Rates
The ________ is the interest rate printed on the bond.
coupon rate
Which of the below is NOT a major component of interest rates?
Historical interest rates
The Fisher Effect involves which of the items below?
Nominal rate, the real rate, and inflation
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 statements below is TRUE?
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.
Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.
fixed-income
Which of the statements below is FALSE?
The prices of goods and services tend to decrease over time because of inflation.
Which of the following are issued with the shortest time to maturity?
Treasury bills
The most common shape for a yield curve is upward sloping.
True
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.
True Nominal Interest Rate Formula
(1+r*) x (1+h) - 1
down payment on home question
-find percentage of house cost and subtract -multiply the annual and monthly "n" by how many years the payment plan is -divide the "I" by monthly or daily -multiply the monthly or daily "n" by 12 or 365 -Multiply month pmt calculation by 12
compounded quarterly question.
-multiply "n" by number of payments -input c/y as 4 for quarterly
difference between annuity interest and daily interest question
-subtract annual fv calculation by pv -divide "I" by daily or monthly plan -multiply "n" by daily or monthly -subtract pv from daily fv
In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.
False In constructing a yield curve you place interest rates on the vertical axis, and TIME TO MATURITY on the horizontal axis.
Micromedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?
all of the above are true
The ________ is the regular interest payment of the bond.
coupon
Annual Interest or coupon value
coupon rate x par value
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
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
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
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.
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 __________ is a market derived interests rate used to discount the future cash flow of the bond.
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
