Finance Test 2

Which of the following statements is FALSE? A. Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. B. Although an APR is quoted on an annual basis, interest can be paid quarterly. 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. The APR can be referred to as a promised annual percentage rate.

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

The ________ is the expiration date of the bond.

maturity date

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

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

False

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

4%

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

B. 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 lower than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. B. 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. C. 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 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 higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

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

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

The ________ is the regular interest payment of the bond.

Coupon

Major components of interest rates?

Default premium Inflation premium Real rate Nominal rate

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. (false bc bonds fall)

The Fisher Effect involves which of the items below?

Nominal rate, the real rate, and inflation

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

speculative

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

Treasury bills

T/F? The most common shape for a yield curve is upward sloping.

True

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

annual percentage rates

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

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

fixed-income

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

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

A basis point is ________.

one-hundredth of a percentage point

The ________ is the face value of the bond.

par value

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