FM Exam 2

What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function? The interest rate in your calculator is entered as a whole number, while in the spreadsheet function it is entered as a decimal. The present value is entered as positive in your calculator and negative in the function. The present value is entered as negative in your in your calculator but as positive in the spreadsheet function.

The interest rate in your calculator is entered as a whole number, while in the spreadsheet function it is entered as a decimal.

True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.

True

True or false: The formula for the future value of an annuity factor is [(1 + r)t − 1]/r.

True

The formula for the Blank______ value interest factor of an annuity is [1 − 1/(1 + r)t]/r. Multiple choice question. future present past

present

Amortization is the process of paying off loans by regularly reducing the Blank______. payment frequency interest rate life of the loan principal

principal

What is the purpose of a sinking fund? to create a contingency cash fund to fund the legal costs of issuing debt to create a fund to repay bonds when they fall due to fund the replacement of fixed assets

to create a fund to repay bonds when they fall due

When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have? upward sloping downward sloping humped flat

upward sloping

Most of the time, a floating-rate bond's coupon adjusts Blank______. with a lag to some base rate dramatically on a continual basis with a lead to some base rate

with a lag to some base rate

To find the present value of an annuity of $100 per year for 10 years at 10 percent per year using the tables, find a present value factor of 6.1446 and multiply it by Blank______. $1 $100 $1.10 $10

$100

If you invest for a single period at an interest rate of r, your money will grow to Blank______ per dollar invested. (1-r) (1+r) (1×r) (1÷r)

(1+r)

If FV = PV × (1 + r) is the single-period formula for future value, which of the following is the single-period present value formula? PV = FV × (1 − r) PV = FV × (1 + r) PV = FV/(1− r) PV = FV/(1 + r)

PV = FV/(1 + r)

The basic present value equation is Blank______. PV/(1 + r)t = FVt PV × FVt = (1 + r)t PV = FVt/(1 + r)t

PV = FVt/(1 + r)t

What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate. R = r + h R = r − h R = r × h R = r/h

R = r + h

What does historical data suggest about the nature of short-term and long-term interest rates? Short-term rates are equal to the long-term rates. Long-term rates are always higher than short-term rates. Sometimes short-term rates are higher and sometimes long-term rates are higher. Short-term rates are always higher than long-term rates.

Sometimes short-term rates are higher and sometimes long-term rates are higher.

True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.

True

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds? $1,060 at the end of 10 years interest at the end of each year, the amount of which is based on the current market rate of interest, and $1,000 at the end of 10 years $60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years $60 at the end of each year in interest and $100 at the end of each year in principal payments

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years

The formula for the present value of an annuity due is: (PV of an ordinary annuity) − (1 + r). (1 + r) × (PV of an ordinary annuity). (PV of an ordinary annuity)/(1 + r). (1 + r) + (PV of an ordinary annuity).

(1 + r) × (PV of an ordinary annuity).

Which of the following is the multi-period formula for compounding a present value into a future value? FV = PV(1+r)tPV1+rt FV = PV × r × t FV = PV × (1 + r)t FV = PV × (1 + r)× t

FV = PV × (1 + r)t

True or false: Future value refers to the amount of money an investment is worth today.

False

True or false: Given the PV, FV, and payment amount, you can determine the number of periods.

False

True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.

False

True or false: The annual percentage rate (APR) is calculated as the interest rate charged per period on a loan divided by the number of periods per year.

False

True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.

False

True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.

False

True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.

False

True or false: The present value is the sum of all expenses in a project.

False

True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

False

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

False

True or false: With interest-only loans, the principal is never repaid. True false question.

False

You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the Blank______ value on the financial calculator. Multiple choice question. PMT FV I/Y N

N

Which of the following is true of zero coupon bonds? They are worth nothing after the first year. No coupon payments are made on the bonds. A price cannot be calculated for the bond.

No coupon payments are made on the bonds.

True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.

True

True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

True

True or false: Interest rates can be quoted in various ways. True false question.

True

True or false: The formula for a present value factor is 1/(1+r)t

True

True or false: The perpetuity present value can be found using the perpetual cash flow and the discount rate.

True

True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

True

The most common way to repay a loan is to pay Blank______. a lump sum of interest and principal at the end of the loan just interest every period a fixed principal amount every period a single fixed payment every period

a single fixed payment every period

The degree of interest rate risk depends on Blank______. how many times the interest rate changes in a year the sensitivity of the bond's coupon rate to interest rate changes the sensitivity of the bond's price to interest rate changes the face value of a bond

the sensitivity of the bond's price to interest rate changes

The real world has moved away from using Blank______ for calculating future and present values. mathematical formulas time value of money tables financial calculators spreadsheets

time value of money tables

If you borrow $15,000 today at 5 percent annual interest to be repaid in one year as a lump sum, this is termed a Blank______. pure discount loan term loan discounted interest loan amortized loan

pure discount loan

Which type of debt is given preference in the event of default? junior senior

senior

The general formula for Blank______ is (1 + quoted rate/m)m − 1. the EAR the APR the SAIR

the EAR

Which of the following variables is not required to calculate the value of a bond? original issue price of bond market yield to maturity remaining life of bond coupon rate

original issue price of bond

The current value of a future cash flow discounted at the appropriate rate is called the Blank______ value. expected current simple present

present

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why? because the $100 is an inflow and should be negative doesn't matter whether you enter it as a positive or negative number because the $100 is an outflow from you which should be negative

because the $100 is an outflow from you which should be negative

A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a Blank______. call provision refunding provision callback provision recall allowance

call provision

The idea behind Blank______ is that interest is earned on interest. compounding rebounding reinsurance simplification

compounding

Calculating the present value of a future cash flow to determine its worth today is commonly called Blank______ valuation. discounted cash flow (DCF) present worth present cash flow (PCF) compounded

discounted cash flow (DCF)

Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the Blank______ of the period. middle spread evenly over the period beginning end

end

Which of the following is not a way to amortize a loan? fixed payments fixed interest payments only interest plus fixed amount

fixed interest payments only

The amount an investment is worth after one or more periods is called the Blank______ value. expected future anticipated present

future

If a bond is selling at a discount from its par value, the YTM must be Blank______ the coupon rate. greater than less than equal to

greater than

More frequent compounding leads to Blank______. lower APRs higher APRs lower EARs higher EARs

higher EARs

The nominal rate is found by adding the Blank______ and the real rate of return. discount coupon inflation price

inflation

When finding the present or future value of an annuity using a spreadsheet, the Blank______ should be entered as a decimal. interest rate future value inflation rate annuity payment

interest rate

A dollar received one year from today has Blank______ value than a dollar received today. the same less more

less

Given an investment amount and a set rate of interest, the Blank______ the time horizon the Blank______ the future value. longer; greater longer; smaller shorter; greater

longer; greater

When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is Blank______ 6 percent. lower than equal to greater than

lower than

Bonds issued by state and local governments are called Blank______. regional bonds municipal bonds state Treasury bonds

municipal bonds

Using a time value of money table, what is the future value interest factor for 10% for 2 years? 1.10 2.00 121 1.21

1.21

What is the nominal rate of return on an investment? It is the percentage change in the dollar value of an investment adjusted for inflation. It is the actual percentage change in the dollar value of an investment unadjusted for inflation. It is the rate of return earned in excess of the average rate of return earned by similar investments. It is the average rate of return earned by similar investments.

It is the actual percentage change in the dollar value of an investment unadjusted for inflation.

Crossover bonds can also be called Blank______ bonds. 5B 4B 2B 3B

5B

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years? 1.2100 1.1500 1.4400 2.4883

1.4400

If you are in the 20 percent federal income tax bracket, what is your aftertax yield on a municipal bond that is currently trading at par to yield 5 percent. Assume there are no state or local taxes. 4 percent 20 percent 5 percent 6 percent

5 percent

Which of the following is the correct Excel function to calculate the present value of $300 due in five years at a discount rate of 10 percent? = PV(0.10,5,0,-300) = PV(10,5,0,-300) = PV(10,5,0,300)

= PV(0.10,5,0,-300)

As an investor in the bond market, why should you be concerned about changes in interest rates? Changes in interest rates lead to changes in the par value of a bond. You shouldn't be concerned as interest rate changes do not affect bonds. Changes in interest rates cause changes in bond prices. Changes in interest rates change the interest payments on fixed coupon bonds.

Changes in interest rates cause changes in bond prices.

Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12 percent compounded quarterly to an EAR? EFFECT(12,4) NOMINAL(0.12,4) EFFECT(0.12,4) EAR(12,4)

EFFECT(0.12,4)

Which of the following is not a difference between debt and equity? Equity represents ownership interest, while debt does not. Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy. Equity is publicly traded, while debt is not. A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not.

Equity is publicly traded, while debt is not.