Test 2

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

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

default premium

Which of the following statements is FALSE?

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

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

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

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.

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

Treasury bills

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

True

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

Ytm

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

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 Fisher Effect involves which of the items below?

Nominal rate, the real rate, and inflation

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

annual percentage rates