business finance exam 2

a convertible bond

can be swapped fro a fixed number of shares of stock anytime before the maturity at the holder's option

the catastrophe bond

covers hurricanes and earthquakes in the U.S.

how would a decrease in interest rates effect the future value of a lump sum, single amount problem (all other variables remain the same). a. increase the time needed to save b. increase the present value c. decrease the present value d. increase future value e. decrease future value

decrease future value

how would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same) a. increase the time needed to save b. decrease the present value c. increase the present value d. change the future value

decrease the present value

what is the first step in the net present value (NPV) process?

estimate the future cash flows

municipal bonds are taxable for federal, state and local taxes.

false

the variables in a present value of a lump sum problem include all of the following expect: a. present value b. time period c. interest rate d. free cash flow

free cash flow

the variable that you are solving for in a future value of an annuity problem is: a. present value b. future value c. time period d. interest rate e. payments

future value

the variable that you solve for in a future value of a lump sum problem is: a. future value b. present value c. time period d. interest rate

future value

a warrant bond

gives the buyer of a bond the right to purchase shares of stock in the company at a fixed price

the features of municipal bonds make them attractive to high income, ______ bracket investors

high-tax

one of the biggest challenges for the net present value method is:

identifying the appropriate discount rate to use

how would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same) a. increase the time needed to save b. increase present value c. change the future value d. decrease the present value

increase the present value

which loan type requires calls for the borrower to pay interest each period and to repay the entire principal at some point in the future? a. interest only b. monthly amortized c. annual amortized d. future payment e. pure discount

interest only

all of the following are advantages of profitability index, expect:

it is useful for comparing mutually exclusive investments

interest rate risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the ______ the time to maturity, the ______ the interest rate risk.

longer, greater

interest rate risk is the risk that arises for bond owners from fluctuating interest Rates. All other things being equal, the _____ the coupon rate, the ______ the interest rate risk.

lower, greater

all of the following are commonly cited reasons for using the internal rate of return, expect:

multiple IRR's allow the company to choose the best one when evaluating projects

the variables in a future value of an annuity problem include all of the following expect: a. future value b. present value c. time period d. interest e. volitatily

volitatily

lochmere corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. what is the breakeven tax rate?

18%

franklin corporation has an opportunity to purchase bonds at a rate of 11%. they are in the 34% tax bracket. what is the after tax yield on these bonds?

7.26%

the largest equities-based exchange in the world based on total market capitalization and listed securities is the ___

New York Stock Exchange (NYSE)

what are non-conventional cash flows:

a combination of cash outflows and inflows

a put bond

allows the holder to force the issuer to buy back the bond at a stated price

the variables in a future value of a lump sum problem include all of the following expect: a. future value b. time period c. annuity payments d. interest rate

annuity payments

treasure issues are

are exempt from state income taxes but not federal income taxes

the price the dealer is willing to pay is called the ____ price

bid

a common error made when solving a future value of annuity problem is: a. using factor tables to help solve the problem b. dividng the annual deposit by the number of years before calculating the problem c. use a financial calculator to help solve the problem d. multiplying the number of years and the interest rate before calculating e. multiplying the annual deposit and the number of years before calculating the problem

multiplying the annual deposit and the number of years before calculating the problem

non-constant growth means supernormal growth rates over some finite length of time but it is also important to note that this always means

no dividends are paid for a certain amount of time and in the future they are constant

two-stage growth is a special case of _____ growth

non-constant

the variables in a future value of lump sum problem include all of the following expect. a. future value b. payments c. time period d. interest

payments

the variables in a present value of a lump sum problem include all of the following expect: a. present value b. time period c. interest d. payments

payments

the variable that you are solving for in a present value of a lump sum problem is: a. present value b. time period c. interest rate d. future value

present value

which loan type requires the borrower to repay a single lump sum payment at some time in the future with interest a. interest only b. monthly amortized c. annual amortized d. future payment e. pure discount

pure discount

the variables in a present value of an annuity problem include all of the following, except: a. time period b. risk profile c. interest rate d. payments

risk profile -- also present value / source of funds

the difference between the bid and ask price is called the ___, and is the basic source of dealer profits

spread

an income bond

states that the bond's coupon payment depends on a company income

non-constant growth means ____ growth rates over some finite length of time

supernormal

discounted payback period rule states a company will accept a project if:

the calculated payback is less than a pre-specified number of years

the payback period rule states that a company will accept a project if:

the calculated payback is less than pre-specified number of years

the internal rate of return (irr) represents which of the following:

the discount rate that makes the net present value equal to zero

all of the following are disadvantages of the payback period except:

the method incorporates the time value of money

all of the following are disadvantages of the payback period, expect:

the method incorporates the time value of money

municipal bonds are exempt for federal taxes and from some state and local taxes, especially if you live in the state in which the bond is issued.

true

when comparing a 10-year bond versus a 1-year bond, the 10-year bond has much greater interest rate risk true or false

true

the variables in a future value of an annuity problem include all of the following, expect: a. usage b. future value c. payments d. time period e. interest rate

usage