FIN 3101 Exam 1 Keen
The Fisher Effect is the relationship between three items: the nominal rate, the real rate, and inflation.
True
True or False: A simple percent change represents a change as part of the old or earlier value.
True
True or False: Capital losses always reduce the investor's rate of return.
True
True or False: Ceteris paribus, as a debtor and for the same annual interest rate, you would prefer simple interest to compound interest.
True
True or False: Ceteris paribus, bond prices move in the same direction as their coupon rates.
True
True or False: FVs represent the amount that an earlier amount will grow into.
True
True or False: For fixed-rate fully amortized mortgage loans, more of the fixed payment goes towards principal as we approach the end of the loan term.
True
True or False: Given the amount needed at the beginning of the retirement period, the annual deposits needed during the working period can be found by solving for "PMT" in the FVA formula.
True
True or False: If the top of a fraction is unchanged and the bottom of a fraction decreases by 5%, then the value of the whole fraction would increase by approximately 5%
True
True or False: In the period 1950 - 1999 changes in the inflation premium was the main factor causing nominal interest rates to change.
True
True or False: PVs are leftward on a time line and FVs are rightward on the time line.
True
True or False: The Fisher Effect illustrates the positive relationship between inflation and nominal interest rates.
True
True or False: The penalty for spending before earning is the interest rate from the point of view of the borrower.
True
Five years ago, Simpson Warehouses Inc. issued twenty−five−year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?
$850.61
Portland Brewery Inc. recently issued 30−year $1,000 face value, 12% annual coupon bonds. The market discount rate for this bond is only 7%. What is the current price of this bond?
$1,620.45
Present value. A smooth-talking used-car salesman who smiles considerably is offering you a great deal on a "pre-owned" car. He says, "For only 5 annual payments of $2,800, this beautiful 1998 Honda Civic can be yours." If you can borrow money at 7%, what is the price of this car? Assume the payment is made at the end of each year. If you can borrow money at 7%, what is the price of this car?
$11,480.55
Big House Nursery Inc. has issued 20−year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________.
$829.73
Convert (a) 194.17% to a decimal; and (b) .4389 to a percent.
1.9417; 43.89%
You have $675 today which is enough to buy 375 bottles of Diet Pepsi. If the price of Diet Pepsi is expected to increase by 4% over the next year, what approximate nominal rate would you have to earn to be able to buy 400 bottles of Diet Pepsi next Year?
10.67%
If your investment doubles in 6 3/4 years, what approximate annual rate of return would you have earned? If you could earn an annual rate of 7.50%, approximately how long would it take for your investment to double?
10.67%; 9.60 years
A new CEO promises to increase company sales by 9% per year from its current level of $3,458,613 to a target level of $12 million. How long would it take for the new CEO to achieve his goal?
14 years
The Rogue Outfitters Corporation $1,000 par value, 15% annual coupon bonds, have 6 years remaining to maturity and are currently selling for $938.45. What is the firm's yield to maturity for these bonds?
16.70%
Assume a Normal distribution with an average return of 7% and a standard deviation of 2%. What is the probability of an actual return of (a) more than 11%; and (b) less than 5%?
2.5%; 16%
Solve for X: 7 - (- 5) - 8 = -6 - (- 9) + 9 - 2X.
4
Which Figures in Chapter 5 of our textbook illustrate the history of inflation and 3-month T-bill yields, respectively?
5.4; 5.5
Your scores on Exam #1 and Exam #2 were 82 and 88, respectively. Your score improved by _____%.
7.32%
Nominal interest rates are the sum of two major components: the real interest rate and the maturity premium.
False
True or False: According to the Order of Operations, exponents are applied before the expression in parentheses, and addition and subtraction are to be completed before multiplication and division.
False
True or False: Interest rates were high in the late 1970s and early 1980s because of unusually high default premiums.
False
True or False: A lump sum can be a one-time earlier but not a one-time later cash flow.
False
True or False: Annuities are unequal cash flows that go on for a finite period of time.
False
True or False: At maturity, investors must repay a bond's par value to the lender.
False
True or False: A $1,000 par value bond with an annual coupon rate of 10% would pay $100 in interest every 6 months
False
True or False: Ceteris paribus, as the frequency of compounding decreases, the EAR will exceed theAPR by greater and greater amounts.
False
True or False: Ceteris paribus, the FV and the number of periods are inversely related.
False
True or False: Compounding is the process used to find a PV.
False
True or False: FVs are earlier values and PVs are later values.
False
True or False: FVs represent what you need to invest later to have it grow into a specified earlier amount.
False
True or False: For a given mean, a larger standard deviation means that actual returns that are far from the mean are less likely to occur.
False
True or False: The working capital management area deals with how much of a firm's assets should be held in cash, inventory and accounts receivable.
True
True or False: We can find the amount needed to pay off a fixed-rate fully amortized mortgage loan at any point in time by solving for the PV of the remaining payments.
True
True or False: What is "discounted" from the FV is the interest part to arrive at the PV.
True
True or False: With compound interest, interest is earned every period on that period's starting amount.
True
True or False: "PMT" in the PVA formula tells us the periodic mortgage payments for a fixed-rate fully amortized loan.
True
True or False: We've discussed 3 different multiple cash flow patterns
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.
The process of planning, evaluating, selecting, and managing the financing of long−term operating projects of the company is termed ________.
capital budgeting
That a company chooses a new product to introduce into the market is a _____________________ decision, that a company chooses to sell a bond to finance the new product is a _______________ decision, and that a company sets production and inventory levels on the new product is a _________________ decision.
capital budgeting: capital structure: working capital management
When the ________ is less than the yield to maturity, the bond sells at a ________ the par value.
coupon rate; discount to
The primary goal of the financial manager is to:
maximize the current share price or equity value of the firm.
The __________________ is the sale of "used" stock in that the current owner sells it to a new owner and the proceeds go to the current owner, not the company, while the _______________________ is the market where the initial sale of common stock is made by a company and the proceeds of the sale go to the company for the newly
secondary market: primary market
Ten years ago Salmon Acqua Farming Inc. issued twenty−five−year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now 7%. Given this information, what is the price today for such a bond?
$1,091.08
You plan to buy a new car when you graduate in 2 years. The car you want currently costs $25,000 and car prices are expected to increase at an annual rate of 4% per year. What will your car cost by the time you graduate? Suppose you wait another 3 years after graduation to make your purchase?
$27,040; $30,416
You borrow $200,000 for 18 years at an annual rate of 5.20%.. What would be your fixed QUARTERLY loan payment?
$4,294
Your parents have promised you possible deposits of $1,050, $1,500 and $2,500 at the end of the next three years, respectively. If your parents can earn 6% per year, what size of a one-time deposit would they have to make today in order to keep their promise?
$4,424.61
You invest $600 an an annual rate of 7% for fifteen years. How much more interest would you earn in year 11 with compound vs. simple interest and for the whole 15 years?
$40.62; $425.42
Your parents tell you that if you apply yourself and earn a minimum grade of B - in Finance 3101, they will reward you by depositing in your account $1,050 next year, $1,500 the following year and $2,500 the year after that. If you can earn an annual rate of 4%, how much would you have in your account immediately after your parents' final deposit?
$5,195.68
If you borrow $100 today and repay with 6% simple interest one year from now, which of the following would be a correct time line entry?
-$106 at year one.
Before going on a diet, Joe weighed 220 lbs. He now weighs 195 lbs. His weight has changed by _______%.
-11.36%
A widget seller sold 1,035 widgets in 2007 and 687 in 2015. What was the annual rate of sales of widgets over this period?
-4.99%
A fraction changes from 3/4 to 4/10. The numerator changed by _____%; the denominator changed by _____%; the value of the fraction changed by approximately _____%.
33%; 150%; -117%
For an 18-year fixed payment loan for $200,000 with an annual interest rate of 5.20% and making QUARTERLY payments, what percent of your first payment would apply to the principal?
39.45%
What is the EAR if the APR is 6% and compounding is quarterly?
6.14%
You would like to increase your purchasing power next year by about 4%. If you expect prices to increase at a rate of 2% over the next year, what approximate increase would you need in your salary in order to achieve your desired increase in purchasing power?
6%
Present value .A smooth-talking used-car salesman who smiles considerably is offering you a great deal on a "pre-owned" car. He says, "For only 6 annual payments of $2,800, this beautiful 1998 Honda Civic can be yours." If you can borrow money at 8%, what is the price of this car? Assume the payment is made at the end of each year.
$12,944.06
Future value. Upstate University charges $17,000 a year in graduate tuition. Tuition rates are growing at 2% each year. You plan to enroll in graduate school in six years. What is your expected graduate tuition in six years?
$19,144.76
Which rating of corporate bond yields in chapter 5 of our textbook is compared to yields on T-bills and T-bonds for the period 2000 - 2013?
AAA
True or False: The YTM on a discount bond will be above its coupon rate.
True
True or False: You can earn a higher return by purchasing zero-coupon bonds at a premium.
False
True or False: "When given the annual withdrawals desired during the retirement period, the FVA tells us the amount we should have accumulated by the time we begin the retirement period.
False
True or False: If you buy a bond at par and hold it to maturity, you will experience a capital gain.
False
True or False: In a Normal Distribution, there is a 68% chance that an actual return will exceed the average return plus one standard deviation
False
True or False: Premium bonds are always worth more than par value at maturity.
False
True or False: The EAR will always be greater than the APR.
False
True or False: The capital budgeting area deals with how the firm should be financed.
False
True or False: The goal of the corporate financial manager is to maximize the firm's market share.
False
True or False: The number of years it would take an investment to double is approximately equal to the annual interest rate divided 72.
False
True or False: The principal part of a fixed mortgage loan payment can be found by multiplying the periodic interest rate by the ending balance for a given period.
False
True or False: There are a total of 5 variables in the basic TVM lump-sum formulas
False
True or False: The right-hand side variables in the discount rate formula represent the 3 key factors determining stock prices.
False
True or False: To change a decimal value to a percent, divide by 100.
False
True or False: We can determine which "PMT" we're being asked to solve for by noting what the problem provides in terms of r and n
False
Future value.Upstate University charges $21,000 a year in graduate tuition. Tuition rates are growing at 3.25% each year. You plan to enroll in graduate school in four years. What is your expected graduate tuition in four years?
$23,865.99
RadicaL CREATIONS Inc. just issued zero−coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond assuming annual compounding?
$239.39
If you can earn 6% per year, how much would you have to invest today to be able to purchase the car in #3 in two years? In five years?
$24,066; $22,729
True or False: We can find the nominal interest rate by subtracting the default and maturity premiums from the sum of the real rate and inflation.
False
You deposit $150 at the end of each of the next 12 years earning 9.00% per year. What would your balance be at the end of the 12 years?
$3,021.11
A financial planner recommends that you have accumulated $2.0 million by the time that you retire in 25 years. If you can earn an annual rate of return of 5%, how much must you invest for each of the next 25 years in order to achieve this goal?
$41,905
Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20−year, 7% annual coupon bonds with a $1,000 par value. The firm has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds?
6.54%
Solve for the following: (a) 18 ÷ 23 + (6 - 2) + 3 = _______; and (b) 10 + 1/2 ÷ 1/6 + 7 = _______.
7.78; 20
A security that is selling for $3,000 and promises to pay annual interest or $250 forever would have an annual yield of
8.33%
What is the EAR if the APR is 10.52% and compounding is daily?
Slightly above 11.09%
Select the statements below which correctly describe the relationship between a company and the community within which it operates. If a company fails to maintain a good relationship with the community, employees may not be loyal to the company causing high turnover and increased personnel costs for recruiting and training: A. If a company fails to maintain a good relationship with the community, employees may not be loyal to the company causing high turnover and increased personnel costs for recruiting and training. B. If a company abuses local facilities such as roads, and in general does not participate in the economic advancement of the local community, facilities such as roads and utilities may not be repaired or modernized by the local community impacting the company's ability to produce a profit. Your answer is correct. C. If the firm pollutes local streams or destroys the quality of life through noise pollution or other types of pollution, the local community may sue the company for its damages and the best local workforce members may choose not to work for the company. Your answer is correct. D. Maintaining a good working relationship with the surrounding community is a good business practice. Your answer is correct. E. A good community relationship is embedded in the goal of maximizing current share price or the equity value of the company.
all of the above
That a company chooses a new product to introduce into the market is a ______________________ decision, that a company chooses to sell a bond to finance the new product is a __________________ decision, and that a company sets production and inventory levels on the new product is a ____________________ decision.
capital budgeting:capital structure :working capital management
Given the following: default premium = 0.50 % pts.; inflation 3.75%; real rate = 1.25%; maturity premium = 1.15% pts., what would be the nominal rate?
6.65%
For a nominal interest rate of 10% and inflation of 3%, according to the Fisher Effect, what would be the approximate real rate?
7%