FIN test 2 ch.5-7

Pataasin ang iyong marka sa homework at exams ngayon gamit ang Quizwiz!

11) The most recent dividend (Div0) from Wallboard Inc, is $0.80, the dividend growth rate (g) is expected to be 6.25%, and the required rate of return (r) on the firm's stock is 10%. What is the stock price according to the constant growth dividend model? A) $22.67 B) $23.47 C) $21.85 D) $20.80

A) $22.67 =(.80*1.0625)/ .10-.0625

27) Which of the following is NOT a category for rating classifications of bonds? A) Investment grade bonds B) American grade bonds C) Extremely speculative grade bonds D) Speculative grade bonds

B) American grade bonds

2) 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. A) long-term equity B) long-term debt C) short-term debt D) short-term equity

B) long-term debt

17) Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving? A) 6% B) 5% C) 4% D) 3%

C) 4% Explanation: We can see that an inflation rate of 2% is 4% less than our 6% investment rate. Thus, 4% is the real rate of your reward for saving.

1) A bond may be issued by ________. A) companies B) state governments C) the federal government D) all of the above

D) all of the above

1) The phrase "price to rent money" is sometimes used to refer to ________. A) historical prices B) compound rates C) discount rates D) interest rates

D) interest rates

36) A putable bond allows the bond issuer to "call-in" the bond prior to maturity. TRUE or FALSE

FALSE Explanation: A putable bond gives the bondholder the right to sell the bond back to the company at a predetermined price prior to maturity.

5) You want to invest in a stock that pays $2.00 annual cash dividends for the next four years. At the end of the four years, you will sell the stock for $27.00. If you want to earn 11% on this investment, what is a fair price for this stock if you buy it today? A) $21.45 B) $23.99 C) $27.90 D) $25.42

B) $23.99 Explanation: MODE = END; N = 4; I = 11; PMT = 2; FV = 27; PV = ? = -23.9906

11) Quality Construction Products Inc. issued $1,000 face value 20-year bonds five years ago. These bonds are currently selling for $1,218.47. From this information, we can conclude that the Quality Construction Products Inc. bonds have a yield-to-maturity greater than the coupon rate on these bonds. TRUE OR FALSE

FALSE Explanation: Prices and interest rates are inversely related. Therefore, a higher price means the yield-to-maturity is less than the original coupon rate.

28) Assume you just bought a new boat and now have a boat loan to repay. The amount of the principal is $68,000, the loan is at 6.75% APR, and the monthly payments are spread out over 7 years. What is the loan payment? Use a calculator to determine your answer. A) $1,225.36 B) $1,206.58 C) $809.52 D) $1,081.01 Explanation: MODE = END; PV = -68,000; N = 84; I = 6.75/12; FV = 0; PMT = ? = 1,018.01

D) $1,081.01 Explanation: MODE = END; PV = -68,000; N = 84; I = 6.75/12; FV = 0; PMT = ? = 1,018.01

15) TravelEasy Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 8%, what is the firm's current price per bond? A) $578.82 B) $579.84 C) $1,675.47 D) $1,678.70

D) $1,678.70 Explanation: MODE = END; N = 30 x 2 = 60; I = 8/2 = 4; PMT = 140/2 = 70; FV = 1000; PV = ? = -1678.7047

16) Air H&H Inc. just paid a dividend of $1.33. Its stock has a dividend growth rate of 7.6% and a required return of 12.21%. What is the current stock price if we anticipate dividends stopping in 10 years? A) $18.46 B) $21.03 C) $11.92 D) $10.64

D) $10.64 Explanation:The price is given by multiplying two components. The first component is =1.33*(1+.076)/.1221-.076=31.043. 1-(1+.076)/(1+.1221)^10= 1 - 0.95891610 = 0.342634. Thus, price = $31.043 × 0.342634 = $10.6364, or about $10.64.

28) Which of the following statements is TRUE? A) Preferred stock usually has a stated or par value and, like bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date. B) The par value for preferred stock, unlike bonds, is never paid back. C) A preferred stock's cash dividend due each year is based on the stated dividend rate times the market value of the stock. D) Some preferred stocks are cumulative with respect to dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future.

D) Some preferred stocks are cumulative with respect to dividends, meaning that if a company skips a cash dividend, it must pay it at some point in the future. Explanation: Preferred stock usually has a stated or par value BUT UNLIKE bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date. The only time this par value would be paid to the shareholder is if the company ceases operations or retires the preferred stock. The cash dividend due each year is based on the stated dividend rate times the PAR VALUE of the stock.

22) 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 lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. D) 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 higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. Explanation:All other answers besides D have at least one word that disagrees with the correct words found in D

1) Which of the statements below is FALSE? A) Common stock usually carries the right to participate in the management of the firm through the right to vote for the members of the Board of Directors and for changes to the charter and bylaws of the company. B) Shareholders with super voting right shares have multiple votes per share - a fact that increases their influence and control over the company. C) Some firms issue several classes of common stock, and these classes may have unequal voting rights. D) The standard of one vote for each share cannot be altered

D) The standard of one vote for each share cannot be altered. Explanation: Although it is usually the standard of one vote for each share of stock owned, this standard CAN BE ALTERED.

7) Which of the following statements is TRUE if you increase your monthly payment above the required loan payment? A) The extra portion of the payment does not go to the principal. B) You can significantly increase the number of payments needed to pay off the loan. C) The extra portion of the payment increases the principal. D) You can significantly reduce the number of payments needed to pay off the loan.

D) You can significantly reduce the number of payments needed to pay off the loan.

6) You want to invest in a stock that pays $1.50 annual cash dividends for the next six years. At the end of the six years, you will sell the stock for $18.50. If you want to earn 7.5% on this investment, what is a fair price for this stock if you buy it today? A) about $18.45 B) about $15.29 C) about $22.45 D) about $19.03

D) about $19.03 Explanation: MODE = END; N = 6; I = 7.5; PMT = 1.5; FV =18.50; PV = ? = -19.0281

18) Rogue Motors Inc. has a 11% required rate of return. The firm does not expect to initiate dividends for 10 years, at which time it will pay $2.00 per share in dividends. At that time, the firm expects its dividends to grow at 6% forever. What is an estimate of the firms' price in 10 years (P10) if its dividend at the end of year 10 is $2.00? A) $42.40 B) $33.40 C) $31.20 D) $42.80

A) $42.40 Explanation: We use the formula: P10 =2*(1+.06)/.11-.06

33) Becky is seeking to expand her rare coin collection. Each year, rare coins increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 26 coins for what 25 coins would cost today. What is the approximate nominal rate necessary to compensate for waiting and to cover inflation? A) 7.00% B) 6.50% C) 6.00% D) 5.00%

A) 7.00% Explanation: The inflation rate is 3.00%. The real rate is given by - 1 where FV = 26, PV = 25 and n = 1. We have: real rate - 1 = 0.04 or 4.00%. Nominal rate = real rate + inflation = 3.00% + 4.00% = 7.00%, which is the rate necessary to compensate her for waiting and to cover inflation.

30) You just bought a car and took out a loan for $30,000 and are scheduled to make monthly payments for 6 years at an annual rate of 3.9% APR. Suppose you add $132.01 each month to the contracted monthly car payment. This extra amount is applied to the principal. How long will it take you to pay off your loan of $30,000? Use a calculator to determine your answer. A) It will take just over 54 months. B) It will take just over 45 months. C) It will take just over 38 months. D) It will take just over 30 months.

A) It will take just over 54 months Explanation: First, determine the original payment MODE = END; PV = -30,000; N = 72; I = 3.9/12; FV = 0; PMT = ? = 467.99 Next add in the additional payment = 467.99+132.01 = 600.00 Solve again MODE = END; PV = -30,000; N = 72; I = 3.9/12; FV = 0; PMT = 600; N = ? = 54.65

31) With a bearer bond, whoever held it was entitled to the ________ and the ________. A) interest payments; principal B) dividend payments; principal C) interest payments; dividend payments D) interest payments; voting rights

A) interest payments; principal

3) Bonds are sometimes called ________ securities because they pay set amounts on specific future dates. A) variable-income B) fixed-income C) bully D) real

B) fixed-income

32) When real property is used as collateral for a bond, it is termed a/an ________. A) debenture B) mortgaged security C) indenture D) senior bond

B) mortgaged security

10) Twenty years ago Bison Enterprises Inc. issued thirty-year 9% 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 firm's bonds is now 11%. Given this information, what is the price today for a bond from this issue? A) $1,000 B) $1,116.54 C) $882.22 D) $914.41

C) $882.22 Explanation: MODE = END; N = 10; I = 11; PMT = 90; FV = 1000; PV = ? = -882.2154

13) When estimating the annual growth rate of a dividend stream, we can use a short-cut to determining the average growth rate by ________. A) using just the first dividend in the stream and the time-value of money equation B) using just the last dividend in the stream and the time-value of money equation C) using the first and last dividend in the stream and the time-value of money equation D) using the first and last dividend in the stream and the future value interest factor

C) using the first and last dividend in the stream and the time-value of money equation

20) Angel is seeking to expand her rare stamp collection. Each year, rare stamps increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 16 stamps for what 15 stamps would cost today. What is her real interest rate (or reward for waiting)? A) Her real interest rate is about 4.23%. B) Her real interest rate is about 5.33%. C) Her real interest rate is about 6.33%. D) Her real interest rate is about 6.67%.

D) Her real interest rate is about 6.67%. Explanation: The real interest rate or reward is given by - 1 where FV = 16, PV = 15 and n = 1. We have: real interest rate or reward = - 1 = 0.0667 or 6.67%.

21) MacroMedia Inc. $1,000 par value bonds are selling for $832. Which of the following statements is TRUE? A) The bonds must have more than six years to maturity. B) The bonds are selling at a premium to the par value. C) The coupon rate is greater than the yield to maturity. D) None of the above is true.

D) None of the above is true.

28) A basis point is ________. A) one-thousandth of a percentage point B) one percentage point C) one-tenth of a percentage point D) one-hundredth of a percentage point

D) one-hundredth of a percentage point

33) A sinking fund may be used for each of the following EXCEPT ________. A) to be held on to and used to pay off the principal at maturity B) to call in bonds early C) to buy back some of the bonds over time D) to be used to pay off other outstanding debt issues

D) to be used to pay off other outstanding debt issues

34) In valuing preferred stock, we can use either the constant dividend model or the growth model with a positive growth rate. TRUE OR FALSE

FALSE Explanation: In valuing preferred stock, we can use either the constant dividend model or the growth model with a ZERO growth rate.

39) Informational efficiency has to do with the speed and accuracy of processing a buy or sell order at the best available price. TRUE OR FALSE

FALSE Explanation: OPERATIONAL efficiency has to do with the speed and accuracy of processing a buy or sell order at the best available price.

14) The coupon rate for a bond is the interest rate for the coupons, stated in annual terms, and printed on the bond. It normally remains the same throughout the life of the bond. TRUE OR FALSE

TRUE

14) You just bought a car and took out a loan for $30,000 and are scheduled to make monthly payments for 6 years at an annual rate of 3.9% APR. Suppose you add $132.01 each month to the contracted monthly car payment. This extra amount is applied to the principal. How long will it take you to pay off your loan of $30,000? Use a calculator to determine your answer. A) It will take just over 54 months. B) It will take just over 45 months. C) It will take just over 38 months. D) It will take just over 30 months.

A) It will take just over 54 months. Explanation: First, determine the original payment MODE = END; N = 72; PV = -30,000; I = 3.9/12; FV = 0; PMT = ? = 467.99 Next add in the additional payment = 467.99+132.01 = 600.00 MODE = END; PV = -30,000; I = 3.9/12; PMT = 600.00; FV = 0; N =? = 54.65; just over 4.5 years

40) James is a rational investor wishing to maximize his return over a 20-year period. The current yield curve is inverted with one-year rates at 5.00% and 20-year rates at 3.50%. James will invest in the lower-rate 20-year bonds if ________. A) he thinks rates will fall in the future and locking in long-term rates today may provide the highest long-run average return B) he thinks rates will rise in the future and locking in long-term rates today may provide the lowest long-run average return C) he thinks rates will remain flat at 5% in the future and locking in long-term rates today will prevent him from appearing greedy to those without this investment opportunity D) he thinks rates will rise in the future and locking in long-term rates today may provide the highest long-run average return

A) he thinks rates will fall in the future and locking in long-term rates today may provide the highest long-run average return

10) Wallboard Inc, plans to pay a dividend in one year (Div1) of $0.80, the dividend growth rate (g) is expected to be 6%, and the required rate of return (r) for the firm's stock is 10%. What is the stock price, according to the constant growth dividend model? A) $20.80 B) $30.80 C) $20.00 D) $15.00

Answer: C =.80/.10-.06

20) Which of the statements below is TRUE? A) A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks. B) A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends. C) A problem with using the dividend growth model is that it produces a positive expected return whenever a firm cuts dividends. D) A problem with using the dividend growth model is that it produces a negative expected return whenever a firm increases its dividends.

B) A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends. Explanation: One problem with using the dividend growth model is that it appears to underestimate the expected return for SOME stocks. Another problem is that it produces a NEGATIVE expected return whenever a firm CUTS its dividends.

30) 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? A) Putable bond B) Callable bond C) Convertible bond D) Junior bond

B) Callable bond

32) Buxton Corp. has outstanding borrowings. One of these borrowings is nonconvertible preferred stock (cumulative) with a par value of $85 and an annual dividend rate of 6.20%. This preferred stock is currently selling for $56.50 per share. What is the yield or return (r) on this preferred stock? A) 9.89% B) 9.56% C) 9.32% D) 9.22%

C) 9.32% Explanation: We first determine the annual dividend by multiplying the dividend rate against the par value: $85 × 0.062 = $5.27. Now, using the equation r =dividend/price and dividing the 5.27

23) The dividend model requires that a firm has a cash dividend history and that the dividend history shows a ________. A) constant dividend or a constant growth in price where constant growth can be either positive or negative B) positive dividend or a negative growth in dividends C) constant dividend or a positive growth in dividends D) constant price or a positive growth in dividends

C) constant dividend or a positive growth in dividends Explanation: The dividend model requires that a firm has a cash dividend history and that the dividend history shows a constant dividend or a positive growth in dividends. The requirements of a constant dividend and positive growth are essential in deriving the Dividend Growth Model.

35) Strong-form efficient markets theory proclaims that ________. A) one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market B) one can exploit publicly available news or financial statement information to routinely outperform the market C) current prices reflect the price and volume history of the stock, all publicly available information, and all private information D) current prices reflect the price and volume history of the stock, all publicly available information, but no private information

C) current prices reflect the price and volume history of the stock, all publicly available information, and all private information

29) Which of the following statements is FALSE? A) Preferred stock usually has a stated or par value but unlike bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date. B) The only time the par value of preferred stock would be paid to the shareholder is if the company ceases operations or retires the preferred stock. C) Skipped preferred dividends become a liability of the company. D) Preferred stock cannot be converted into common stock.

D) Preferred stock cannot be converted into common stock.

24) Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive than the dividend models and provides expected returns for companies based on aspects besides their historical dividend patterns. Which of the below is NOT one of these aspects? A) The company's risk B) The premium for taking on risk C) The reward for waiting D) Stable dividends

D) Stable dividends Explanation: What we need is a pricing model that is more inclusive than the dividend model in that it can estimate expected returns for stocks without the need for a stable dividend history. The capital asset pricing model (CAPM) is more inclusive and provides expected returns for companies based on (1) their risk, (2) the premium for taking on risk, and (3) the reward for waiting, and not on their historical dividend patterns.

13) The coupon payment for an annual-coupon corporate bond is equal to the coupon rate multiplied by the current price of the bond. TRUE OR FALSE

FALSE Explanation: The coupon payment for an annual-coupon corporate bond is equal to the coupon rate multiplied by the PAR VALUE of the bond.

40) In weak-form efficient markets, current prices already reflect the price history and volume of the stock, as well as all available public information. TRUE OR FALSE

FALSE Explanation: In SEMI-STRONG-FORM efficient markets, current prices already reflect the

12) Assume you just bought a new boat and now have a boat loan to repay. The amount of the principal is $68,000, the loan is at 6.75% APR, and the monthly payments are spread out over 7 years. What is the loan payment? Use a calculator to determine your answer. A) $1,225.36 B) $1,206.58 C) $809.52 D) $1,081.01

D) $1,081.01 Explanation: MODE = END; PV = -68,000; I = 6.75/12; FV = 0; PMT = 1,018.01

26) If a bond is selling at a premium above the par value that means that the yield to maturity is greater than the coupon rate. TRUE or FALSE

FALSE Explanation: If a bond is selling at a premium above the par value that means the yield to maturity is LESS than the coupon rate.

20) MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE? A) The bond market currently requires a rate (yield) less than the coupon rate. B) The bonds are selling at a premium to the par value. C) The coupon rate is greater than the yield to maturity. D) All of the above are true.

D) All of the above are true.

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

D) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. Explanation: Interest CAN BE PAID DAILY (even though it may not be the common mode of payment).

2) Which of the statements below is FALSE? A) Selling of shares is the selling of ownership in the company. B) A company is said to go "public" when it opens up its ownership structure to the general public through the sale of common stock. C) Companies choose to sell stock to attract permanent financing through equity ownership of the company. D) Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue.

D) Most companies have the resident expertise to complete an initial public offering (IPO) or first public equity issue. Explanation: Most companies DO NOT HAVE the resident expertise to complete an initial public offering (IPO), or first public equity issue.

37) 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 lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. D) 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 higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. Explanation: All other answers besides D have at least one word that disagrees with the correct words found in D.

38) Which of the statements below is FALSE? A) If you invest money for a short period and buy a six-month CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period. B) The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. C) The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full. D) The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.

D) The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands. Explanation: The longer the loan, the greater the risk of nonpayment and the HIGHER the interest rate the lender demands.

18) Douglas Distributing Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 6% and the current yield to maturity is 7%, what is the firm's current price per bond? A) $875.28 B) $1,000.00 C) $934.34 D) $466.79

A) $875.28 Explanation: MODE = END; N = 2 x 30 = 60; I = 7/2 = 3.5; PMT = 60/2 = 30; FV = 1000; PV = ? = -875.2763

16) TravelEasy Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 15%, what is the firm's current price per bond? A) $934.20 B) $1,000.00 C) $934.34 D) $466.79

A) $934.20 Explanation: MODE = END; N = 30 x 2 = 60; I = 15/2 = 7.5; PMT = 140/2 = 70; FV = 1000; PV = ? = -934.2031

39) A U.S. Treasury bill is currently selling at a discount basis of 4.25%. The par value of the bill is $100,000, and will mature in 180 days. What is the price of this Treasury bill? A) $97,875.00 B) $97,937.50 C) $96,975.00 D) $99,500.00

A) $97,875.00 Explanation: Price=face value × [1 - (discount rate × )] = $100,000 × [1 - (.0425 × 180/360)] = $97,875.00

19) Becky is seeking to expand her stamp collection. Each year, stamps increase in price at a seven percent rate. She believes that if she invests her money for one year, she should be able to buy 24 stamps for what 23 stamps would cost today. What is her real interest rate or reward for waiting? A) 4.35% B) 3.35% C) 2.25% D) 1.00%

A) 4.35% Explanation: The real interest rate or reward is given by - 1; where FV = 24, PV = 23 and n = 1.

24) Douglas Dynamics Inc. has outstanding $1,000 face value 4% coupon bonds that make semiannual payments, and have 10 years remaining to maturity. If the current price for these bonds is $938.57, what is the annualized yield to maturity? A) 4.78% B) 4.96% C) 5.02% D) 5.13%

A) 4.78% Explanation: MODE = END; PV = -938.57; N = 10 x 2 = 20; PMT = 40/2 = 20; FV = 1000; I = ? = 2.39; Annual interest rate = 2 x 2.39 = 4.7799

32) The real rate is 1.25% and inflation is 5.25%. What is the approximate nominal rate? A) 6.50% B) 5.25% C) 3.25% D) 1.25%

A) 6.50% Explanation: Roughly speaking, the nominal rate is the real rate plus inflation. Thus, the nominal rate is 1.25% plus 5.25% equals 6.50%.

18) The real rate is 1.25% and inflation is 5.25%. What is the approximate nominal rate? A) 6.50% B) 5.25% C) 3.25% D) 1.25%

A) 6.50% Explanation: Roughly speaking, the nominal rate is the real rate plus inflation. Thus, the nominal rate is 1.25% plus 5.25% equals 6.50%.

35) Which of the statements below is FALSE? A) No part of the default premium has to do with the frequency of default by the borrower. B) For the home loan, the collateral (the house) is an asset that will increase in value over time (in general) compared to a car loan where the collateral (the car) decreases in value over time. C) With a house, the potential loss due to default is less than a car because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan. D) A personal credit card essentially has no collateral so the potential loss is even higher if the customer defaults on his or her credit card payments.

A) No part of the default premium has to do with the frequency of default by the borrower. Explanation: A PART of the default premium has to do with the frequency of default by the borrower.

25) What is the EAR if the APR is 5% and compounding is quarterly? A) Slightly above 5.09% B) Slightly below 5.09% C) Under 5.00% D) Over 5.25%

A) Slightly above 5.09% Explanation: EAR = [(1 + APR/m)m] -1 = [(1 + .05/4)4] - 1 = 5.0945%.

4) The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator. A) current yield B) yield to maturity C) bond discount rate D) coupon rate

A) current yield

12) Bartlett Batteries Inc. just paid an annual dividend of $1.12. If you expect a constant growth rate of 4% and have a required rate of return of 13%, what is the current stock price according to the constant growth dividend model? A) $12.44 B) $12.94 C) $13.46 D) There is not enough information to answer this question.

B) $12.94 =1.12*(1.04)/.13-.04

11) Assume you just bought a new car and now have a car loan to repay. The amount of the principal is $22,000, the loan is at 5.9% APR, and the monthly payments are spread out over 6 years. What is the loan payment? Use a calculator to determine your answer. A) $305.56 B) $363.57 C) $331.14 D) $297.70 Explanation: MODE = END; N = 72; PV = -22,000; I = 5.9/12; FV = 0; PMT = 363.57

B) $363.57 Explanation: MODE = END; N = 72; PV = -22,000; I = 5.9/12; FV = 0; PMT = 363.57

27) Assume you just bought a new car and now have a car loan to repay. The amount of the principal is $22,000, the loan is at 5.9% APR, and the monthly payments are spread out over 6 years. What is the loan payment? Use a calculator to determine your answer. A) $305.56 B) $363.57 C) $331.14 D) $297.70

B) $363.57 Explanation: MODE = END; PV = -22,000; N = 363.57; I = 5.9/12; FV = 0; PMT = ? = 363.57

17) Cavalier Custom Design Inc. just paid a dividend of $0.73. Its stock has a dividend growth rate of 5.62% and a required return of 10.21%. What is the current stock price if we anticipate dividends stopping in 20 years? A) $4.62 B) $9.62 C) $10.62 D) $16.80

B) $9.62 Explanation: The price is given by multiplying two components. The first component is =.73+(1+.0562)/.1021-.0562=16.798. The second component is 1-(1+.0562)/(1+.1021)^20= 1 - 0.95835220 = 0.572926. Thus, price = $16.798 × 0.572926 = $9.624 or about $9.62.

8) Ten years ago Pancake House Inc. issued twenty-five-year 8% 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 Bacon bonds is now 9%. Given this information, what is the price today for such a bond? A) $1,000 B) $919.39 C) $901.77 D) $1.085.59

B) $919.39 Explanation: MODE = END; N = 15; I = 9; PMT = 80; FV = 1000; PV = ? = -919.3931

38) A U.S. Treasury bill is currently selling at a discount basis of 2.25%. The par value of the bill is $100,000, and will mature in ninety days. What is the price of this Treasury bill? A) $97,750.00 B) $99,437.5 C) $99,952.05 D) $97,952.78

B) $99,437.5 Explanation: Price = face value × [1 - (discount rate / 360)] = $100,000 × [1 - (.0225 × 90/360)] = $99,437.50

23) 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? A) 15.00% B) 16.70% C) 16.66% D) 15.47%

B) 16.70% Explanation: MODE = END; PV = -938.45; N = 6; PMT = 150; FV = 1000; I = ? = 16.7016

15) For the Cloud B&B Company Inc., a stream of past dividends includes an initial dividend is $1.20 and the most recent dividend of $1.80. The number of years between these two dividends (n) is 8 years. What is the average annual growth rate of dividends during this eight-year period? Use a calculator to determine your answer. A) 5.00% B) 5.20% C) 7.50% D) 6.72%

B) 5.20% Explanation: MODE = END; PV = -1.20; N = 8; PMT = 0; FV = 1.80; I = ? = 5.1990

25) Douglas Dynamics Inc. has outstanding $1,000 face value 12% coupon bonds that make semiannual payments, and have 8 years remaining to maturity. If the current price for these bonds is $1,274.35, what is the annualized (annual) yield to maturity? A) 7.81% B) 7.40% C) 6.12% D) 6.00%

B) 7.40% Explanation: MODE = END; PV = -1,274.35; N = 8 x 2 = 16; PMT = 120/2 = 60; FV = 1000; I = ? = 3.69777; Annual interest rate = 2 x 3.69777 = 7.3955

13) You just entered into a $150,000 30-year home mortgage at an annual interest rate of 4.25% making monthly payments of $737.91. Suppose you add an additional payment of $295.97 each month to the $737.91 house payment making your total monthly payments equal to $1,033.88. This extra amount is applied against the principal of the original loan. How long will it take you to pay off your loan of $150,000? Use a calculator to determine your answer. A) It will take about 186 months. B) It will take about 206 months. C) It will take about 216 months. D) It will take about 265 months.

B) It will take about 206 months. Explanation: MODE = END; -150,000; I = 4.25/12; FV = 0; PMT = 1,033.88; N = ? = 204

29) You just entered into a $150,000 30-year home mortgage at an annual interest rate of 4.25% making monthly payments of $737.91. Suppose you add an additional payment of $295.97 each month to the $737.91 house payment making your total monthly payments equal to $1,033.88. This extra amount is applied against the principal of the original loan. How long will it take you to pay off your loan of $150,000? Use a calculator to determine your answer. A) It will take about 186 months. B) It will take about 206 months. C) It will take about 216 months. D) It will take about 265 months. Explanation: MODE = END; PV = -150,000; I = 4.25/12; PMT = 1,033.88; FV = 0; N = ? = 204

B) It will take about 206 months. Explanation: MODE = END; PV = -150,000; I = 4.25/12; PMT = 1,033.88; FV = 0; N = ? = 204

29) Moody's has developed a corporate bond default-risk rating system using capital and lower case letters and numbers. Below are several examples of Moody's ratings. Which answer choice lists a collection of ratings for "high credit investment grade" bonds? A) Baa1, A1, A3 B) Ba1, Baa2, Baa3 C) Aa2, Aa3, A1 D) Caa, Ca, C

C) Aa2, Aa3, A1

5) Which of the following statements is TRUE? A) On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the EAR rate. B) On many calculators the TVM key for interest is Y/I; this is Interest per Year, or the APR rate. C) On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the APR rate. D) On many calculators the TVM key for a period is I/Y.

C) On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the APR rate. Explanation: All other answers besides C have at least one word and/or fraction that disagree with the correct words found in C.

6) Which of the statements below is FALSE? A) Reducing principal at a faster pace reduces the overall interest paid on a loan. B) The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher. C) Reducing principal at a faster pace increases the overall interest paid on a loan. D) Monthly interest on a loan is equal to the beginning balance times the periodic interest rate.

C) Reducing principal at a faster pace increases the overall interest paid on a loan.

10) Suppose that over the life of the loan, the total interest expense for a monthly loan is $17,000, while the total interest payment for an annual loan is $19,000. Which of the below statements is FALSE? A) The difference reflects the reduction of the principal each month versus the annual reduction of the principal. B) The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher. C) Reducing principal at a slower pace reduces the overall interest paid on a loan. D) Reducing principal at a slower pace increases the overall interest paid on a loan.

C) Reducing principal at a slower pace reduces the overall interest paid on a loan.

26) What is the EAR if the APR is 10.52% and compounding is daily? A) Slightly above 10.09% B) Slightly below 11.09% C) Slightly above 11.09% D) Over 11.25%

C) Slightly above 11.09% Explanation: EAR = [(1 + APR/m)m] -1 = [(1 + 0.1052/365)365] -1 = 11.0916%.

2) 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 lending money to you with a promise to repay that money with interest. C) The bank is technically renting money from you with a promise to repay that money with interest. D) The bank is lending money to you, but not borrowing money from you.

C) The bank is technically renting money from you with a promise to repay that money with interest.

8) Which of the following statements is FALSE if you increase your monthly payment above the required loan payment? A) The extra portion of the payment goes to the principal. B) You can significantly decrease the number of payments needed to pay off the loan. C) The extra portion of the payment increases the principal. D) Besides lowering the principal, you can significantly reduce the number of payments needed to pay off the loan.

C) The extra portion of the payment increases the principal. Explanation: If you increase your monthly payment above the required loan payment, then the additional portion of the payment goes to DECREASING the principal. But the important fact to note is that an extra payment above the required annuity can significantly reduce the number of payments needed to pay off the loan.

22) Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? A) When the yield to maturity and coupon rate are the same, the bond is called a par value bond. B) A bond selling at a premium means that the coupon rate is greater than the yield to maturity. C) When interest rates go up, bond prices go up. D) A bond selling at a discount means that the coupon rate is less than the yield to maturity.

C) When interest rates go up, bond prices go up.

34) Nancy is seeking to expand her rare stamp collection. Each year, rare stamps increase in price at a three percent rate. She believes that if she invests her money for one year, she should be able to buy 16 stamps for what 15 stamps would cost today. What is the approximate nominal rate necessary to compensate for waiting and to cover inflation? A) 3.00% B) 3.67% C) 6.67% D) 9.67%

D) 9.67% Explanation: The inflation rate is 3.00%. The real interest rate or reward is given by - 1 where FV = 16, PV = 15 and n = 1. We have: real interest rate or reward = - 1 = 0.0667 or 6.67%. Nominal rate = real rate + inflation = 3.00% + 6.67% = 9.67%, which is the rate necessary to compensate her for waiting and to cover inflation.

30) Peppercorn Inc. has outstanding nonconvertible preferred stock (cumulative) that pays a quarterly dividend of $1.00. If your required rate of return is 8.0%, what should you be willing to pay for 1000 shares of the firm? A) $50,000.00 B) $52,621.58 C) $52,611.58 D) $52,601.58

A) $50,000.00 Explanation: This situation is that of a perpetuity without growth that has a quarterly required rate of return of .08/4=.02, . Thus, you should be willing to pay per share: P0 =1/.02=50 For 1000 shares, you should be willing to pay 1000 x $50.00 = $50,000

36) In ________, current prices reflect the price history and trading volume of the stock. It is of no use to chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market. A) weak-form efficient markets B) strong-form efficient markets C) semi-strong-form efficient markets D) operational efficient markets

A) weak-form efficient markets

37) The ________ are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets. A) domestic bond markets B) equity markets C) fixed income markets D) foreign bond markets

B) equity markets

38) Most academic research supports markets as ________ efficient. A) weak-form B) semi-strong-form C) strong-form D) not at all

B) semi-strong-form

22) Dividend models suggest that the value of a financial asset is determined by the ________ the owner is entitled to while holding the asset. A) present cash flows B) past cash flows C) future cash flows D) past and present cash flows

C) future cash flows Explanation: Dividend models do not focus on past and present cash flows but future cash flows, which are discounted by a required rate of return.

31) Allison Corp. has just issued nonconvertible preferred stock (cumulative) with a par value of $20 and an annual dividend rate of 4.25%. The preferred stock is currently selling for $18.75 per share. What is the annual yield or return (r) on this preferred stock? A) 4.11% B) 4.87% C) 4.26% D) 4.53%

D) 4.53% Explanation:We first determine the annual dividend by multiplying the par value by the dividend rate. We have: $20 × 0.0425 = $0.85. Now, using the equation r =dividend/price and dividing the $0.85 annual dividend by the current price of $18.75, we have: r = 0.045333, or about 4.53%.

21) Which of the statements below is FALSE? A) The dividend model requires that a firm have a cash dividend history and that the dividend history shows a constant dividend or a positive growth in dividends. B) A problem with using the dividend growth model is that it appears to underestimate the expected return for some stocks. C) A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts its dividends. D) A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks.

D) A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks. Explanation: A problem with using the dividend growth model is that it appears to underestimate the expected return for SOME stocks.

25) Which of the statements below is FALSE? A) Shortcomings of the dividend pricing models suggest that we need a pricing model that is more inclusive and that can estimate expected returns for stocks without the need for a stable dividend history. B) A firm's dividend in 2008 was less than its dividend in 2003. This means that the estimated growth rate is negative, and this produces a negative expected return. C) The dividend models (growth or constant dividend) appeal to a fundamental concept of financial assets, that is, the value of the financial asset is determined by the future cash flow the owner is entitled to while holding the asset. D) Lack of a dividend pattern is not a problem for the dividend models to work.

D) Lack of a dividend pattern is not a problem for the dividend models to work. Explanation: Lack of a dividend pattern means that the model CANNOT produce an expected return.

26) The dividend growth model has a limitation due to the necessity to have a non-growing dividend pattern in order for it to work. TRUE OR FALSE Explanation: The dividend growth model has a limitation due to the necessity to have a GROWING dividend pattern in order for it to work.

FALSE Explanation: The dividend growth model has a limitation due to the necessity to have a GROWING dividend pattern in order for it to work.

33) The term "preferred" comes from the fact that preferred shareholders receive all past (if cumulative) and present dividends before common shareholders can receive any cash dividends—in other words, their dividend claims are preferred over common stock dividend claims. TRUE OR FALSE

TRUE

An application of the capital asset pricing model, called the security market line, is more inclusive than the dividend growth model for pricing stocks and provides expected returns for companies based on their risk, the premium for taking on risk, and the reward for waiting and not on their historical pattern of dividends. TRUE OR FALSE

TRUE

9) Fifteen years ago McDemott's Motels Inc. issued twenty-five-year 10% 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 firm's bonds is now 6%. Given this information, what is the price today for such a bond? A) $1,000 B) $1,294.40 C) $1,091.08 D) $914.41

B) $1,294.40 Explanation: MODE = END; N = 10; I = 6; PMT = 100; FV = 1000; PV = ? = -1294.4035

8) A corporation is scheduled to produce a line of products for the next ten years and then go out of business. The firm will pay an annual dividend of $1.75 for only those ten years. What is the present value of a share for this company if we want an 8% annual return on the stock? A) $11.74 B) $12.97 C) $14.97 D) $15.97

A) $11.74 Explanation: MODE = END; N = 10; I = 8; PMT = 1.75; FV = 0; PV = ? = -11.7426

7) Craftwell Inc. pays a $0.75 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual return of 10.5% on your investment? A) $28.57 B) $29.17 C) $30.02 D) $30.94

A) $28.57 Explanation: Quarterly rate of = 2.625%; Price = = = $28.57

7) Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________. A) $80 B) $40 C) $90 D) $45

A) $80 Explanation: The annual interest or coupon payment is equal to the coupon rate multiplied by the par value of the bond. Here that is 0.08 × $1,000 = $80.

39) James is a rational investor wishing to maximize his return over a 20-year period. The current yield curve is inverted with one-year rates at 5.00% and 20-year rates at 3.50%. James will invest in the lower-rate 20-year bonds if ________. A) he thinks rates will fall in the future and locking in long-term rates today may provide the highest long-run average return B) he thinks rates will rise in the future and locking in long-term rates today may provide the lowest long-run average return C) he thinks rates will remain flat at 5% in the future and locking in long-term rates today will prevent him from appearing greedy to those without this investment opportunity D) he thinks rates will rise in the future and locking in long-term rates today may provide the highest long-run average return

A) he thinks rates will fall in the future and locking in long-term rates today may provide the highest long-run average return Explanation: Locking in low long-term rates today may be a successful strategy if long-term rates become even lower in the future. If rates are expected to rise in the future, then locking in the lower long-term rates now will result in a LOWER long-run average, which is NOT a rational decision.

34) When a bond is callable, the ability to call the bond is an option for ________. A) the bond issuer B) the bond purchaser C) a mutual decision between the issuer and the purchaser of the bond D) the trustee holding the bond

A) the bond issuer

3) The hiring process for an investment banker can happen in two ways. Which of the below is one of these ways? A) Randomly choose an investment banking firm from a list of underwriting firms. B) Pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry. C) Have the primary government regulator of your industry choose the best investment banking firm for your company. D) Solicit advice from a government agency and use it as your primary guide in choosing an investment banker.

B) Pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry. Explanation: A company can simply pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry, or it can solicit bids from many investment bankers. The most common practice for corporations is the hand-picked selection process, and the most common for government agencies is the multiple-bidder selection process.

4) Part of the negotiation with the investment banker during the selection process has to do with how the investment banker will be compensated for taking the company public. One of these two standard compensation packages involves ________. A) a firm-commitment approach, in which the investment banker essentially buys the entire stock issue from the company at several prices B) a best efforts approach, in which the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock C) a best efforts approach, in which the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue at the auction for a higher price D) a firm-commitment approach, in which the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock

B) a best efforts approach, in which the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock Explanation: There are two standard compensation packages. The first is a firm-commitment approach. With firm commitment, the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue for a higher price. A second compensation is a best efforts sale by the investment banker. Here, the investment banker pledges to do his or her best to sell the shares and will take a small percentage of the sale of each stock. The firm, however, is not guaranteed a specific amount from the sale-only the proceeds of the sale minus the commission paid to the investment banker on a per-share basis.

35) A ________ is an unsecured bond, and most of the bonds sold today in the United States are of this type. A) mortgage bond B) debenture C) senior bond D) bond indenture

B) debenture

5) 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. A) current yield B) yield to maturity C) prime rate D) coupon rate

B) yield to maturity

17) Quality Production Products Inc. has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 12% and the current yield to maturity is 10%, what is the firm's current price per bond? A) $934.20 B) $1,000.00 C) $1,171.59 D) $1,362.74

C) $1,171.59 Explanation: MODE = END; N = 20 x 2 = 40; I = 10/2 = 5; PMT = 120/2 = 60; FV = 1000; PV = ? = -1171.5909

19) 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 if it is priced in the conventional manner? A) $1,000 B) $239.39 C) $231.38 D) This question cannot be answered because the coupon payment information is missing.

C) $231.38 Explanation: MODE = END; N = 30; I = 10/2 = 5; PMT = 0; FV = 1000; PV = ? = -231.3774

9) You buy a stock for which you expect to receive an annual dividend of $2.10 for the ten years that you plan on holding it. After 10 years, you expect to sell the stock for $26.15. What is the present value of a share for this company if you want an 8% return? A) $7.72 B) $15.97 C) $26.20 D) $31.41

C) $26.20 Explanation: MODE = END; N = 10; I = 8; PMT = 2.10; FV = 26.15; PV = ? = -26.2037

16) Suppose you postpone consumption so that by investing at 5% you will have an extra $500 to spend in one year. Suppose that inflation is 2% during this time. What is the approximate real increase in your purchasing power? A) $800 B) $500 C) $300 D) $200

C) $300 Explanation: We can see that an inflation rate of 2% is 2/5 of our 5% rate of investment. Thus, 3/5 of the $500, or $300, is the real increase in your purchasing power.

24) Kenna invests $5,000 today, compounded monthly, with an annual interest rate of 8.52%. What amount of interest will she earn in one year? A) $334.04 B) $5,443.04 C) $443.04 D) $5,334.04

C) $443.04 Explanation: PV = -$5,000 PMT = 0, I=8.52; N = 12; FV = ? = $5,443.04 Interest earned = FV - PV = $5,443.04 - $5,000 = $443.04.

14) You are examining a firm with a stream of past dividends where the initial dividend is $1.32 and the most recent dividend is $1.96. The number of years between these two dividends (n) is 6 years. What is the average annual dividend growth rate during this six-year period? Use a calculator to determine your answer. A) 4.74% B) 5.35% C) 6.81% D) 7.35%

C) 6.81% Explanation: MODE = END; PV = -1.32; N = 6; PMT = 0; FV = 1.96; I = ? = 6.8104

21) Which of the statements below is FALSE? A) A part of the default premium has to do with the frequency of default by the borrower. B) For the home loan, the collateral (the house) is an asset that will increase in value over time (in general), compared with a car loan in which the collateral (the car) decreases in value over time. C) With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan. D) A personal credit card essentially has no collateral, so the potential loss is even higher if the customer defaults on his or her credit card payments.

C) With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan. Explanation: With a HOUSE, the potential loss due to default is less than a car because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan.

36) Which of the statements below is FALSE? A) A part of the default premium has to do with the frequency of default by the borrower. B) For the home loan, the collateral (the house) is an asset that will increase in value over time (in general), compared with a car loan in which the collateral (the car) decreases in value over time. C) With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan. D) A personal credit card essentially has no collateral, so the potential loss is even higher if the customer defaults on his or her credit card payments.

C) With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan. Explanation: With a HOUSE, the potential loss due to default is less than a car because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan.

37) Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments. A) bills; bonds; notes B) notes; bills; bonds C) notes; bonds; bills D) bonds; bills; notes

C) notes; bonds; bills

4) 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. A) number of compounding periods for the length of an investment B) number of discounting periods for the length of an investment C) number of compounding periods per year D) number of compounding periods per month

C) number of compounding periods per year

23) What if Jennifer were to invest $2,750 today, compounded semiannually, with an annual interest rate of 5.25%. What amount of interest will Jennifer earn in one year? A) $2,896.27 B) $84.27 C) $525.27 D) $146.27

D) $146.27 Explanation: PV = -$2,750; PMT = 0; I =5.25; N = 2, FV = ? = $2,896.27.I. interest earned FV - PV = $2,896.27 - $2,750 = $146.27.

19) Nash Inc. has an 12% required rate of return. It does not expect to initiate dividends for 15 years, at which time it will pay $3.00 per share in dividends. At that time, Nash expects its dividends to grow at 6% forever. What is an estimate of Nash's price in 15 years (P15) if its dividend at the end of year 15 is $3.00? A) $33.33 B) $55.00 C) $57.50 D) $53.00

D) $53.00 Explanation: P15 = 3*(1+.06)/.12-.06

31) Assume that you are willing to postpone consumption of $1,000 today and buy a certificate of deposit (CD) at your local bank with the $1,000. Holding the CD for one year provides you with an 8% reward for saving or postponing consumption. This reward for postponing consumption implies that at the end of the year you will have how much more money for spending? A) $79.50 B) $79.75 C) $79.90 D) $80.00

D) $80.00 Explanation: We take 8% times $1,000 and get $80.00 more for spending.

15) Assume that you are willing to postpone consumption of $1,000 today and buy a certificate of deposit (CD) at your local bank with the $1,000. Holding the CD for one year provides you with an 8% reward for saving or postponing consumption. This reward for postponing consumption implies that at the end of the year you will have how much more money for spending? A) $79.50 B) $79.75 C) $79.90 D) $80.00

D) $80.00 Explanation:We take 8% times $1,000 and get $80.00 more for spending.

9) Suppose that over the life of the loan, the total interest expense for a monthly loan is $7,000, while the total interest payment for an annual loan is $8,000. Which of the below statements is FALSE? A) The difference reflects the reduction of the principal each month versus the annual reduction of the principal. B) The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher. C) Reducing principal at a faster pace reduces the overall interest paid on a loan. D) The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is lower.

D) The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is lower. Explanation: The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is HIGHER.

6) The four steps to determining the price of a bond are ________. A) determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons B) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons C) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons D) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons

D) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons

40) The Department of the Treasury offers three types of "bonds" for sale: Treasury bills, Treasury munis, and Treasury bonds: TRUE or FALSE

FALSE Explanation: The Department of the Treasury offers Treasury bills, Treasury NOTES, and Treasury bonds for sale.

12) Zero-coupon bonds are more difficult and time-consuming to price because of the extensive revision of the basic bond pricing formula. TRUE OR FALSE

FALSE Explanation: The bond pricing formula has two components. The first part prices the face value and the second part determines the value of the coupon payments. Because there are no coupon payments, the second part of the equation always has a value of $0. This makes zero-coupon bonds comparatively easy to price.


Kaugnay na mga set ng pag-aaral

Carbohydrates Dynamic Study Module

View Set

Tissue: Epithelial Connective, Nervous, and Muscle

View Set