Finance 3101 Exam 1
True or False: When solving for the future value of a stream of unequal cash flows, it is important to add together the values BEFORE applying the future value formula to determine their future value.
False
True or False: Capital structure decisions deal with how much a firm should hold in inventory.
False
bond price
(par value x (1/(1+r)^n) ) + (annual coupon payment x (1- (1/(1+r)^n)/r)
Rule of 72
72/r = n to double, 72/n = r to double
Effective Annual Rate (EAR)
EAR = (1+ APR/m)^m -1
Future value of an ordinary annuity
FV = PMT x (((1+r)^n) -1)/r
FV of a lump sum
FV = PV x (1+r)^n
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.
False
True or False: A "Lump Sum" would involve cash flows occurring at two or more different time periods.
False
True or False: Ceteris paribus, stocks that are perceived as being riskier would have higher prices.
False
True or False: Corporations can send cash back to creditors through the repurchase of stock.
False
True or False: The EAR is about 6.09% if the APR is 6.01% and compounding is monthly.
False
True or False: Borrowers are investors.
False
True or False: Nominal interest rates were historically high in the late 1970s and early 1980s because of unusually high default premiums.
False
PV of a lump sum
PV = FV x 1/(1+r)^n
True or False: Ceteris paribus, stocks that provide cash flows sooner would have higher prices.
True
True or False: Ceteris paribus, stocks that are expected to provide larger future cash flows would have higher prices.
True
True or False: Consider a two−year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).
True
True or False: In the "Cycle of Money" we discussed, there were 2 major types of investors.
True
True or False: To calculate how long it would take for an earlier amount to grow into a later amount, we would solve the lump-sum Time Value of Money formula for the variable "n".
True
The primary goal of the financial manager is to
maximize the current share price or equity value of the firm
waiting period (n) of a lump sum
n = ln (FV/PV)/ln (1+r)
interest rate (r) of a lump sum
r = (FV/PV)^(1/n) -1
Periodic interest rates
r = APR/m
True or False: 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.
False
True or False: The coupon payment for an annual−coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond.
False
True or False: The discounting process adds the interest part to the future value to arrive at the present value.
False
True or False: With compound interest, interest is earned every period on only the original starting amount.
False
Calculating PMT from PV
PMT = PV/ (1-(1/(1+r)^n)/r)
True or False:The variable "n" in the annuity formulas represents the number of "PMT"s.
True
annual coupon payment for bond prices
(par value x annual coupon rate)/(# of payments/yr)
True or False: For compounding periods more frequent than once a year, the APR will exceed the EAR.
False
True or False: Nominal interest rates are purchasing power rates.
False
True or False: Nominal interest rates can be viewed as the sum of the real rate and inflation premium minus the sum of the default and maturity premiums.
False
True or False: The maturity premium protects lenders from the risk that borrowers won't repay the loan as agreed.
False
True or False: The present value of an annuity is used in the formula to find the price of a zero-coupon bond.
False
True or False: The price of a multiple coupon-paying bond is equal to the PV of an uneven stream of multiple cash flows plus the PV of its par value.
False
True or False: The primary goal of corporate financial managers is to maximize a firm's profits.
False
True or False: To find the amount needed at the beginning of your retirement period that would enable you to make desired annual withdrawals from your account, you would solve for "PMT" in the FVA formula.
False
True or False: We can use the "Rate" function in Excel to find a bond's precise YTM and the "FV" function in Excel to find a bond's price.
False
True or False: At an annual growth rate of 5%, the approximate time it would take for an amount to double could be found by dividing 5 by 72.
False
True or False: There is an inverse relationship between the present value and the discount rate, meaning that they move in the same direction.
False
Present Value of an Ordinary Annuity
PV = PMT x (1-(1/(1+r)^n)/r)
Perpetuity PV
PV = PMT/r
True or False: A bond's current yield represents its annual coupon payment as a percent of its current price.
True
True or False: Ceteris paribus, the higher the inflation rate, the lower the real rate.
True
True or False: Lenders buy bonds.
True
True or False: The Fisher Effect illustrates the positive relationship between inflation and nominal interest rates.
True
True or False: The process used to find the precise YTM on a multiple coupon-paying bond is trial-and-error.
True
True or False: We can use the basic discount rate formula from chapter 3 to find the precise YTM on a zero-coupon bond.
True
True or False: Capital budgeting decisions deal with into which long-term assets the firm should invest.
True
True or False: Ceteris paribus, as a lender, you would prefer compound interest over simple interest.
True
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
r for bond prices
r = YTM/m
The movement of money from lender to borrower and back again is known as ________.
the cycle of money
True or False: Present values are earlier values that appear rightward on a time line and future values are later values that appear leftward on a time line.
False
True or False: There are 3 basic Time Value of Money formulas covered in chapter 3 of our text.
False
True or False: The "Cycle of Money" we discuss deals with how investors borrow money from a corporation.
False
True or False: Once you determine that you are solving for the "PMT" variable, the appropriate formula to use is determined by the values of "r" and "n".
False
True or False: The interest rate is viewed as a penalty from the perspective of the lender.
False
True or False: To find the loan amount for a fixed-rate fully-amortized loan, solve for "PMT" in the PVA formula.
False
True or False: With the PVA and PVP formulas, if the first "PMT" you use is for the end of period 8, then the formula will give you the value as of the end of period 9.
False
True or False:The simple FV formula is to be used to solve for the PV of an uneven stream of cash flows.
False
True or False: Ceteris paribus, Ba-rated bonds would have lower interest rates than would A-rated bonds.
False
True or False: To find the "PMT" in the FVA or PVA formulas, we calculate the value in the bracket and then multiply it by the FVA or PVA.
False
True or False: Perpetuities are like annuities that go on forever.
True
True or False: When solving for the FV of an uneven stream of cash flows, the appropriate exponents go down as you go from left to right on the time line of those cash flows
True