Sample Test 2 FIN 325

Your parents set up a trust fund for you 20 years ago that is now worth $38,400. If the fund earned 7% per year, how much did your parents invest? This is a:

Present value problem

Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

compounding

The process of determining the present value of future cash flows in order to know their value today is referred to as:

discounted cash flow valuation.

Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as:

interest on interest

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) _______ loan.

interest-only

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?

interest-only loan

The current yield or yield to maturity is defined as the annual interest on a bond divided by which one of the following?

market price

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is:

priced the same as a $1 perpetuity.

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

pure discount

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning?

simple interest

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $40,000 per year forever. If the required return on this investment is 5.1 percent, how much will you pay for the policy?

$784,313.73

Gerald invested $5,600 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years?

$8,400

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

Coupon

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

Cumulative

Which one of the following variables is the exponent in the present value formula?

time

Which one of the following accurately defines a perpetuity?

unending equal payments paid at equal time intervals

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

A perpetuity is:

an annuity that has no end, or a stream of cash payments that continues forever.

What is the interest rate charged per period multiplied by the number of periods per year called?

annual percentage rate

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

Protective covenants:

are primarily designed to protect bondholders.

You purchase preferred stock in UMKC, INC., a perpetuity. Suppose the expected dividend next year is $1.30, and dividends are expected to grow at 5% forever. If the discount rate is 10%, what is the present value of this promised dividend stream?

$26.00

If you put up $38,000 today in exchange for a 5.8 percent, 15-year annuity, what will the annual cash flow be?

$3861.62

Using the Rule of 72, if the rate of return on an investment is 7.3 percent, how long will it take for the investment to double in value.

9.86 years

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

Compounding

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

Face or par value

T/F: The formula for calculating future value using simple interest is: FV= PV*(1+r)^n

False

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

Over-the-counter

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

Sue will have more money than Neal as long as they retire at the same time.

What is the relationship between present value and future value interest factors?

The factors are reciprocals of each other.

Can stocks have negative growth rates?

True

A bond that is payable to whomever has physical possession of the bond is said to be in:

bearer form.

Which one of the following is the price a dealer will pay to purchase a stock?

bid price

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following?

call premium

An agent who maintains an inventory from which he or she buys and sells securities is called a:

dealer

A sinking fund is managed by a trustee for which one of the following purposes?

early bond redemption

When you are comparing two investments with different compounding period, the most appropriate rate to use for the comparison is:

effective annual rate

An ordinary annuity is best defined by which one of the following?

equal payments paid at regular intervals over a stated time period

Interest rates that include an inflation premium are referred to as:

nominal rates

Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following?

present value

In a present value calculation, if the discount rate rises the:

present value will fall.

The effective annual rate (EAR) is:

the annual rate of interest that accounts for the effect of compounding

What is the future value of $6,200 invested for 23 years at 9.25 percent compounded annually?

$47,433.47

The value of an ordinary annuity is $5,000. The discount rate for the annuity is 5 percent. The value of this annuity would be _____ if it were an annuity due.

$5,250

Thomas Jack Armstrong IV, your long-lost and very much removed cousin, offers to help with your college expenses. Because of his own financial predicament, he offers to give you $2,000 at the end of three years, $4,000 at the end of year five, $6,000 at the end of year seven. You rejoice! However, you would like to have the money now. At a nearby park, you meet Lefty U. Broke, your friendly sidewalk loan officer. He says he will loan you the money, but his required return is 10 percent. You agree to his terms. How much money is he going to hand to you? Oh, by the way, if you don't hand over the payments from your cousin on time, Bruno will visit you. It won't be pretty.

$7,065.26

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Constant-growth model

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

In today's dollars, Luis' money is worth more than Soo Lee's.

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

Which one of the following statements related to loan interest rates is correct

When comparing loans you should compare the effective annual rates.

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

coupon rate decreases and the time to maturity increases.

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

discount rate

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

A discount bond's coupon rate is equal to the annual interest divided by the:

face value.

You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?

future value

Which one of the following premiums is compensation for expected future inflation?

inflation