Ch. 8,9,10 Notes 3

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40. What would be the future value of a CD of $1,000 for two years if the bank offered a 10% interest rate compounded semiannually? Pick the closest answer. a. $1,720 b. $1,960 c. $1,200 d. $1,216

41. The basic future and present value equations contain four variables. Which one of the following is not included? a. present value (PV) b. future value (FV) c. interest rate (r) d. inflation rate (I) e. number of periods (n)

5. Which of the following statements is false? a. The present value of a future sum decreases as the discount rate increases. b. If the present value of a sum is equal to its future value, the interest rate must be zero. c. If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series. d. For a given APR, the present value of a future sum decreases as the number of discounting periods per year decreases.

50. When compounding more than once a year, the true opportunity costs measure of the interest rate is indicated by the: a. annual percentage rate b. contract rate c. stated rate d. effective annual rate

51. The interest rate that measures the true interest rate when compounding occurs more frequently than once a year is called the: a. annual percentage rate b. compound rate of interest c. stated rate of interest d. effective annual rate

61. Lance plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If he can earn 12 percent on his contributions, how much will he have at the end of the twentieth year? Pick the closest answer. a. $44,800 b. $161,397 c. $40,000 d. $144,105

65. The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, is: Pick the closest answer. a. $1,303.14 b. $1,241.02 c. $1,620.46 d. $1,558.14

74. The time value concept/calculation used in amortizing a loan is a. future value of a dollar b. future value of an annuity c. present value of a dollar d. present value of an annuity

81. Taylor owns stock in a company which has consistently paid a growing dividend over the last 10 years. At the end of the first year Taylor owned the stock, he received $4.50 per share and at the end of the 10th year, he received $4.92 per share. What is the growth rate of the dividends during this time? Pick the closest answer. a. 3% b. 4% c. 2% d. 1%

82. A ski chalet in Vail now costs $250,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 10 years before Larry and his wife retire from successful investment banking careers. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon retirement? Pick the closest answer. a. $23,333 b. $19,565 c. $24,005 d. $22,108

83. Jonathan wishes to accumulate $1 million by making equal annual end-of-year deposits over the next 20 years. If he can earn 10 percent on his investments, how much must he deposit at the end of each year? Pick the closest answer. a. $15,872 b. $50,000 c. $16,643 d. $17,460

84. Megan is planning for her son's college education to begin five years from today. Megan estimates the yearly tuition to be $5,000 per year for a four-year degree. Tuition must be paid at the beginning of each year. How much must Megan deposit today, at an interest rate of 8 percent, for her son to be able to withdraw $5,000 per year for four years of college? Pick the closest answer. a. $20,000 b. $13,620 c. $39,520 d. $12,173

a. a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement.

100. Unlike a line of credit, in a revolving credit agreement:

b. a revolving credit agreement

101. Under the terms of _____, a firm will pay interest on any funds it borrows, and a commitment fee on any funds it does not borrow.

commitment fee

102. Under a revolving credit agreement, the _____ is lower than the interest on the borrowed funds, but it can amount to a fairly hefty charge if the firm has a large unused balance.

Calculating modified duration involves A. dividing the value of duration by the change in the market interest rate. B. dividing the value of duration by 1 plus the interest rate. C. dividing the value of duration by discounted change in interest rates. D. multiplying the value of duration by discounted change in interest rates. E. dividing the value of duration by the curvature effect.

B. dividing the value of duration by 1 plus the interest rate

Interest expense incurred when borrowing money and dividends paid to stockholders are tax deductible.

False, Interest expense incurred when borrowing money is tax deductible; however, dividends paid to stockholders are not tax deductible.

Amortization of a discount on a bond payable will make the amount of interest expense reported on the income statement less than the cash paid for that year.

False, bond interest expense is greater when a bond is sold at a discount because when the bond was issued, the market rate was higher than the stated rate. So interest expense will be greater than the interest payment when a bond is sold at a discount.

bond

formal debt instrument issued by a company to borrow money

On July 1, 20XA, Duval Company sold (issued) 300, $1,000, ten-year, 7% bonds at 7.4% ($291,000). The bonds were dated July 1, 20XA, and interest is payable each December 31 and June 30. The amount of discount amortization on December 31, 20XA (1st interest payment would be):

$267, Semi-annual bond; carrying value $291,000 x .074/2 = $10,767 interest expense. (Interest expense - interest payment = discount amortized. Interest payment is $300,000 x .035 = 10,500. ($10,767 - 10,500 = $267 discount amortized)

Johnson Company issued $50,000 bonds payable, 9% annual interest, maturity in ten years. The bonds were sold at $48,000 and the market rate of interest was 9.64%. The amount of interest expense for the first full year would be

$4627, Bond liability x market rate of interest = interest expense. $48,000 x .0964 = $4,627.20

On January 1, 20XA, Washer Company sold (issued) 600, $1,000, five-year, 8% bonds at $576,000 (when the market rate was 9%). The bonds were dated January 1, 20XA, and interest is payable each June 30 and December 31. The amount of the net liability for bonds payable (bond carrying amount) that would be reported on the December 31, 20XA, balance sheet is

$579926.4, by December 31st there would have been two interest payments made.

decrease in carrying value=

(cash paid) - (carrying value x interest rate)

Double Declining method formula

(2 X Beginning period book value) / useful life

pros of debt financing

-Interest payments that a firm makes on debt are a tax-deductible expense -Enables the firm to acquire additional funds without requiring existing stockholders to invest more of their own money or the sale of stock to new investors

lump sum purchase formula

1) appraised value/total of appraised values= % of total 2) % of total X total acquisition cost= ALLOCATED COST

3 pieces of info needed to calculate depreciation

1) cost 2) salvage value 3) useful life

Units of production formula

1) cost - salvage value / total units of production= depreciation per unit 2) depreciation per unit X units produced in period

depletion expense formula

1) cost- salvage value / total units of capacity = depletion per unit 2) depletion per unit X units extracted & sold in period

formula to find gain/loss on disposal of fixed asset

1) original purchase price - all accumulated depreciation = carrying amount of asset 2) amount of asset - sale price of asset = gain/loss

steps to recording the disposal of an asset

1) record depreciation up to date of disposal 2) record the removal of the disposed assets account balances- including its Accumulated Depreciation 3) record any cash received/paid 4) record any gain or loss

If a bond is sold (issued) at a premium, the stated rate of interest was

higher than market rate

d. Revolving credit agreement

103. Kenneth wants to start a new business. To get start-up capital, he takes a short-term loan from a bank. The bank agrees to provide him the agreed-upon funds as per a legally binding commitment. However, the bank requires Kenneth to pay interest on any fund he borrows and a commitment fee based on the unused amount of funds. Which of the following short-term financing sources does Kenneth utilize to fund his business in the given scenario?

c. Commercial paper

104. _____ consists of short-term (and usually unsecured) promissory notes issued by large corporations. a. Line of credit

c. It is not backed by a pledge of collateral.

105. Which of the following statements is true of commercial paper?

a. commercial paper

106. Reesa Mork is a multinational corporation that has good credit ratings. It issues promissory notes to other companies. Based on the given information in the scenario, it appears that Reesa Mork uses _____ as a short-term financing option to other companies.

c. Commercial paper

107. Gotwing Inc., a multinational company, issues promissory notes to big corporations. As the company has strong credit ratings, it easily finds buyers without having to offer a substantial discount for its debt. Which of the following short-term financing options is being used by Gotwing Inc. in the given scenario?

b. Asset-backed commercial paper

108. Tinix is a well-established petrochemical company that holds excellent credit ratings in the market. It provides shortterm financial capital to other big firms by issuing promissory notes that are collateralized by physical assets. Which of the following short-term financing options is being offered by Tinix in the given scenario?

d. Commercial paper

109. Juxipi Inc. is well known for having a stronger credit score than its competitors. That is why, buyers are more willing to buy promissory notes from Juxipi than its competitors. Which of the following short-term financing options is being offered by Juxipi Inc. in the given scenario?

a. it sells newly issued stock.

110. For a corporation, direct investment from owners occurs when:

d. Retained earnings

111 Which of the following is a source of long-term funds for a firm?

a. meet the company's long-term financial needs.

112. Alpha Inc. saw an increase in profits in the previous year following which the management decided to reinvest its earnings. These retained earnings will be used to:

b. Direct investments from owners

113. Connink, a software development firm, invested on developing new products from the company's earnings from the previous year. Which of the following sources of long-term funds is being used by Connink in the given scenario?

a. Corporate bonds

114. Miranti Nex, an automobile company, plans to invest in developing a hybrid car. It refrains from using loans from other firms and instead uses its own monetary resources to fund the project. Which of the following sources of longterm funds is being used by Miranti Nex in the given scenario?

a. Direct investments from owners

115. Merith Qin, a textile company, relies on self-funding in order to sustain the promotion of its new product in the market. The company sold its newly issued stock and was able to amass a sizable amount of money to invest. Which of the following sources of long-term funds is being used by Merith Qin in the given scenario?

c. Direct investments from owners

116. Timoth Steels, a steel manufacturing company, wants to install a new factory in Temenia. The company decides to use funds from its own account and refrain from borrowing money from banks. Which of the following sources of long-term funds is being used by Timoth Steels in the given scenario?

: a. issuing bonds.

117. In addition to contributions from owners, firms can also raise long-term funds by:

b. Long-term debt

118. Mezzinzi Bank offers loans to companies in the form of bonds. The companies who apply for these loans can repay the amount over a prolonged period of time. Which of the following financing options is being offered by Mezzinzi Bank in the given scenario?

a. Long-term debt

119. Dominic and Matherson, a finance management company, lends money to Ebok, a fast food chain, in order to help Ebok market its new product. Dominic and Matherson provides financial support in the form of bonds. Which of the following financing options is being used by Ebok in the given scenario?

d. Long-term debt

120. Maude Shade, a fashion apparel manufacturing company, wants to invest in research before finalizing the production of its proposed product. In order to do so, it approaches Ruemen Bank and takes a loan of $80,000 in the form of bonds. Which of the following financing options is being used by Maude Shade in the given scenario?

c. Long-term debt

121. Delventon Bank offers loans to multinational corporations which can be returned over an extended period along with interest. The bank issues such loans in the form of bonds. Which of the following financing options is being offered by Delventon Bank in the given scenario?

b. A term loan

122. Timini Inc., a beverage company, wants to produce a new health drink. It borrows money from Maverk Bank to finance the procedure. The bank mandates Timini Inc. to return the amount with interest in a regular schedule of fixed payments. Which of the following sources of long-term funds is being used by Timini Inc. in the given scenario?

c. Term loans

123. Rudolf and Martin, a finance management company, offers funds to corporations that require a permanent source of funding. However, it required the company to make fixed payments on a regular schedule to ensure that the amount borrowed and interest are repaid. Which of the following sources of long-term funds is being offered by Rudolf and Martin in the given scenario?

b. Commercial paper

124. Tusken Thaw, a shipping industry, plans to expand its customer base to other countries. To facilitate this process, Tusken Thaw seeks financial assistance from Jermino Bank. The bank agrees to lend a specified amount of money; however, it mandates Tusken Thaw to return the amount with interest in a regular schedule of fixed payments. Which of the following sources of long-term funds is being used by Tusken Thaw in the given scenario?

A term loan

125. Newot Texin, a pharmaceutical company, introduces a new pain relieving drug in the market. It borrows $1 million from Esterotia, a private bank, to market the drug. In return, Esterotia allows Newot Texin to return the full amount with interest in fixed amounts of $200,000 every six months. Which of the following sources of long-term funds is being used by Newot Texin in the given scenario?

b. covenant

126. A _____ is a requirement a lender imposes on the borrower as a condition of the loan.

d. Corporate bonds

127. Which of the following is a source of long-term funds for firms?

b. Corporate bonds

128. Westbro Inc., a home appliances company, wants to invest in marketing new products. In order to generate funds for the process, it issues its own formal IOUs and sells them to its investors. Which of the following sources of longterm funds is being used by Westbro Inc. in the given scenario?

d. Corporate bonds

129. Vironi Mave, a designer clothing company, wants to hire fashion designers to start a new clothing line for men. To obtain funds for the project, Vironi Mave issues several formal IOUs to sell them to its investors, with a maturation period of ten years. Which of the following sources of long-term funds is being used by Vironi Mave in the given scenario?

a. Nigel buys an IOU of Herbiscus Pharmaceuticals with a maturity period of eight years.

130. Which of the following scenarios involves the use of corporate bonds?

c. Corporate bonds

131. Gratinut Entos, an automobile company, wants to launch a new model of bike that would appeal to young adults. The company issues its own formal IOUs to fund the project. Which of the following sources of long-term funds is being used by Gratinut Entos in the given scenario?

b. Debt financing

132. _____ refers to funds provided by creditors.

a. equity financing

133. When a company issues and sells new stock or uses retained earnings to meet its financial needs, it is using _____.

b. debt financing

134. When a company takes out a bank loan, or issues and sells corporate bonds, it is relying on _____. a. equity financing

d. capital structure

135. The extent to which a firm relies on various forms of debt and equity to satisfy its financing needs is called that firm's _____.

a. The interest payments a firm makes on debt are a tax-deductible expense.

136. Which of the following is an advantage of debt financing?

b. it does not require firms to sell stock to new investors to gain additional funds.

137. An advantage of debt financing is that:

c. return on equity

138. In the context of debt financing, if a firm invests the borrowed funds profitably, the use of debt can substantially improve the _____ to the shareholders. a. total contract value

b. It requires firms to make fixed payments.

139. Which of the following is a disadvantage of debt financing?

b. retained earnings

140. One of the major sources of equity financing for corporations is _____.

b. It is less risky than debt financing.

141. In the context of the capital structure of a firm, which of the following statements is true of equity financing?

a. imposes no required payments.

142. Unlike the debt in a firm's capital structure, the equity in a firm's capital structure:

b. Darths would report a higher return-on-equity than Pro

143. Pro Corp. and Darths Inc. are two companies that are identical in every aspect except for the fact that Pro only uses equity financing, while Darths relies heavily on debt financing. Over the past year, the firms had identical earnings before interest and taxes. If net income for both firms is high, _____. a. Pro would pay lower taxes than Darths

b. It forgoes the opportunity to use financial leverage.

144. Which of the following statements is most likely true of a company that relies mainly on equity financing? a. It has to agree to burdensome covenants to acquire equity funds.

c. highly leveraged

145. Firms that rely on a lot of debt in their capital structure are said to be _____.

c. it magnifies the financial return on the investment of stockholders when times are good.

146. The main advantage of financial leverage is that:

c. it reduces the financial return to stockholders' investment when times are bad.

147. The main disadvantage of financial leverage is that:

d. the firms replaced much of the debt in their capital structure with equity.

148. As the recession of 2007-2008 loomed over both large and small businesses, many firms looked for ways to deleverage. The term deleveraging implies that:

b. It required large firms in the financial sector to hold more equity and less debt in their capital structures.

149. Which of the following statements is true of the Dodd-Frank Act?

a. paying dividends

150. As a current asset, firms use cash for _____.

b. It earns no return.

151. In comparison with other assets, which of the following is a shortcoming of cash?

d. cash

152. A firm's _____ refers to its holdings of currency plus demand deposits.

c. Cash equivalents

153. _____ are safe and highly liquid assets that many firms list with their cash holdings on their balance sheet. a. Trade credits

a. Cash equivalents

154. _____ are very safe and highly liquid assets that can be converted into cash quickly and easily. a. Cash equivalents

a. Commercial paper

155. Which of the following is a popular cash equivalent?

c. they offer a better financial return than currency.

156. An advantage of cash equivalents is that:

b. it is a safe way to earn some interest.

157. Firms buy commercial paper as part of their portfolio of cash equivalents because:

a. They are highly liquid.

158. Which of the following statements is true of U.S. Treasury bills (T-bills)?

c. Unlike commercial paper, U.S. Treasury bills are essentially risk-free.

159. Which of the following is a difference between commercial paper and U.S. Treasury bills?

a. It pools funds from many investors and uses these funds to purchase very safe, highly liquid securities.

160. Which of the following statements best describes a money market mutual fund?

c. They are affordable for small investors.

161. Which of the following statements is true of money market mutual funds?

b. increase its sales.

162. An advantage of offering lenient credit terms is that it can help a firm:

c. delay the receipt of cash that the firm needs to meet its financial obligations.

163. One drawback of offering liberal credit to customers is that it can:

b. it is best to have money today, so it can be put to work sooner to make even more money.

164. The time value of money reflects the fact that:

b. a dollar received today is worth less than a dollar received in the future.

165. From a financial manager's perspective, the time value of money reflects the fact that:

b. net present value

166. Grisham is the financial manager of Plink Inc., an electronics company. He invests a major portion of the company's profit in his business. He believes that money has the potential to grow in value over a certain period, which is why he prefers to receive and invest an amount of money today rather than in the future. In this scenario, Grisham is most likely to be influenced by _____ while utilizing the finances of the company.

a. He will quite certainly gain approval since the project has a positive net present value.

167. Ashton is working on a project at PowerTek Inc., a well-known multinational corporation. He uses capital budgeting to estimate the project's future cash flows. He finds that the present value of the estimated future cash flows is greater than the cost of the project. How likely is he to gain approval from the board?

b. rejected since the expected future cash flows from the project are less than the cost of the investment.

168. A project with a negative net present value should be:

b. She should not invest in the warehouse since a negative NPV means that the present value of the future cash flows does not justify the cost of the warehouse.

169. Jessie, the regional manager of a large electronics firm, is trying to determine whether a new warehouse for herfirm would be a good investment. After discussing with her firm's financial managers, she concludes that the project carries a negative NPV (Net Present Value). What should Jessie do and why?

Answers will vary. The budgeting process provides financial managers with much of the information they need for financial planning. The budgeted income statement and budgeted balance sheet are two key financial planning tools. Also called pro forma financial statements, they provide a framework for analyzing the impact of the firm's plans on the financing needs of the company. The budgeted income statement uses information from the sales budget and various cost budgets (as well as other assumptions) to develop a forecast of net income for the planning period. This can help the firm evaluate how much internal financing (funds generated by earnings) will be available. The budgeted balance sheet forecasts the types and amounts of assets a firm will need to implement its future plans. It also helps financial managers determine the amount of additional financing (liabilities and owners' equity) the firm must arrange to acquire those assets.

170. Describe the two major types of pro forma financial statements, and explain the role they play in financial planning.

Answers will vary. The money that customers owe a firm when they buy on credit shows up in accounts receivable on the company's balance sheet. A factor buys the accounts receivables of other firms. The factor makes a profit by purchasing the receivables at a discount and collecting the full amount from the firm's customers. Although firms that use factors don't receive the full amount their customers owe, factoring offers some definite advantages. Instead of having to wait for customers to pay, the firm gets its money almost immediately. Also, since the factor is responsible for collection efforts, the firm using the factor may be able to save money by eliminating its own collection department. Finally, the factor typically assumes the risk for bad debts on any receivables it buys.

171. Explain the role a factor plays in providing short-term financing to a firm.

Answers will vary. For corporations, equity financing comes from two major sources: retained earnings and money directly invested by stockholders who purchase newly issued stock. Equity financing is more flexible and less risky than debt financing. Unlike debt, equity imposes no required payments. A firm can skip dividend payments to stockholders without having to worry that it will be pushed into bankruptcy. And a firm doesn't have to agree to burdensome covenants to acquire equity funds. On the other hand, equity financing doesn't yield the same tax benefits as debt financing. In addition, existing owners might not want a firm to issue more stock, since doing so might dilute their share of ownership. Finally, a company that relies mainly on equity financing forgoes the opportunity to use financial leverage.

172. Explain the advantages and disadvantages of equity financing.

Answers will vary. One of the most challenging aspects of the evaluation of a long-term project's cash flows is that they are spread out over a number of years. When financial managers compare cash flows that occur at different times, they must take the time value of money into account. The time value of money reflects the fact that, from a financial manager's perspective, a dollar received today is worth more than a dollar received in the future because the sooner you receive a sum of money, the sooner you can put that money to work to earn even more money. Because money has a time value, a cash flow's value depends not only on the amount of cash received but also on when it is received. Financial managers compare cash flows occurring at different times by converting them to their present values. The present value of a cash flow received in a future time period is the amount of money that, if invested today at an assumed rate of interest (called the discount rate), would grow to become that future amount of money.

173. Explain how the accounting process can be used for a long-term project's cash flows that are spread out over a number of years.

Answers will vary. The most commonly used method to evaluate capital budgeting proposals is to compute their net present value (NPV). The NPV of an investment proposal is found by adding the present values of all of its estimated future cash flows and subtracting the initial cost of the investment from the sum. A positive NPV means that the present value of the expected cash flows from the project is greater than the cost of the project. In other words, the benefits from the project exceed its cost. Financial managers approve projects with positive NPVs. A negative NPV means that the present value of the expected future cash flows from the project is less than the cost of the investment. This would indicate that the cost of the project outweighs its cash flow benefits. Financial managers would reject proposals with negative NPVs.

174. Describe how net present value (NPV) is used to evaluate capital budgeting proposals.

c. liquidity ratios

35. Mort Zuba, an automobile company, needs to pay off its loans to banks the following year. The company plans to sell its factories in Astonsia in order to pay its debts. In this scenario, Mort Zuba's ability to sell its factories in Astonsia to pay its debts is measured by calculating _____.

c. funds a firm uses to acquire its assets and finance its operations

26. Financial capital refers to the:

c. financial management

27. Dora works for PowTran Corp. Her primary responsibilities include managing the firm's working capital and analyzing long-term investment opportunities for the firm. Dora is most likely a part of the firm's _____ team. a. administrative management

a. they have a fiduciary duty.

28. Financial managers emphasize the goal of maximizing the market price of stock because:

c. It has an obligation to respect the needs of all stakeholders.

29. Which of the following statements is true of a socially responsible firm?

c. degree of uncertainty about the actual outcome of a decision.

30. In financial management, risk is referred to as the:

d. financial ratio analysis

32. Financial managers use _____ to assess the financial strengths and weaknesses of their firm. a. financial leverage

d. liquid asset

33. In finance, a _____ is one that can be quickly converted into cash with little risk of loss.

c. Liquidity ratios

34. _____ measure the ability of an organization to convert assets into the cash it needs to pay off liabilities that come due in the following year.

d. liquidity ratios

36. Trumbeak Inc., an electronics company, needs to pay its debt to Breston Bank the following year. Trumbeak Inc. sells half of its shares to other companies and is able to acquire the cash it needs to pay its debt. In this scenario, Trumbeak Inc.'s ability to sell its shares to other companies in order to pay its debt to Breston Bank is measured by calculating _____.

b. Liquidity ratios

37. Yellow Dustur, a textile company, converts its overseas assets into cash in order to pay its debts to different companies the following year. In the given scenario, which of the following financial ratios is most likely being analyzed by Yellow Dustur?

c. liquidity ratios

38. Maurio Pena, a petroleum company, needs to pay $2 million to Zaiten Inc. Maurio Pena sells its old assets to another company and obtains enough money to pay its debt. In this scenario, Maurio Pena's ability to sell its old assets to another company in order to pay its debt to Zaiten is measured by analyzing _____. a. leverage ratios

d. Current ratio

39. Which of the following is the most commonly used liquidity ratio?

current assets

40. A firm's _____ include cash and other assets expected to be converted into cash in the following year. a. current assets

b. current liabilities

41. In the context of liquidity ratios, a firm's _____ are the debts that must be repaid in the following year. a. fixed assets

c. A current ratio that is below 1.0 signifies a company's inability to pay its short-term liabilities with its current assets.

42. Which of the following statements is true of current ratio?

a. Asset management ratios

43. _____ are also sometimes called activity ratios.

a. Asset management ratios

44. _____ measure how effectively an organization uses its resources to generate net income. a. Asset management ratios

a. Asset management ratios

45. Nemfembo, a pharmaceutical company, gains most of its net income by outsourcing its manufacturing plants to foreign countries. For every product it manufactures, the demand for those products becomes more pronounced. Which of the following financial ratio analyses can be used to measure how effectively Nemfembo is using its resources to generate revenues?

d. asset management ratios

46. Nestrum, a real estate management company, employs qualified analysts to predict customers' buying habits and budgets. Hence, the company has been able to acquire at least one customer per month. In the given scenario, the analysts most likely need to analyze the company's _____ to measure how effectively it has been using its assets to generate revenues.

b. Asset management ratios

47. Bon Suede, a shoe manufacturing company, produces ten thousand units of shoes of a distinct design. In 2015, the company was able to sell all the units within six months of manufacture, prompting the company to produce an additional ten thousand units. Which of the following financial ratios has most likely been analyzed in the given scenario?

d. asset management ratios

48. Umbero Nix, a garment manufacturing company, produces twenty thousand units of sweaters. These units are sold within three months and replenished with another twenty thousand units. In one year, Umbero Nix replaces its inventory of sweaters four times over. Umbero Nix most likely analyzes _____ to measure how many times its inventory is sold and replaced each year. a. capital budgeting ratios

b. asset turnover ratio

49. The _____ measures how many times a firm's stock is sold and replaced each year.

a. a firm can continue its daily operations with a small amount of inventory on hand.

50. A high inventory turnover ratio is good because it indicates that:

c. Liquidity ratios measure a firm's ability to pay its short-term liabilities as they come due, whereas leverage ratios measure the extent to which a firm relies on debt to meet its financing needs.

51. Which of the following is a difference between liquidity ratios and leverage ratios?

a. financial leverage

52. The term _____ refers to the use of debt to meet a firm's funding needs.

b. It is the use of debt in a firm's capital structure.

53. Which of the following statements is true of financial leverage?

c. It is a firm that relies heavily on debt.

54. Which of the following statements best describes a highly leveraged firm?

c. Leverage ratios

55. _____ are ratios that measure the extent to which a firm relies on debt financing in its capital structure. a. Liquidity ratios

a. financial leverage

56. Leverage ratios measure the extent to which a firm uses _____.

b. leverage ratios

57. Hevron Hrist, a multinational company, finances itself each year by procuring 25 percent of its yearly budget through loans from banks. The remaining budget is covered by the company itself. The given scenario suggests that the firm most likely relies on measuring _____ to decide its capital structure.

d. leverage ratios

58. Ponlinaytion, a clothing company, imports its raw materials from different countries. To cover the cost of expensive raw materials, Ponlinaytion takes a yearly loan of $5 million from Heritage Rimier, a finance company. The remaining budget is covered by the company itself. The given scenario indicates that the firm most likely relies on measuring _____ to decide how it finances its overall operations and growth by using different sources of funds.

a. leverage ratios

59. Initiatium, a software development firm, utilized $2 million to create a new software. Half of the total budget was acquired from loans from different sponsors while the rest was funded by the firm. The debt ratio amounts to 0.5. The given scenario illustrates the analysis of _____.

c. leverage ratios

60. Omnimenium, an automobile company, incurred a debt of $20 million for the fiscal year of 2016. The company used that money with an additional $20 million of its own to buy out a rival company. The ratio of the company's debt to its investment is 0.5. The given scenario illustrates the analysis of _____.

d. The debt ratio

61. Which of the following is a leverage ratio?

d. Profitability ratios

62. _____ are ratios that measure the rate of return a firm is earning on various measures of investment. a. Liquidity ratios

d. Profitability ratios

63. Yennex Inc., a textile company, planned to sell its stock products in two months' time. The company was able to sell those products within a month's time. Therefore, it was able to sell double the estimated amount in a year. Given the scenario, which of the following ratio analyses is most likely to have been analyzed by Yennex Inc. to achieve this success?

a. profitability ratios

64. Munit Exon, an automobile company, sells 100 cars in a year. The net income earned by the company is relatively more than the amount invested by it, thereby giving larger returns to its shareholders. To reach this conclusion, Munit Exon most likely analyzed its _____.

b. profitability ratios

65. Trestone, a guitar manufacturing company, produces a thousand units of electric guitars each year. The company has been able to sell all its guitars by the end of the fiscal year and earn twice the amount spent on production and marketing. The given scenario indicates that Trestone most likely analyzes _____ for its financial planning.

d. Profitability ratios

66. Kitsure, a cosmetics company, was able to sell 20 percent more than its estimated sales in a year. The company was able to acquire its investment along with a higher turnover for its shareholders. Which of the following financial ratios provides the measure of Kitsure's earnings?

b. Return-on-equity

67. _____ measures the income earned per dollar invested by the stockholders of a firm.

a. $55

68. Wild Trails Inc., an adventure resort in Texas, has 500 shares of outstanding common stock and has not issued any preferred stock. Its net income is $27,500. Wild Trails Inc.'s earnings per share (EPS) is _____.

a. The current ratio

69. _____ compares assets that will provide cash in the following year to debts that will come due in the following year.

b. inventory turnover ratio

70. The _____ is an asset management ratio that measures how quickly a firm sells its stock to generate revenue.

b. The average collection period

71. _____ measures how long it takes for a firm to receive payment from customers who buy on credit. a. The current ratio

c. debt ratio

72. The _____ is a common measure of leverage that compares liabilities to assets.

c. return-on-equity

73. Since common stockholders are the true owners, preferred stockholders' dividends are deducted from net income before computing _____.

d. The budgeted balance sheet

74. _____ forecasts the types and amounts of assets a firm will need to implement its future plans and help financial managers determine the amount of additional financing the firm must arrange in order to acquire those assets.

b. budgeted income statement

75. The _____ of a firm uses information from the sales budget and various cost budgets to develop a forecast of net earnings for the planning period.

a. budgeted income statement

76. A _____ can help a firm evaluate how much internal financing (funds generated by earnings) will be available for a planning period.

b. The budgeted balance sheet

77. _____ helps financial managers determine the amount of additional financing a firm must arrange to acquire the assets needed to implement its future plans.

a. cash budget

78. Garry, a financial manager at AtoZ technologies, wants to know when his firm will need to arrange for short-term financing and when the firm is likely to have surplus cash available to pay off loans or to invest in short-term liquid assets. These concerns suggest that Garry would want to develop a _____.

b. Both invest in risky opportunities that offer the possibility of high rates of return.

79. Which of the following is a similarity between angel investors and venture capitalists?

d. They typically provide funds to start-ups in exchange for a share of ownership.

80. Which of the following statements is true of angel investors?

a. Trade credit

81. _____ is a spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment.

c. It is granted by suppliers after evaluating the creditworthiness of a firm.

82. Which of the following statements is true of trade credit?

b. Trade credit

83. Rumerion Inc., a shoe manufacturing company, buys its raw materials from Coy Kaymilford, a footwear raw material supplier. Coy Kaymilford allows Rumerion Inc. to make the payment at a later date, as opposed to immediate payment. Which of the following short-term financing options is being used by Rumerion in the given scenario?

d. Trade credit

84. Trumen House, a confectionary manufacturing company, orders its raw materials in bulk from Nesinbon. Nesinbon allows Trumen House to make the payment at a later date, as opposed to immediate payment. Which of the following short-term financing options is being offered by Nesinbon?

a. Trade credit

85. Duk Yu, a beverage company, buys its raw materials from Nessange, a fruits and vegetables exporting company, without making any payment at the time of purchase. Instead, Nessange allows Duk Yu to pay the total purchase amount within a period of six months. Which of the following short-term financing options is being used by Duk Yu in the given scenario?

b. Trade credit

86. Juxiplex, an electronics company, introduced a new range of smart phones. It bought the required raw materials from Gunplet Inc. without making payment at the time of purchase. Instead, Gunplet Inc. allowed Juxiplex to pay within fifteen days from the time of purchase. Which of the following short-term financing options was used by Juxiplex in the given scenario?

a. Spontaneous financing

87. _____ refers to financing that arises during the natural course of business without the need for special arrangements.

a. It buys the accounts receivables of other firms.

88. In the context of short-term financing, which of the following statements is true of a factor?

c. factor

89. A(n) _____ makes a profit by purchasing the receivables of a firm at a discount and collecting the full amount from the firm's customers.

d. firms using factors get their money almost immediately.

90. An advantage of factoring is that:

c. Factoring

91. When customers of Trankent Corp., an equipment manufacturing unit, buy equipment on credit and then delay making payments, they receive a bill from a collection agency. Which of the following sources for short-term financing is being used by Trankent Corp. in this scenario?

c. Factoring

92. Tobit Financing offers short-term financing plans to other companies. It buys the accounts of other companies at a discount and collects the full amount from the customers of those companies. Which of the following short-term financing options is being provided by Tobit Financing in this scenario?

Liquidity

Ability to convert assets to cash quickly and meet short-term obligations

d. Factoring

93. Rel Eston, a network service provider, sells off its accounts receivable to a financing company in order to gain early access to funds that would help accelerate company's growth trajectory in the market in the following year. Which of the following short-term financing options is being used by Rel Eston in the given scenario?

b. Factoring

94. Tunebeak, a fast food service chain, wants to introduce a new product. However, it lacks the financial support required to promote its product. Therefore, it sells its accounts receivables from its customers to a financing firm and is able to invest in the promotion of its product. Which of the following short-term financing options is being used by Tunebeak in the given scenario?

a. Factoring

95. Maurio Inc., a publishing house, wants to invest in digital publishing. However, the company does not possess enough capital to kick start the project. In order to gain immediate funds, Maurio Inc. sells its accounts of credits to Restube, a financing firm, at a discount. Which of the following short-term financing options is being used by Maurio Inc. in the given scenario?

b. Short-term bank loans

96. MVJ Corp., a market research firm, borrowed $2 million from Trimitium Bank. While negotiating with the bank, the firm signs a promissory note, which specifies that the firm must pay the borrowed amount in 90 days with interest. However, the bank also requires the firm's inventories and receivables to be pledged as collateral to back the loan. Which of the following short-term financing options is being offered by Trimitium Bank in the given scenario?

c. Short-term bank loans

97. Dimitium National Bank is well known for lending money to companies who need it as quickly as possible. Any company that takes money from the bank is required to return the amount within six months at an interest at a rate of 12 percent. Which of the following short-term financing options is being offered by Dimitium National Bank in the given scenario?

a. Line of credit

98. Renita works as a freelancer. She wants to start her own business, but she does not have the required funding. To meet the working capital for her business, she takes a short-term loan from a bank. The bank agrees to provide her funding up to $50,000, as and when she needs it. However, she can repay the amount immediately or over a pre-specified period of time. Which of the following short-term financing sources does Renita utilize to fund her business in the given scenario?

b. A revolving credit agreement

99. _____ is a guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement.

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. 78. What is the price of the bond if market interest rates are 6 percent? A. $95,082.68. B. $95,769.55. C. $95,023.00. D. $100,000.00. E. $96,557.87.

A $95,082.68

Which of the following is a disadvantage to the corporation issuing bonds? A)The required interest payment must be met each period. B)The liquid nature of the bonds makes them attractive to investors who may not want to hold them to maturity. C)The large principal payment due at maturity. D)A and C are both disadvantages. E)All of the above are disadvantages.

A & C are disadvantages

Lincoln County retires a $50 million bond issue when the carrying value of the bonds is $48 million, but the market value of the bonds is $54 million. Lincoln County will record the retirement as

A debit of $6 million to Loss due to early extinguishment

Wages

A term used to describe amounts due employees who are paid according to the number of hours they actually work

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent 99. What is the bond's current market price? A. $962.09. B. $961.39. C. $1,000. D. $1,038.90. E. $995.05.

A. $962.09

If yields increase by 10 basis points, what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship. A. +$179.39 B. +$16.05 C. -$1,605.05 D. -$16.05 E. +$160.51

A. +179.39

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. 94. If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation? A. -$7.985 B. -$7.941 C. -$3.990 D. +$3.990 E. +$7.949

A. -$7.985

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. 92. What is the leverage-adjusted duration gap? A. 0.605 years. B. 0.956 years. C. 0.360 years. D. 0.436 years. E. 0.189 years.

A. 0.605 years.

The following is an FI's balance sheet ($millions). Notes to Balance Sheet: Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent. 116. What is the duration of the municipal notes (the value of x)? A. 1.94 years. B. 2.00 years. C. 1.00 years. D. 1.81 years. E. 0.97 years.

A. 1.94 years

Calculate the duration of the assets to four decimal places. A. 2.5375 years. B. 4.3750 years. C. 1.7500 years. D. 3.0888 years. E. 2.5000 years.

A. 2.5375 years.

When does "duration" become a less accurate predictor of expected change in security prices? A. As interest rate shocks increase in size. B. As interest rate shocks decrease in size. C. When maturity distributions of an FI's assets and liabilities are considered. D. As inflation decreases. E. When the leverage adjustment is incorporated.

A. As interest rate shocks increase in size

First Duration Bank has the following assets and liabilities on its balance sheet 82. What is the FI's interest rate risk exposure? A. Exposed to increasing rates. B. Exposed to decreasing rates. C. Perfectly balanced. D. Exposed to long-term rate changes. E. Insufficient information.

A. Exposed to increasing rates

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: All Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is 0.003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits If the relative change in interest rates is a decrease of 1 percent, calculate the impact on the bank's market value of equity using the duration approximation. (That is, ΔR/(1 + R) = -1 percent) A. The bank's market value of equity increases by $325,550. B. The bank's market value of equity decreases by $325,550. C. The bank's market value of equity increases by $336,500. D. The bank's market value of equity decreases by $336,500. E. There is no change in the bank's market value of equity.

A. The bank's market value of equity increase by $325,550

The duration of all floating rate debt instruments is A. equal to the time to maturity. B. less than the time to repricing of the instrument. C. time interval between the purchase of the security and its sale. D. equal to time to repricing of the instrument. E. infinity.

A. equal to the time to maturity

The duration of a consol bond is A. less than its maturity. B. infinity. C. 30 years. D. more than its maturity. E. given by the formula D = 1/(1-R).

A. less than its maturity

Solvency

Ability of a business to pay liabilities in the long run

Going Concern Assumption

Accounting presumption that a company will continue to operate indefinitely, benefiting from its assets and paying its obligations in full; justifies reporting assets and liabilities in the financial statements

Current asset

Asset that will be converted to cash or consumed with one year or an operating cycle, whichever is longer

Which of the following statements about bond accounting is correct? a.The cash interest paid is calculated as the bond face value x the market rate. b.The interest expense is calculated as the carrying value x the market rate. c.Cash interest paid minus interest expense is added to the carrying value of the bonds if bonds were sold at a premium. d.Interest expense minus interest paid is deducted from the carrying value of the bonds if bonds were sold at a discount.

B, (A is not correct because it should be x stated rate) (C & D are not correct because Interest expense is subtracted from interest payment to determine the amount amortized; the amount amortized is added to the bond carrying amount at the beginning of the period to determine the carrying value after the interest payment).

Eaton Company issued $5 million in bonds. The stated rate of interest was 10% and the market rate 11%. Which of the following statements is true? A)The bonds were issued at a premium. B)Annual interest expense will exceed the company's actual cash payments for interest. C)Annual interest expense will be $500,000. D)Eaton Company cannot issue bonds if the market rate is higher than the stated rate. E)Both B and C are correct.

B, (answer C is the amount cash interest that will be paid not interest expense. Interest expense would be more than $500,000).

Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par. 89. If interest rates increase by 20 basis points (i.e., ΔR = 20 basis points), use the duration approximation to determine the approximate price change for the Treasury note. A. $0.000. B. $0.2775 per $100 face value. C. $2.775 per $100 face value. D. $0.2672 per $100 face value. E. $2.672 per $100 face value.

B. $0.2775 per $100 face value

A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest. The duration of this bond is 4.99 years. What will be the new price using the duration model if interest rates increase to 8.5 percent? A. $23.10. B. $976.90. C. $977.23. D. $1,023.10. E. -$23.10.

B. $976.90

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. 86. If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged adjusted duration gap of this position? Use your answer to the previous question. A. +1.25 years B. +1.12 years C. -1.12 years D. +0.92 years E. -1.25 years

B. +1.12 years

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the percentage price change for the bond if interest rates decline 50 basis points from the original 5 percent? A. -2.106 percent. B. +2.579 percent. C. +0.000 percent. D. +3.739 percent. E. +2.444 percent.

B. +2.579 percent

87. Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points. A. -$1.756 B. -$1.775 C. +$98.24 D. -$1.000 E. +$1.924

B. -$1.775

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. 91. What is the duration of the liabilities? A. 0.708 years. B. 0.354 years. C. 0.350 years. D. 0.955 years. E. 0.519 years.

B. 0.354 years

First Duration Bank has the following assets and liabilities on its balance sheet 81. What is the FI's leverage-adjusted duration gap? A. 0.91 years. B. 0.83 years. C. 0.73 years. D. 0.50 years. E. 0 years.

B. 0.83 years

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. 85. What is the duration of the two-year loan (per $100 face value) if it is selling at par? A. 2.00 years B. 1.92 years C. 1.96 years D. 1.00 year E. 0.91 years

B. 1.92 years

What is the leverage-adjusted duration gap of the FI? A. 3.61 years. B. 3.74 years. C. 4.01 years. D. 4.26 years. E. 4.51 years.

B. 3.74 years.

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. What is the duration of this bond? A. 5 years. B. 4.31 years. C. 3.96 years. D. 5.07 years. E. Not enough information to answer

B. 4.31 years.

What is the weighted average duration of the liabilities of the FI? A. 5.00 years. B. 5.35 years. C. 5.70 years. D. 6.05 years. E. 6.40 years.

B. 5.35 years.

Which of the following statements is true? A. The optimal duration gap is zero. B. Duration gap measures the impact of changes in interest rates on the market value of equity. C. The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. D. The duration of all floating rate debt instruments is equal to the time to maturity. E. The duration of equity is equal to the duration of assets minus the duration of liabilities.

B. Duration gap measures the impact of changes in interest rates on the market value of equity

Which of the following statements about leverage adjusted duration gap is true? A. It is equal to the duration of the assets minus the duration of the liabilities. B. Larger the gap in absolute terms, the more exposed the FI is to interest rate shocks. C. It reflects the degree of maturity mismatch in an FI's balance sheet. D. It indicates the dollar size of the potential net worth. E. Its value is equal to duration divided by (1 + R).

B. Larger the gap in absolute terms, the more expected the FI is to interest rate shocks.

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. 84. What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years? A. The risk that interest rates will rise since the FI must purchase a 2-year CD in one year. B. The risk that interest rates will rise since the FI must sell a 1-year CD in one year. C. The risk that interest rates will fall since the FI must sell a 2-year loan in one year. D. The risk that interest rates will fall since the FI must buy a 1-year loan in one year. E. There is no interest rate risk exposure

B. The risk that interest rates will rise since the FI must sell a 1-year CD in one year

Classified balance sheets

Balance sheet that distinguishes between current and noncurrent items

How is bond interest expense determined?

Bond carrying amount x market rate of interest at time of issuance = bond interest expense (if semiannual then Bond carrying amount x ½ market rate). (Bond carrying amount is the same thing as bond liability).

Serial bonds are:

Bonds that mature in installments

If bonds are issued at a premium, over the life of the bonds, the carrying value and interest expense will: Multiple Choice Both increase. Both decrease. Carrying value will increase and interest expense will decrease. Carrying value will decrease and interest expense will increase.

Both decrease.

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. 77. What is the price of the bond if market interest rates are 4 percent? A. $105,816.44. B. $105,287.67. C. $105,242.14. D. $100,000.00. E. $106,290.56.

C. $105,242.14

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. 95. Using present value bond valuation techniques, calculate the exact price of the bond after the interest rate increase of 20 basis points. A. $1,007.94. B. $992.02. C. $992.06. D. $996.01. E. $1,003.99.

C. $992.06

If all interest rates decline 90 basis points (ΔR/(1 + R) = -90 basis points), what is the change in the market value of equity? A. -$4.4300 million B. +$3.9255 million C. +$4.3875 million D. +$2.5506 million E. +$0.0227 million

C. +$4.3875

First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent. 74. What is the impact on the dealer's market value of equity per $100 of assets if the change in all interest rates is an increase of 0.5 percent [i.e., ΔR = 0.5 percent] A. +$336,111. B. -$0.605. C. -$336,111. D. +$0.605. E. -$363,000.

C. -$336,111

What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 4 percent. A. -27.56 million. B. -28.01 million. C. -29.85 million. D. -31.06 million. E. -33.76 million.

C. -29.85 million

An FI has financial assets of $800 and equity of $50. If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap? A. 0.9000 years. B. 0.9600 years. C. 0.9756 years. D. 0.8844 years. E. Cannot be determined.

C. 0.9756 years.

C. 0.98 years

Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par. 88. What is the duration of this Treasury note? A. 1.500 years. B. 1.371 years. C. 1.443 years. D. 2.882 years. E. 1.234 years.

C. 1.443 years

What is the duration of an 8 percent annual payment two-year note that currently sells at par? A. 2 years. B. 1.75 years. C. 1.93 years. D. 1.5 years. E. 1.97 years.

C. 1.93 years

Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par. Principal of $20,000,000 is due at the end of two years. A. 2 years. B. 1.91 years. C. 1.94 years. D. 1.49 years. E. 1.75 years.

C. 1.94 years

Calculate the duration of the liabilities to four decimal places. A. 2.05 years. B. 1.75 years. C. 2.22 years. D. 2.125 years. E. 2.50 years.

C. 2.22

The short-term debt consists of 4-year bonds paying an annual coupon of 4 percent and selling at par. What is the duration of the short-term debt? A. 3.28 years. B. 3.53 years. C. 3.78 years. D. 4.03 years. E. 4.28 years.

C. 3.78 years.

What is the weighted average duration of the assets of the FI? A. 7.25 years. B. 7.75 years. C. 8.25 years. D. 8.75 years. E. 9.25 years.

C. 8.25 years

Which of the following is indicated by high numerical value of the duration of an asset? A. Low sensitivity of an asset price to interest rate shocks. B. High interest inelasticity of a bond. C. High sensitivity of an asset price to interest rate shocks. D. Lack of sensitivity of an asset price to interest rate shocks. E. Smaller capital loss for a given change in interest rates.

C. High sensitivity of an asset price to interest rate shocks

What is this bank's interest rate risk exposure, if any? A. The bank is exposed to decreasing interest rates because it has a negative duration gap of -0.21 years. B. The bank is exposed to increasing interest rates because it has a negative duration gap of -0.21 years. C. The bank is exposed to increasing interest rates because it has a positive duration gap of +0.21 years. D. The bank is exposed to decreasing interest rates because it has a positive duration gap of +0.21 years. E. The bank is not exposed to interest rate changes since it is running a matched book.

C. The bank is exposed to increasing interest rates because is has a positive duration gap of +0.21 years.

What will be the impact, if any, on the market value of the bank's equity if all interest rates increase by 75 basis points? (i.e., ΔR/(1 + R) = 0.0075) A. The market value of equity will decrease by $15,750. B. The market value of equity will increase by $15,750. C. The market value of equity will decrease by $426,825. D. The market value of equity will increase by $426,825. E. There will be no impact on the market value of equity.

C. The market value of equity will decrease by $426,825.

What conclusions can you draw from the duration gap in your answer to the previous question? A. The market value of the dealer's equity decreases slightly if interest rates fall. B. The market value of the dealer's equity becomes negative if interest rates rise. C. The market value of the dealer's equity decreases slightly if interest rates rise. D. The market value of the dealer's equity becomes negative if interest rates fall. E. The dealer has no interest rate risk exposure.

C. The market value of the dealer's equity decreases slightly if interest rates rise

The larger the size of an FI, the larger the _________ from any given interest rate shock. A. duration mismatch B. immunization effect C. net worth exposure D. net interest income E. risk of bankruptcy

C. net worth exposure

When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds

Carrying value and interest expense increase

When bonds are issued at face amount, what happens to the carrying value and interest expense over the life of the bonds? Multiple Choice Carrying value and interest expense increase. Carrying value and interest expense decrease. Carrying value and interest expense remain unchanged. Carrying value increases and interest expense decreases.

Carrying value and interest expense remain unchanged.

Interest expense on bonds payable is calculated as

Carrying value times the market interest rate

Calculate the leverage-adjusted duration gap to four decimal places and state the FI's interest rate risk exposure of this institution. A. +1.0308 years; exposed to interest rate increases. B. -0.3232 years; exposed to interest rate increases. C. +0.8666 years; exposed to interest rate increases. D. +0.4875 years; exposed to interest rate increases. E. -1.3232 years; exposed to interest rate decreases.

D. +.04875 years; exposed to interest rate increases.

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. 90. What is the duration of the assets? A. 0.708 years. B. 0.354 years. C. 0.350 years. D. 0.955 years. E. 0.519 years.

D. 0.955 years.

Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par. The $30,000,000 loan is 100 percent amortizing with annual payments. A. 2 years. B. 1.89 years. C. 1.94 years. D. 1.49 years. E. 1.73 years.

D. 1.49 years.

What is the duration of the above Treasury note? Use the asked price to calculate the duration. Recall that Treasuries pay interest semiannually. A. 3.86 years. B. 1.70 years. C. 2.10 years. D. 1.90 years. E. 3.40 years.

D. 1.90 years.

First Duration Bank has the following assets and liabilities on its balance sheet 80. What is the duration of the commercial loans? A. 1.00 years. B. 2.00 years. C. 1.73 years. D. 1.91 years. E. 1.50 years.

D. 1.91 years

An FI purchases a $9.982 million pool of commercial loans at par. The loans have an interest rate of 8 percent, a maturity of five years, and annual payments of principal and interest that will exactly amortize the loan at maturity. What is the duration of this asset? A. 4.12 years. B. 3.07 years. C. 2.50 years. D. 2.85 years. E. 5.00 years.

D. 2.85 years

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually? A. 0.50 years. B. 2.00 years. C. 4.40 years. D. 5.00 years. E. 4.05 years.

D. 5.00 years

D. 6.51 years

For small change in interest rates, market prices of bonds move in an inversely proportional manner according to the size of the A. equity. B. asset value. C. liability value. D. duration value. E. Answers A and B only.

D. Duration Value

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. If rates do not change, the balance sheet position that maximizes the FI's returns is A. a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs. B. a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans. C. a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD. D. a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans. E. a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans.

D. a positive spread of 165 basis points by selling 1-year CDs to finance 20year loans.

A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by A. increasing the average duration of its assets to 9.56 years. B. decreasing the average duration of its assets to 4.00 years. C. increasing the average duration of its liabilities to 6.78 years. D. increasing the average duration of its liabilities to 9.782 years. E. increasing the leverage ratio, k, to 1.

D. increasing the average duration of its liabilities to 9.782 years.

Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio. A. book value of assets B. maturity C. market prices D. interest rates E. duration

D. interest rates

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when A. the maturity gap is zero. B. the repricing gap is zero. C. the duration gap is zero. D. the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI. E. after-the-fact analysis demonstrates that immunization coincidentally occurred.

D. the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI.

For a bond issued at a premium, carrying Value _______ over time

DECREASES

Journal entry for depletion expense

DR: Depletion expense CR: Accumulated Depletion

journal entry for depreciation expense

DR: Depreciation Expense CR: Accumulated Depreciation

journal entry for a purchase of an asset

DR: Machine CR: Cash

journal entry for additional expenditures (extraordinary)

DR: Machines/Buildings/Etc. CR: Cash/Accounts Payable

journal entry for additional expenditures (ordinary)

DR: Repairs and Maintenance Expense CR: Cash/Accounts Payable

If a bond is sold at a premium what will happen to interest expense each interest payment? Will it stay the same, increase, or decrease each payment?

Decrease each payment because the bond carrying amount is decreasing... (bond carrying value x market rate = interest expense).

An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration. If interest rates rise by 4 percent, calculate the bond's new value. Recall that Treasury bonds pay interest semiannually. Use the duration valuation equation. A. $28,572 B. $20,864 C. $15,000 D. $22,642 E. $71,428

E. $71,428

Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually. 76. What is the price of the bond if market interest rates are 7 percent? A. $99,050.15. B. $99,457.94. C. $99,249.62. D. $100,000.00. E. $99,065.42.

E. $99,065.42

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent 101. Calculate the percentage change in this bond's price if interest rates on comparable risk securities decline to 7 percent. Use the duration valuation equation. A. +8.58 percent B. +12.76 percent C. -12.75 percent D. +11.80 percent E. +11.52 percent

E. +11.52 percent

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent Calculate the percentage change in this bond's price if interest rates on comparable risk securities increase to 11 percent. Use the duration valuation equation. A. +4.25 percent B. -4.25 percent C. +8.58 percent D. -3.93 percent E. -3.84 percent

E. -3.84 percent

Calculate the modified duration of a two-year corporate loan paying 6 percent interest annually. The $40,000,000 loan is 100 percent amortizing, and the current yield is 9 percent annually. A. 2 years. B. 1.91 years. C. 1.94 years. D. 1.49 years. E. 1.36 years.

E. 1.36 years.

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent 100. What is the duration of the bond? A. 4.677 years. B. 5.000 years. C. 4.674 years. D. 4.328 years. E. 4.223 years

E. 4.223 years

Managers can achieve the results of duration matching by using these to hedge interest rate risk. A. Rate sensitive assets. B. Rate sensitive liabilities. C. Coupon bonds. D. Consol bonds. E. Derivatives.

E. Derivitives

The shortcomings of this strategy are the following except A. duration changes as the time to maturity changes, making it difficult to maintain a continuous hedge. B. estimation of duration is difficult for some accounts such as demand deposits and passbook savings account. C. it ignores convexity which can be distorting for large changes in interest rates. D. it is difficult to compute market values for many assets and liabilities. E. it does not assume a flat term structure, so its estimation is imprecise.

E. it does not assume a flat term structure so its estimation is imprecise.

The cash paid for interest on bonds payable is calculated as: Multiple Choice Face amount times the stated interest rate. Carrying value times the market interest rate. Face amount times the market interest rate. Carrying value times the stated interest rate.

Face amount times the stated interest rate.

The related interest expense for the period is determined by multiplying the stated interest rate by the book value of the bond at the beginning of the current period.

False, the bond carrying amount (bond liability, book value) is multiplied by the market rate of interest not the stated rate.

The issue price of a bond is the discounted present value of the principal and the present value of the cash interest to be received over the life of the bonds discounted by the stated or coupon rate.

False, the issue price of a bond is determined by using the market rate of interest to present value the cash flows not the stated rate

Item17 3.7 points Time Remaining 11 minutes 10 seconds 00:11:10 Item 17 Item 17 3.7 points Time Remaining 11 minutes 10 seconds 00:11:10 If bonds are issued at a discount, interest expense will be Lower than cash interest paid. Higher than cash interest paid. Equal to cash interest paid. Lower or higher depending on current market interest rates.

Higher than cash interest paid.

For a bond issued at a discount, carrying Value _______ over time

INCREASES

If bonds are issued at a discount, over the life of the bonds, the carrying value will: Increase. Decrease. Stay the same. Depend on the current market interest rate.

Increase.

if bonds are issued at a discount, over the life of the bonds, interest expense will: Decrease. Increase. Remain unchanged. The effect cannot be determined from the information given.

Increase.

What is the bond carrying amount?

It is the bond liability. (Face amount + unamortized bond premium) or (Face amount - unamortized bond discount), if there is no premium or discount then the bond carrying amount = face amount. By definition face amount and bond payable are the same thing...but face amount and bond liability is NOT the same thing.

If a bond is sold at a discount what will happen to interest expense each payment? Will it stay the same, increase, or decrease each payment?

It will increase each payment because the bond liability is increasing (increasing bond liability x market rate = increasing interest expense).

If a $10,000 ten year bond is sold at face what will its bond carrying amount be at the end of the fifth year?

It'll be the $10,000 face amount (bond principal, maturity value) because when a bond is issued at face, there isn't a premium or discount to deal with; the bond carrying amount will equal the face amount the whole life of the bond.

Note Payable

Liability represents by a legal document called a note the describes pertinent details such as principal amount, interest charges, maturity date, and collateral

Interest expense is calculated using what rate?

MARKET rate

Current Ratio

Measure of liquidity; calculated by dividing current assets by current liabilities

If a bond is sold at a discount will its bond carrying amount ever be more than the face amount?

No. Bond carrying amount for a bond sold at a discount will equal face amount - unamortized bond discount. The most the bond carrying amount will ever be for a bond issued at a discount will be its face amount once the bond discount is fully amortized away (at maturity).

Is Face amount and bond liability the same thing?

No. The only time face amount is equal to the bond liability is when a bond is sold at face. [However, on the date the bond matures the bond liability will become the face amount (maturity amount) (because any premium or discount will have been completely amortized away on that date.)]

Is bond interest paid (bond interest payable) the same as bond interest expense?

No. They can be the same amount if the bond was sold at face; but by definition they are not the same thing.

Current Liability

Obligation due within one year or an operating cycle, whichever is longer

Issuer

Party that issues the bond (the borrower)

How is bond interest payable (cash payment for interest) determined?

Principal x stated rate = annual interest or (Principal x ½ stated rate = semi-annual interest)

Operating Cycle

Process of converting cash into inventory, inventory into receivables, and receivables back to cash; its length can be measured in days using financial statement data

Convertible bonds

Provide potential benefits to both the issuer and the investor

If a bond is sold at a discount how will interest expense compare with interest paid? Will interest expense be greater than, equal to, or less than interest paid?

The bond sold at a discount because the market rate of interest was higher than the stated rate; based on a higher market rate interest expense will be higher than the amount of interest paid.

Which of the following is true for bonds issued at a discount? LO9-6 a. The stated interest rate is greater than the market interest rate. b. The market interest rate is greater than the stated interest rate. c. The stated interest rate and the market interest rate are equal. d. The stated interest rate and the market interest rate are unrelated.

The market interest rate is greater than the stated interest rate.

The issue price of a bond is calculated as: Multiple Choice The bond's face amount to be paid at maturity. The present value of the bond's face amount to be paid at maturity. The present value of the bond's periodic interest payments over the life of the bond. The present value of the bond's face amount plus the present value of its periodic interest payments.

The present value of the bond's face amount plus the present value of its periodic interest payments.

the price of a bond is equal to

The present value of the face amount plus the present value of the stated interest payments

A bond sold at a premium will pay cash interest in excess of the amount of interest expense recognized for accounting purposes

True, interest payable is based on the stated rate. Since the bond was sold at a premium, the stated rate was greater than the market rate when the bond was issued...so the interest payment is going to be greater than interest expense.

Bonds sold at a discount will have an effective (market) interest rate that is higher than the stated interest rate.

True, when the market rate is higher than the stated rate, the bond will sell for less than face value (sells at a discount).

13. Your college has agreed to give you a $10,000 tuition loan. As part of the agreement, you must repay $12,600 at the end of the three-year period. What interest rate is the college charging? a. 8% b. 9% c. 11% d. 6%

18. Claire bought 100 shares of Minnesota Mining and Manufacturing in June, 1987 for $38 a share for a total investment of $3,800. She sold the shares in June, 1996 for $8,960. What is Claire's annual rate of return on her investment? Pick the closest answer. a. 10% b. 10.6% c. 11% d. 11.2%

2. You need to have $35,000 on hand to buy a new Lexus five years from today. To achieve that goal, you want to know how much you must invest today in a certificate of deposit guaranteed to return you 3% per year. To help determine how much to investment today, you will use: a. present value of a single lump sum b. future value of a single lump sum c. present value of an annuity d. future value of an annuity

24. Your subscription to Consumer Reports is about to expire. You may renew it for $24 a year or, instead, you may get a lifetime subscription to the magazine for a onetime payment of $400 today. Payments for the regular subscription are made at the beginning of each year. Using a discount rate of 5%, how many years does it take to make the lifetime subscription the better deal? Pick the closest answer. a. 33 years b. 28 years c. 36 years d. 40 years

30. Suppose you receive $3,000 a year in Years One through Four, $4,000 a year in Years Five through Nine, and $2,000 in Year 10, with all the money to be received at the end of the year. If your discount rate is 12%, what is the present value of these cash flows? Pick the closest answer. a. 18,926.12 b. 19,560.80 c. 20,651.24 d. 24,175.00

33. Tracey deposits $5,000 in a five-year certificate of deposit paying 6% compounded semi-annually. How much will Tracey have at the end of the five-year period? Pick the closest answer. a. $6,720 b. $6,690 c. $6,596 d. $6,910

35. Assume that a borrower is willing to pay you $2,000 at the end of three years in return for a sum of money now. To receive a return of 10%, what is the most you should be willing to lend now? Pick the closest answer. a. $1,503 b. $1,786 c. $1,802 d. $1,818

38. If $1,000 were invested now at a 12% interest rate compounded annually, what would be the value of the investment in two years? Pick the closest answer. a. $1,254 b. $1,210 c. $1,188 d. $1,160

44. The present value of an annuity of $5,000 to be received at the end of each of the 6 years at a discount rate of 4% would be: (Pick the closest answer.) a. $26,211 b. $33,165 c. $3,950 d. $27,259

47. Interest earned only on an investment's principal or original amount is referred to as: a. simple interest b. compound interest c. discount interest d. annuity interest

52. The interest rate determined by multiplying the interest rate charged per period by the number of periods in a year is called the: a. annual percentage rate b. compound rate of interest c. stated rate of interest d. effective annual rate

54. If the quarterly rate of interest is 2.5% and interest is compounded quarterly, then the EAR is: Pick the closest answer. a. 10.38% b. 10.00% c. 2.50% d. 39.06%

56. In future value or present value problems, unless stated otherwise, cash flows are assumed to be a. at the end of a time period. b. at the beginning of a time period. c. in the middle of a time period. d. spread out evenly over a time period.

58. The future value of $100 received today and deposited at 6 percent for four years is: Pick the closest answer. a. $126.25 b. $126.53 c. $141.85 d. $116.99

63. Shannon plans to fund his individual retirement account (IRA) with the maximum contribution of $2,500 at the end of each year for the next 30 years. If Shannon can earn 10 percent on his contributions, how much will he have at the end of the tenth year? Pick the closest answer. a. $39,844 b. $411,235 c. $43,828 d. $27,500

69. The future value of $200 received today and deposited for three years in an account which pays 8 percent interest compounded semiannually is ________. Pick the closest answer. a. $253.06 b. $251.94 c. $253.35 d. $212.27

73. Assume your bank has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded quarterly. Which account provides the highest effective annual return? a. Account A b. Account B c. Both provide the same effective annual return. d. We don't have sufficient information to make a choice.

75. If a savings bond can be purchased today for $29.50 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond? Pick the closest answer. a. 5% b. 6% c. 7% d. 8%

8. The _________ value of a savings or investment is its amount or value at the current time. a. present b. future c. book d. none of the above

85. Jonathan borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments, with the payments being made at the end of each year. The amount paid toward interest in the first year's payment is: Pick the closest answer. a. $1,155 b. $2,481 c. $144 d. $1,327

88. Jonathan borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments, with the payments being made at the end of each year. The loan balance at the end of the second year is: Pick the closest answer. a. $7,700.17 b. $5,536.18 c. $8,164.05 d. $9,113.72

91. Assume your bank has a choice between two deposit accounts. Account A has an annual percentage rate of 4.62 percent with interest compounded monthly. Account B has an annual percentage rate of 4.62 percent but with interest compounded quarterly. Which account provides the highest effective annual return? a. Account A b. Account B c. Both provide the same effective annual return. d. We don't have sufficient information to make a choice.

Which of the following leases is essentially the purchase of an asset with debt financing? LO9-3 a. An operating lease. b. A capital lease. c. Both an operating lease and a capital lease. d. Neither an operating lease nor a capital lease.

a capital lease

plant asset age formula

accumulated depreciation / annual depreciation

cost determination of fixed asset

all NORMAL, REASONABLE, and NECESSARY expenditures in preparing an asset for its intended use

The annual interest rate specified on a bond (which is based on the maturity amount of the bond) appropriately can be called the A)stated rate. B)nominal rate. C)coupon rate. D)contract rate. E)A through D are all acceptable terms.

all are acceptable

bonds: convertible

allow the investor to convert each bond into a specific number of shares of common stock

issue price

amount investors pay cash to the company on the issue date

sinking fund

an investment fund to which an organization makes payments each year over the life of its outstanding debt

partial year depreciation formula

annual depreciation expense X (# of months owned / 12)

Outdoor Adventures issues bonds at a discount. On the maturity date, the bonds carrying value will be:

at face amount

11. A loan that is repaid in equal payments over a specified time period is referred to as a (n): a. discounted loan b. amortized loan c. simple interest-free loan d. inflation-indexed loan

14. Larry deposited $5,000 in a savings account that paid 8% interest compounded quarterly. What is the effective rate of interest? a. 8.00% b. 8.24% c. 8.33% d. 8.46%

16. Kristen has just purchased a used Mercedes for $18,995. She plans to make a $2,500 down payment on the new car. What is the amount of her monthly payment on the remaining loan if she must pay 12% annual interest on a 24-month car loan? Pick the closest answer. a. $759.53 b. $776.48 c. $894.16 d. $899.87

20. Megan puts $1,000 in a savings passbook that pays 4% compounded quarterly. How much will she have in her account after five years? Pick the closest answer. a. $1,200.50 b. $1,220.20 c. $1,174.80 d. $1,217.50

21. In 1983, the average tuition for one year in the MBA program at a university was $3,600. Thirty years later, in 2013, the average tuition was $27,400. What is the compound annual growth rate in tuition (rounded to the nearest whole percentage) over the 30-year period? Pick the closest answer. a. 6% b. 7% c. 8% d. 10%

22. You want to buy a Volvo in seven years. The car is currently selling for $50,000, and the price will increase at a compound rate of 10% per year. You can presently invest in high-yield bonds earning a compound annual rate 14% per year. How much must you invest at the end of each of the next seven years to be able to purchase your dream car in seven years? Pick the closest answer. a. $8,831.46 b. $9,080.20 c. $9,125.42 d. $9,282.09

23. Taylor deposits $2,000 per year at the end of the year for the next 20 years into an IRA account that pays 6%. How much will Taylor have on deposit at the end of 20 years? Pick the closest answer. a. $67,520 b. $73,572 c. $81,990 d. $75,686

25. Your current bank is paying 6.25% simple interest rate. You can move your savings account to Harris Bank that pays 6.25% compounded annually or to First Chicago bank paying 6% compounded semi-annually. To maximize your return you would choose: a. your current bank b. Harris Bank c. First Chicago bank d. you are indifferent, because the effective interest rate for all three banks is the same

27. You need $8,000 four years from now for a down payment on your future house. How much money must you deposit today if your credit union pays 5% interest compounded annually? Pick the closest answer. a. $6,269.59 b. $6,581.62 c. $6,394.12 d. $6,189.83

28. In 1976, the average price of a domestic car was $5,100. Twenty years later, in 1996, the average price was $16,600. What was the annual growth rate in the car price over the 20-year period? Pick the closest answer. a. 5.89% b. 6.07% c. 7.12% d. 8.23%

3. Which of the following characteristics is not descriptive of an amortization schedule? a. Each payment is the same. b. The same dollar amount of interest is paid with each payment. c. Payment on principal increases with each total payment. d. Balance owed is reduced by the principal portion of each payment.

31. You have just won a lottery! You will receive $50,000 a year beginning one year from now for 20 years. If your required rate of return is 10%, what is the present value of your winning lottery ticket? Pick the closest answer. a. $418,250 b. $425,700 c. $444,640 d. $453,850

34. An investment will mature in 20 years. Its maturity value is $1,000. If the discount rate is 7%, what is the present value of the investment? Pick the closest answer. a. $178 b. $258 c. $276 d. $362

37. If we will receive $100 per year beginning one year from now for a period of three years with a 12% discount rate, what would be the value of our investment today? Pick the closest answer. a. $230 b. $240 c. $250 d. $260

42. $2,000 invested today at 6% in 3 years would result in a future value of: Pick the closest answer. a. $2,000 b. $2,382 c. $6,362 d. $3,145

45. The present value of an annuity of $5,000 to be received at the beginning of each of the 6 years at a discount rate of 4% would be: Pick the closest answer. a. $26,210 b. $27,259 c. $17,326 d. $18,365

46. If you have an account with a 21.5% annual percentage rate where interest is compounded quarterly, what is the effective annual rate of interest? Pick the closest answer. a. 23.75% b. 23.3% c. 21.5% d. 5.375%

53. If the quarterly rate of interest is 2.5% and interest is compounded quarterly, then the APR is: Pick the closest answer. a. 10.38% b. 10.00% c. 2.50% d. 39.06%

57. When the amount earned on a deposit becomes part of the principal at the end of a period and can earn a return in future periods, this is called a. discount interest. b. compound interest. c. primary interest. d. future value.

59. The future value of $200 received today and deposited at 8 percent for three years is: Pick the closest answer. a. $248.00 b. $251.94 c. $370.19 d. $218.55

6. Suppose you have a choice of two equally risky annuities, each paying $1,000 per year for 20 years. One is an annuity due, while the other is an ordinary annuity. Which annuity should you choose? a. the ordinary annuity b. the annuity due c. either one because the annuities have the same present value d. without information about the appropriate interest rate, we cannot tell which annuity is better

66. A generous benefactor to the local university plans to make a one-time endowment which would provide the university with $150,000 per year into perpetuity. The rate of interest is expected to be 5 percent for all future time periods. How large must the endowment be? Pick the closest answer. a. $300,000 b. $3,000,000 c. $750,000 d. $1,428,571

68. The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is: Pick the closest answer. a. $2,500 b. $3,045 c. $6,516 d. $2,856

70. The future value of an ordinary annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly is: Pick the closest answer. a. $17,549 b. $75,401 c. $19,655 d. $77,664

76. Lance would like to send his parents on a cruise for their 50th wedding anniversary. He expects the cruise will cost $15,000 and he has 5 years to accumulate this money. How much must Lance deposit at the end of each year in an account paying 10 percent interest in order to have enough money to send his parents on the cruise? Pick the closest answer. a. $1,136 b. $2,457 c. $1,193 d. $2,234

78. Claire makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest rate of 13 percent. The original principal amount was: Pick the closest answer. a. $16,953 b. $15,002 c. $15,873 d. $16,417

79. Megan owns stock in a company which has consistently paid a growing dividend over the last five years. At the end of the first year Megan owned the stock, she received $1.71 per share and in the fifth year, she received $2.89 per share. What is the growth rate of the dividends during this time? Pick the closest answer. a. 11 percent b. 14 percent c. 12 percent d. 13 percent

80. Shelby was given a gold coin originally purchased for $1 by her great-grandfather 50 years ago. Today the coin is worth $450. The rate of return realized on the sale of this coin is approximately equal to: Pick the closest answer. a. 12% b. 13% c. 14% d. cannot be determined with the given information

9. If the stated or nominal interest rate is 10 percent and the inflation rate is 4 percent, the net or differential compounding rate would be ________ percent a. ten b. six c. four d. fourteen

90. The present value of an annuity of $5,000 to be received at the end of every six months for 6 years at a 4% annual rate would be (Pick the closest answer.): a. $26,210 b. $52,877 c. $53,934 d. $27,259

who benefits from callable bonds

benefit issuer

What are three other names for "bond payable"?

bond principal, maturity value, face value

bonds: secured

bonds are backed by collateral EX: signing a mortgage agreement for buying a house

bonds: unsecured

bonds are not backed by collateral

what is the difference between a bond and a note

bonds are usually for greater amounts and are issued to many lenders while notes are issued to a single lender like a bank

revision of depreciation estimate formula

book value at date of revision - revised salvage value/revised remaining useful life

debt financing

borrowing money from creditors (liabilities)

1. A famous athlete is awarded a contract that stipulates equal payments to be made monthly over a period of five years. To determine the value of the contract today, you would need to use: a. present value of a single lump sum b. future value of a single lump sum c. present value of an annuity d. future value of an annuity

10. A loan that is repaid in equal payments over a specified time period is called a (n) a. discount loan b. balloon loan c. amortized loan d. none of the above

12. The method of calculating interest on a loan that is set by law is called the: a. negotiated legal rate (NLR) b. effective annual rate (EAR) c. annual percentage rate (APR) d. none of the above

15. Taylor has just accepted a job as a stockbroker. He estimates his gross pay each year for the next three years is $35,000 in year 1, $21,000 in year 2, and $32,000 in year 3. His gross pay is received at the end of each year. Calculate the present value of these cash flows, if they are discounted at 4%. Pick the closest answer. a. $79,452.30 b. $80,294.50 c. $81,517.10 d. $88,000

19. You borrow $10,000 to pay for your college tuition. The loan is amortized over a three-year period with an interest rate of 18%. The payments are made at the end of each year. What is your remaining balance at the end of Year Two? Pick the closest answer. a. $7,201 b. $4,599 c. $3,898 d. $3,303

26. You put $2,000 in an IRA account at Northern Trust. This account pays a fixed interest rate of 8% compounded quarterly. How much money do you have in five years? Pick the closest answer. a. $2,914 b. $2,939 c. $2,972 d. $2,999

29. You deposit $1,000 in a long-term certificate of deposit with an interest rate of 8.81%. How many years will it take for you to triple your deposit? Pick the closest answer. a. 11 years b. 12 years c. 13 years d. 14 years

32. Consolidated Freightways is financing a new truck with a loan of $60,000 to be repaid in six annual end-ofyear installments of $13,375. What annual interest rate is Consolidated Freightways paying? Pick the closest answer. a. 7% b. 8% c. 9% d. 10%

36. Assume a lender offers you a $25,000, 10%, three-year loan that is to be fully amortized with three annual payments. The first payment will be due one year from the loan date. How much will you have to pay each year? Pick the closest answer. a. $8,042 b. $9,026 c. $10,053 d. $11,120

39. Suppose you were going to save $1,000 per year for three years at a 10% interest rate compounded annually, with the first investment occurring today. What would be the future value of this investment? Pick the closest answer. a. $2,124 b. $2,310 c. $3,641 d. $3,812

4. Which of the following terms best describes an annuity due? a. decreasing payments b. increasing payments c. payment at beginning of year d. payment at the end of the year

43. An ordinary annuity of $5,000 invested at 8% in 5 years would result in a future value of (Pick the closest answer.): a. $25,000 b. $7,345 c. $29,333 d. $31,680

48. When solving for the future value of an amount deposited now, which one of the following factors would not be part of the calculation? a. present value amount b. 1 plus the interest rate c. 1 divided by the sum of 1 plus the interest rate d. number of periods to compound over

49. A series of equal payments or receipts that occur at the beginning of each of a number of time periods is referred to as: a. an ordinary annuity b. a deferred annuity c. an annuity due d. an extraordinary annuity

55. If the APR is 12% and interest is compounded monthly, then the EAR is: Pick the closest answer. a. 12.00% b. 1.00% c. 12.68%% d. none of the above

60. The future value of a dollar ________ as the interest rate increases and ________ the farther in the future the funds are to be received. a. decreases; decreases. b. decreases; increases. c. increases; increases. d. increases; decreases.

62. Collin plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 10 years. If Collin can earn 10 percent on his contributions, how much will he have at the end of the tenth year? Pick the closest answer. a. $22,000 b. $20,000 c. $31,875 d. $35,062

64. A hospital received a contribution to its endowment fund of $2 million. The hospital can never touch the principal, but it can use the earnings. At an assumed interest rate of 9.5 percent, how much can the hospital earn to help its operations each year? Pick the closest answer. a. $95,000 b. $19,000. c. $190,000. d. $18,000

67. $100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is ________. Pick the closest answer. a. $1,536.25 b. $672.86 c. $727. 37 d. $1,245.16

7. Which of the following statements is false? a. For a given APR, more frequent compounding results in additional return on the investment. b. An amortized loan is repaid in equal payments over a specified time period. c. The effective annual rate is determined by multiplying the interest rate charged per period by the number of periods in a year. d. Each of the above statements is true.

71. What is the highest effective rate attainable with a 12 percent nominal rate? Pick the closest answer. a. 12.00% b. 12.55% c. 12.72% d. 12.95%

72. Kristen plans to start her college education four years from now. To pay for her college education, she has decided to save $1,000 at the end of each quarter for the next four years in a bank account paying 12 percent interest. How much will she have at the end of the fourth year? Pick the closest answer. a. $20,762 b. $5,353 c. $20,157 d. $4,779

77. Olivia borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment is: Pick the closest answer. a. $1,323 b. $1,298 c. $1,482 d. $1,518

86. Jonathan borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments, with the payments being made at the end of each year. The amount paid toward the principal in the first year's payment is: Pick the closest answer. a. $1,155 b. $2,481.91 c. $1,326.91 d. $8,018.90

89. A wealthy inventor has decided to endow her favorite art museum by establishing funds for an endowment which would provide $1,000,000 per year forever. She will fund the endowment upon her fiftieth birthday 10 years from today. She plans to accumulate the endowment by making annual end-of-year deposits into an account. The rate of interest is expected to be 5 percent in all future periods. How much must the scientist deposit each year to accumulate to the required amount? Pick the closest answer. a. $1,875,333 b. $736,000 c. $1,590,091 d. $943,396

most corporate bonds are...

callable (redeemable)

when bonds issue at face amount, the carrying value interest expense are ______ over time

constant

What is another name for the stated rate?

contract rate, nominal rate, or coupon rate

straight line depreciation formula

cost-salvage value / useful life in periods

17. Lance deposits $2,000 per year at the end of the year for the next 15 years into an IRA account that currently pays 7%. How much will Lance have on deposit at the end of the 15 years? Pick the closest answer. a. $39,981 b. $46,753 c. $49,002 d. $50,258

87. Jonathan borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments, with the payments being made at the end of each year. The loan balance at the end of the first year is: Pick the closest answer. a. $8,934.24 b. $9,345 c. $8,018.91 d. $9,173.09

If the stated rate is 8% and the market rate is 8% what will the bond sell for, premium, face or discount?

face

journal entry for bonds issued at a premium

debit cash, credit bonds payable (face value), credit premium on bonds payable

journal entry for bond at discount

debit cash, debit discount on bonds payable, credit bonds payable

journal entry of an installment note (payment if monthly installment note)

debit interest expense, debit notes payable (difference between cash and interest expense)

Philips Corporation issued (sold) $50,000,000 of its 10% bonds at face on January 1, 20XD. On December 31, 20XD the bonds were trading on the bond exchange at a premium. Since the issue date, the market rate of interest on similar risk bonds has

decreased, when the bonds were issued, the market rate of interest equaled the stated rate (10%), since that date, the market rate of interest has declined because the same bond is now selling at a premium. A bond will sell at a premium if the stated rate is greater than the market rate (or if the market rate is less than the stated rate).

what is the gain/loss on disposal of fixed asset determined by

determined by comparing the book value with the market value

market interest rate

implied rate based on the price investors are willing to pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond

installment payment

includes both an amount that represents interest and an amount that represents a reduction of the outstanding balance

who benefits from a convertible bond?

issuer and investory

bonds: callable

issuing company can pay off bonds early at a specified call price

If a bond is sold at a discount, what was higher the stated rate of interest or the market rate of interest?

market rate was higher

3 sources of debt

notes, leases, bonds

equity financing

obtaining investment from stockholders (stockholders equity)

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at A premium. Face amount. A discount. A discount or premium depending on the maturity date.

premium

Which of the following is not a primary source of corporate debt financing? LO9-1 a. Bonds. b. Notes. c. Leases. d. Receivables.

receivables

the total cost of a combined purchase of land and building is separated on the basis of a lump sum formula's what

relative fair market values

Amortization of a premium related to a bond issuance would

require interest expense be calculated by multiplying the market interest rate times the book value of the bonds & lead to higher premium amortization and lower interest expense over the life of the bonds

bonds: serial

require payments in installments over a series of years EX: a $20 million bond is issued and $2 is due each year for 10 years

bonds: term

requires payment of the full principal amount of the bond on a single date

gain/loss on disposal of fixed asset

sale price > book value = gain sale price < book value = loss

If a bond is sold at a premium what was higher the market rate of interest or the stated rate?

stated rate was higher

Which of the following ratios measures financial leverage? LO9-8 a. The return on assets ratio. b. The inventory turnover ratio. c. The times interest earned ratio. d. The debt to equity ratio.

the debt to equity ratio

what do callable bonds protect?

the issuing company from future decreases in interest rates... if they decline the company can buy back the high-interest-rate bonds at a fixed price and issue new bonds at the new, lower interest rate price

The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity.

true

We first compute interest expense and then compute the amortization of premium or discount by comparing the interest expense to interest payable.

true

most bonds are....

unsecured

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