Chapter 5

discount bond

A bond that sells below its par value; occurs whenever the going rate of interest is above the coupon rate

You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the ______ value on the financial calculator.

N

premium bond

a bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate

Which of the following is a perpetuity?

a constant stream of cash flows forever

An annuity with payments beginning immediately rather than at the end of the period is called an ______.

annuity due

An annuity due is a series of payments that are made _______.

at the beginning of each period

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.

compounding

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.

effective

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the ______ of each period.

end

Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the ______ of the period.

end

If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity.

greater than

A perpetuity is a constant stream of cash flows for a(n) ______ period of time.

infinite

When finding the present or future value of an annuity using a financial calculator, the ______ should be entered as a percentage.

interest rate

The formula for the ______ value interest factor of an annuity is [1 − 1/(1 + r)t]/r.

present

coupon rate

the interest rate that a bond issuer will pay to a bondholder

Because of ______ and ______, interest rates are often quoted in many different ways.

tradition and legislation

True or false: Interest rates can be quoted in various ways.

true

True or false: The annuity present value of an amount C is calculated as c*{1−[1/(1+r)t]r}

true