FIN 2302 Exam 2

Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond? A) Callable bond B) Convertible bond C) Putable bond D) Junior bond

A) Callable bond

Which of the statements below is FALSE? A) The prices of goods and services tend to decrease over time because of inflation. B) The real interest rate is the reward for waiting. C) The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. D) Nominal interest rates are the sum of two major components: the real interest rate and expected inflation.

A) The prices of goods and services tend to decrease over time because of inflation.

The most common shape for a yield curve is upward sloping. A) True B) False

A) True

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

B) 4%

The Fisher Effect involves which of the items below? A) Nominal rate, the bond rate, and inflation B) Nominal rate and inflation only C) Nominal rate, the real rate, and inflation D) Nominal rate and the real rate only

C) Nominal rate, the real rate, and inflation

The ExecUfind Corporation has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond? A) $1,171.59 B) $1,170.27 C) $850.61 D) $849.54

D) $849.54

Which of the below is NOT a major component of interest rates? A) Real rate B) Inflation premium C) Default premium D) Historical interest rates

D) Historical interest rates

The ________ compensates the investor for the additional risk that the loan will not be repaid in full. A) default premium B) interest rate C) inflation premium D) real rate

A) default premium

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

A) fixed-income

Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 8.00%. What is your investment worth in one year? A) $1,080.00 B) $1,082.43 C) $1,800.00 D) $1,824.30

B) $1,082.43

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________. A) you will be able to buy fewer goods or services B) you will be able to buy more goods or services C) you will be able to consume fewer goods D) you will be able to buy the same amount of goods or services

B) you will be able to buy more goods or services

The ________ is the regular interest payment of the bond. A) coupon rate B) par C) coupon D) dividend

C) coupon

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________. A) the credit rating decreases, the default risk decreases, and the required rate of return decreases B) the credit rating increases, the default risk decreases, and the required rate of return increases C) the credit rating increases, the default risk decreases, and the required rate of return decreases D) the credit rating increases, the default risk increases, and the required rate of return decreases

C) the credit rating increases, the default risk decreases, and the required rate of return decreases

You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30-year payment schedule. What is the annual annuity payment under this schedule? A) $11,009.49 B) $18,100.23 C) $6,666.67 D) $11,439.96

D) $11,439.96

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

D) $80

Which of the statements below is TRUE? A) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. B) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. C) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. D) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

D) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

Which of the following are issued with the shortest time to maturity? A) Treasury bonds B) Treasury notes C) Treasury stocks D) Treasury bills

D) Treasury bills

Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par value. The firm has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds? A) 6.54% B) 6.55% C) 7.00% D) 7.35%

A) 6.54%

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

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

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value. A) coupon rate; discount to B) coupon rate; premium over C) time to maturity; same price as D) time to maturity; discount to

A) coupon rate; discount to

The ________ is the expiration date of the bond. A) maturity date B) future value C) coupon D) yield to maturity

A) maturity date

Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________. A) $1,000.00 B) $829.73 C) $1,196.36 D) There is not enough information to answer this question.

B) $829.73

In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis. A) True B) False

B) False

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE? A) The bank is lending money to you, but not borrowing money from you. B) The bank is technically renting money from you with a promise to repay that money with interest. C) The bank is borrowing money from you without a promise to repay that money with interest. D) The bank is lending money to you with a promise to repay that money with interest.

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

The ________ is the interest rate printed on the bond. A) semiannual coupon rate B) coupon rate C) yield to maturity D) compound rate

B) coupon rate

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

B) notes; bonds; bills

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate. A) number of compounding periods for the length of an investment B) number of compounding periods per year C) number of compounding periods per month D) number of discounting periods for the length of an investment

B) number of compounding periods per year

The ________ is the face value of the bond. A) maturity date B) par value C) coupon rate D) coupon

B) par value

The ________ is a market derived interest rate used to discount the future cash flows of the bond. A) semiannual coupon rate B) yield to maturity C) compound rate D) coupon rate

B) yield to maturity

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. A) coupon rate B) yield to maturity C) prime rate D) current yield

B) yield to maturity

Which of the following statements is FALSE? A) The APR can be referred to as a promised annual percentage rate. B) The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. C) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. D) Although an APR is quoted on an annual basis, interest can be paid quarterly.

C) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.

When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise. A) effective annual rates B) daily rates C) annual percentage rates D) APYs

C) annual percentage rates

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future. A) short-term equity B) short-term debt C) long-term debt D) long-term equity

C) long-term debt

"Junk" bonds are a street name for ________ grade bonds. A) investment B) extremely speculative C) speculative D) speculative and investment

C) speculative

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

D) All of the above are true.

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

D) Slightly above 5.09%

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

D) one-hundredth of a percentage point