FIN 2303 Test 2

Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 8.00%. What is your investment worth in one year?

$1,082.43

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?

$11,439.96

RadicaL CREATIONS Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond if it is priced in the conventional manner (semiannual compounding)?

$231.38

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 ________.

$80

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

$829.73

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?

$849.54

Five years ago, Simpson Warehouses Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?

$850.61

Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving?

4%

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?

6.54%

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

All of the above are true.

Which of the following statements is false? The APR can be referred to as a promised annual percentage rate. 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. Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. Although an APR is quoted on an annual basis, interest can be paid quarterly.

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

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?

Callable bond

In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.

False

Which of the below is NOT a major component of interest rates?

Historical interest rates

The Fisher Effect involves which of the items below?

Nominal rate, the real rate, and inflation

What is the EAR if the APR is 5% and compounding is quarterly?

Slightly above 5.09%

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?

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

Which of the statements below is TRUE? 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. 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. 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. 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.

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

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

Which of the following are issued with the shortest time to maturity?

Treasury bills

The most common shape for a yield curve is upward sloping.

True

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

When interest rates go up, bond prices go up.

When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.

annual percentage rates

The ________ is the regular interest payment of the bond.

coupon

The ________ is the interest rate printed on the bond.

coupon rate

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

coupon rate; discount to

The ________ compensates the investor for the additional risk that the loan will not be repaid in full.

default premium

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

fixed-income

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.

long-term debt

The ________ is the expiration date of the bond.

maturity date

Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.

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.

number of compounding periods per year

A basis point is ________.

one-hundredth of a percentage point

The ________ is the face value of the bond.

par value

"Junk" bonds are a street name for ________ grade bonds

speculative

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that

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

The ________ is a market derived interest rate used to discount the future cash flows of the bond.

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.

yield to maturity

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 ________.

you will be able to buy more goods or services