FIN 421 Final Study Guide

5) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is A) $650. B) $1,300. C) $130. D) $13. E) None of the above.

A) $650.

9) With an interest rate of 8 percent, the present value of $100 received one year from now is approximately A) $93. B) $96. C) $100. D) $108.

A) $93

2) A bond's future payments are called its A) cash flows. B) maturity values. C) discounted present values. D) yields to maturity.

A) cash flows.

6) The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) present value B) future value C) interest D) deflation

A) present value

3) A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond.

D) discount bond.

8) With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately A) $1,000. B) $2,000. C) $2,560. D) $3,000.

B) $2,000.

4) (I) A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment. (II) A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par value) is repaid. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false.

B) (I) is false, (II) true.

12) The yield to maturity of a one-year, simple loan of $500 that requires an interest payment of $40 is A) 5 percent. B) 8 percent. C) 12 percent. D) 12.5 percent.

B) 8 percent.

17) A frequently used approximation for the yield to maturity on a long-term bond is the A) coupon rate. B) current yield. C) cash flow interest rate. D) real interest rate.

B) current yield.

1) A loan that requires the borrower to make the same payment every period until the maturity date is called a A) simple loan. B) fixed-payment loan. C) discount loan. D) same-payment loan. E) none of the above.

B) fixed-payment loan.

7) Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________. A) more; discounting B) less; discounting C) more; inflating D) less; inflating

B) less; discounting

15) A consol bond is a bond that A) pays interest annually and its face value at maturity. B) pays interest in perpetuity and never matures. C) pays no interest but pays its face value at maturity. D) rises in value as its yield to maturity rises.

B) pays interest in perpetuity and never matures.

16) The yield to maturity on a consol bond that pays $200 yearly and sells for $1000 is A) 5 percent. B) 10 percent. C) 20 percent. D) 25 percent.

C) 20 percent.

13) Which of the following $1,000 face value securities has the highest yield to maturity? Assume that the coupon bond matures in 2 years. A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 12 percent coupon bond selling for $1,000 D) A 12 percent coupon bond selling for $1,100

C) A 12 percent coupon bond selling for $1,000

11) Financial economists consider the ________ to be the most accurate measure of interest rates. A) simple interest rate B) discount rate C) yield to maturity D) real interest rate

C) yield to maturity

10) The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the A) simple interest rate. B) discount rate. C) yield to maturity. D) real interest rate.

C) yield to maturity.

14) Which of the following are true for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are negatively related. C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. D) All of the above is true. E) Only A and B of the above are true.

E) Only A and B of the above are true.