Fin mn

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest rate risk

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Liquidity.

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Long-term; zero coupon.

An ordinary annuity is best defined by which one of the following?

Equal payments paid at the end of regular intervals over a stated time period.

A project has an initial cash outflow of $39,800 and produces cash inflows of $18,304, $19,516, and $14,280 for years 1 through 3, respectively. What is the NPV at a discount rate of 11 percent?

$2,971.13 NPV = -$39,800 + $18,304 / 1.11 + $19,516 / 1.112 + $14,280 / 1.113 NPV = $2,971.13

Future Motors is expected to pay a $3.30 a share annual dividend next year. Dividends are expected to increase by 2.75 percent annually. What is one share of this stock worth to you today if your required rate of return is 15 percent?

$26.94 P0 = $3.30 / (.15 - .0275) = $26.94

You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $21,500 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?

$398,148 GPPV = $21,500 / (.079 - .025) = $398,148

You just won the grand prize in a national writing contest! As your prize, you will receive $1,000 a month for 10 years. If you can earn 7 percent on your money, what is this prize worth to you today?

$86,126.35 PVA = $1,000 × [(1 - {1 / [1 + (.07 / 12)](10 × 12)}) / (.07 / 12)] = $86,126.35

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

.05 / (1 - t*) = .07.

A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

1.79 percent decrease Bond price = $30 × [(1 - {1 / [1 + (.055 / 2)](13 × 2)}) / (.055 / 2)] + $1,000 / [1 + (.055 / 2)](13 × 2)Bond price = $1,046.01 Bond price = $30 × [(1 - {1 / [1 + (.057 / 2)](13 × 2)}) / (.057 / 2)] + $1,000 / [1 + (.057 / 2)](13 × 2)Bond price = $1,027.28 Percentage change in price = ($1,027.28 - 1,046.01) / $1,046.01= -.0179, or -1.79%

Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years?

12,093 FVADue = $1,500 × {[(1 + .065)35 - 1] / .065} × (1 + .065) = $198,145.42 FVA = $1,500 × {[(1 + .065)35 - 1] / .065} = $186,052.04 Difference = $198,145.42 - 186,052.04 = $12,093

What is the effective annual rate of 11.9 percent compounded continuously?

12.64 percent EAR = e.119 - 1 = .1264, or 12.64 percent

Global Tek is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 15.5 percent?

2.49 P4 = [$.20 × (1 + .15)4 × (1 + .035)] / (.155 - .035) = $3.017 P0 = {[$.20 × (1 + .15)] / (.155 - .15)} ×{1 - [(1 + .15) / (1 + .155)]4} + $3.017 / (1 + .155)4 = $2.49

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $972. Interest is paid semiannually. What is the yield to maturity?

5.92 percent

A stock pays a constant annual dividend and sells for $56.07 a share. If the market rate of return on this stock is 12.2 percent, what is the amount of the next annual dividend?

6.84 D1 = .122 × $56.07 = $6.84

Your credit card company charges you 1.65 percent interest per month. What is the annual percentage rate on your account? Correct! 19.80 percent

APR = .0165 × 12 = 19.80 percent

A bond that is payable to whomever has physical possession of the bond is said to be in:

Bearer form.

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

Comparable real rate.

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

Dirty price.

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

Discounted payback period.

You are considering five loan offers. The only significant difference between them is their interest rates. Given the following information, which offer should you accept? (Assume a 365-day year.)Offer A: 6.75 percent APR with daily compounding.Offer B: 6.8 percent APR with monthly compounding.Offer C: 7 percent APR with annual compounding.Offer D: 6.825 percent APR with quarterly compounding.Offer E: 6.85 percent APR with semi-annual compounding.

Offer E Offer A: EAR = [1 + (.0675 / 365)]365 - 1 = .0698, or 6.98 percent Offer B: EAR = [1 + (.068 / 12)]12 - 1 = .0702, or 7.02 percentOffer C: EAR = (1 +.07)1 - 1 = .0700, or 7.00 percentOffer D: EAR = [1 + (.06825 / 4)]4 - 1 = .0700, or 7.00 percentOffer E: EAR = [1 + (.0685 / 2)]2 - 1 = .0697, or 6.97 percent

Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?

Preferred stock.

You are considering two projects with the following cash flows:Which one of the following statements is true concerning these two projects given a positive discount rate?

Project X has both a higher present and a higher future value than Project Y.

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) ________ loan.

Pure discount.

Which one of the following statements is correct?

The real rate must be less than the nominal rate given a positive rate of inflation.

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

Two month's interest.

Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $1,300. Toy sales are expected to produce net cash inflows of $3,300, $4,900, $4,400, and $4,100 over the next four years, respectively. Should Alicia add toys to her store if she assigns a three-year payback period to this project? Why or why not?

Yes; The payback period is 2.59 years. Payback = 2 + ($9,500 + 1,300 - 3,300 - 4,900) / $4,400 = 2.59 years Since the payback period is less than the requirement, the project should be accepted.

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following?

Yield to maturity.