FINA365 Test 2 Multiple Choice

Nadine is retiring today at age 66 and expects to live to age 82. She has $136,000 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death?

$1,103.56

On the day you entered college, you borrowed $25,000 on an interest-only, four-year loan at 4.75 percent from your local bank. Payments are to be paid annually. What is the amount of your loan payment in year 2?

$1,187.50

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

Island News purchased a piece of property for $1.36 million. The firm paid a down payment of 12 percent in cash and financed the balance. The loan terms require monthly payments for 10 years at an annual percentage rate of 4.75 percent, compounded monthly. What is the amount of each mortgage payment?

$12,548.18

You borrow $230,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 25 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

$153,524

This morning, you borrowed $13,400 at a 6.9 percent annual interest rate. You are to repay the loan principal plus all of the loan interest in one lump sum three years from today. How much will you have to repay?

$16,369.59

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: A. Growth analysis. B. Discounting. C. Accumulating. D. Compounding. E. Reducing

B. Discounting.

Which one of the following applies to the dividend growth model? A. An individual stock has the same value to every investor. B. Even if the dividend amount and growth rate remain constant, the value of a stock can vary. C. Zero-growth stocks have no market value. D. Stocks that pay the same annual dividend will have equal market values. E. The dividend growth rate is inversely related to a stock's market price.

B. Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: A. Increases at an increasing rate. B. Increases at a decreasing rate. C. Increases at a constant rate. D. Decreases at an increasing rate. E. Decreases at a decreasing rate.

B. Increases at a decreasing rate.

Your grandmother has promised to give you $10,000 when you graduate from college. She is expecting you to graduate three years from now. What happens to the present value of this gift if you speed up your graduation by one year and graduate two years from now? A. Remains constant. B. Increases. C. Decreases. D. Becomes negative. E. Cannot be determined from the information provided.

B. Increases.

A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent? A. The bond is currently selling at a premium. B. The current yield exceeds the coupon rate. C. The bond is selling at par value. D. The current yield exceeds the yield-to-maturity. E. The coupon rate has increased to 7 percent.

B. The current yield exceeds the coupon rate.

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true? A. The dividend must be constant. B. The stock has a negative capital gains yield. C. The dividend yield must be zero. D. The required rate of return for this stock increased over the year. E. The firm is experiencing supernormal growth.

B. The stock has a negative capital gains yield.

You are buying a pre-owned car today at a price of $8,500. You are paying $300 down in cash and financing the balance for 36 months at 7.75 percent. What is the amount of each monthly loan payment?

$256.01

You estimate that you will owe $39,950 in student loans by the time you graduate. The interest rate is 3.75 percent. If you want to have this debt paid in full within 10 years, how much must you pay each month?

$399.74

You are borrowing $21,800 to buy a car. The terms of the loan call for monthly payments for five years at 8.25 percent interest. What is the amount of each payment?

$444.64

John's Auto Repair just took out a $52,000, 10-year, 8 percent, interest-only loan from the bank. Payments are made annually. What is the amount of the loan payment in year 10?

$56,160

Travis International has a one-time expense of $2.86 million that must be paid three years from now. Since the firm cannot raise that amount in one day, it wants to save an equal amount each month over the next three years to fund this expense. If the firm can earn 2.1 percent on its savings, how much must it save each month?

$77,037.69

On this date last year, you borrowed $3,400. You have to repay the loan principal plus all of the interest six years from today. The payment that is required at that time is $6,000. What is the interest rate on this loan?

8.45 percent

Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 percent coupon. B. 3-year; 6 percent coupon. C. 5-year; 6 percent coupon. D. 7-year; 6 percent coupon. E. 7-year; 4 percent coupon.

B. 3-year; 6 percent coupon.

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: A. An increase in all stock values. B. All stock values to remain constant. C. A decrease in all stock values. D. Dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. E. Dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.

C. A decrease in all stock values.

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true? A. Barb will earn more interest the first year than Andy will. B. Andy will earn more interest in year three than Barb will. C. Barb will earn more interest the second year than Andy. D. After five years, Andy and Barb will both have earned the same amount of interest. E. Andy will earn compound interest.

C. Barb will earn more interest the second year than Andy.

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South. A. Market price. B. Dividend yield. C. Capital gains yield. D. Total return. E. Real return.

C. Capital gains yield.

Which one of the following relationships applies to a par value bond? A. Yield to maturity > current yield > coupon rate. B. Coupon rate > yield-to-maturity > current yield. C. Coupon rate = current yield = yield-to-maturity. D. Coupon rate < yield to maturity < current yield. E. Coupon rate > current yield > yield to maturity.

C. Coupon rate = current yield = yield-to-maturity.

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A. Coupon rate increases. B. Time to maturity decreases. C. Coupon rate decreases and the time to maturity increases. D. Time to maturity and coupon rate both decrease. E. Coupon rate and time to maturity both increase.

C. Coupon rate decreases and the time to maturity increases.

The process of determining the present value of future cash flows in order to know their worth today is referred to as: A. Compound interest valuation. B. Interest on interest computation. C. Discounted cash flow valuation. D. Present value interest factoring. E. Complex factoring.

C. Discounted cash flow valuation.

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts? A. The present values of Luis and Soo Lee's money are equal. B. In future dollars, Soo Lee's money is worth more than Luis's money. C. In today's dollars, Luis's money is worth more than Soo Lee's. D. Twenty years from now, the value of Luis's money will be equal to the value of Soo Lee's money. E. Soo Lee's money is worth more than Luis's money given the 7 percent discount rate.

C. In today's dollars, Luis's money is worth more than Soo Lee's.

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The value of his winnings today discounted at his discount rate is called which one of the following? A. Single amount. B. Future value. C. Present value. D. Simple amount. E. Compounded value.

C. Present value.

Samantha opened a savings account this morning. Her money will earn 3.5 percent interest, compounded annually. After four years, her savings account will be worth $5,000. Assume she will not make any withdrawals. Given this, which one of the following statements is true? A. Samantha deposited more than $5,000 this morning. B. Samantha is earning simple interest on her savings. C. Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest. D. The present value of Samantha's account is $5,000. E. Samantha could earn more interest on this account if she withdrew her interest earnings each year.

C. Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest.

Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning? A. Free interest. B. Complex interest. C. Simple interest. D. Interest on interest. E. Compound interest.

C. Simple interest.

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines. B. The bonds will pay 10 interest payments of $60 each. C. The bonds will sell at a premium if the market rate is 5.5 percent. D. The bonds will initially sell for $1,030 each. E. The final payment will be in the amount of $1,060.

C. The bonds will sell at a premium if the market rate is 5.5 percent.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. a premium; less than B. a premium; equal to C. a discount; less than D. a discount; higher than E. par; less than

C. a discount; less than

Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount. B. The call price must equal the par value. C. An increase in market rates increases the market price of a bond. D. Decreasing the time to maturity increases the price of a discount bond, all else constant. E. Increasing the coupon rate decreases the current yield, all else constant.

D. Decreasing the time to maturity increases the price of a discount bond, all else constant.

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? A. Electing the board of directors. B. Receiving a distribution of company profits. C. Voting either for or against a proposed merger or acquisition. D. Determining the amount of the dividend to be paid per share. E. Having first chance to purchase any new equity shares that may be offered.

D. Determining the amount of the dividend to be paid per share.

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? A. Dividend amount. B. Number of future dividends, provided the number is less than infinite. C. Dividend growth rate. D. Discount rate. E. Both the discount rate and the dividend growth rate.

D. Discount rate.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: A. 3.5 percent. B. Greater than 3.5 percent but less than 7 percent. C. 7 percent. D. Greater than 7 percent. E. Less than 3.5 percent.

D. Greater than 7 percent.

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will: A. Pay an increasing dividend for a period of time and then cease paying dividends altogether. B. Increase the dividend amount every other year. C. Pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year. D. Grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely. E. Pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

D. Grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.

Supernormal growth is a growth rate that: A. Is both positive and follows a year or more of negative growth. B. Exceeds a firm's previous year's rate of growth. C. Is generally constant for an infinite period of time. D. Is unsustainable over the long term. E. Applies to a single, abnormal year.

D. Is unsustainable over the long term.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: A. Coupon rate will also increase. B. Current yield will decrease. C. Yield to maturity will be less than the coupon rate. D. Market price of the bond will decrease. E. Coupon payment will increase.

D. Market price of the bond will decrease.

The dividend growth model: A. Only values stocks at Time 0. B. Cannot be used to value constant dividend stocks. C. Can be used to value both dividend-paying and non-dividend-paying stocks. D. Requires the growth rate to be less than the required return. E. Assumes dividends increase at a decreasing rate.

D. Requires the growth rate to be less than the required return.

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct? A. The interest you earn 6 years from now will equal the interest you earn t10 years from now. B. The interest amount you earn will double in value every year. C. The total amount of interest you will earn will equal $1,000 ´.06 ´40. D. The present value of this investment is equal to $1,000. E. The future value of this amount is equal to $1,000 ´(1 + 40).06.

D. The present value of this investment is equal to $1,000.

Which one of the following represents the capital gains yield as used in the dividend growth model? A. D1 B. D1 / P0 C. P0 D. g E. g / P0

D. g

Interest earned on both the initial principal and the interest reinvested from prior periods is called: A. Free interest. B. Dual interest. C. Simple interest. D. Interest on interest. E. Compound interest.

E. Compound interest.

Which one of the following applies to a premium bond? A. Yield to maturity > current yield > coupon rate. B. Coupon rate = current yield = yield-to-maturity. C. Coupon rate > yield-to-maturity > current yield. D. Coupon rate < yield to maturity < current yield. E. Coupon rate > current yield > yield to maturity

E. Coupon rate > current yield > yield to maturity

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following? A. Current yield. B. Effective rate. C. Compound rate. D. Simple rate. . E. Discount rate.

E. Discount rate.

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? A. No dividends for five years, then increasing dividends forever B. $1 per share annual dividend for two years, then $1.25 annual dividends forever C. Decreasing dividends for six years followed by one final liquidating dividend payment D. Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter E. Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

E. Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

Which one of the following statements is correct? A. Stocks can only be assigned one dividend growth rate. B. Preferred stocks generally have constant growth rates. C. Dividend growth rates must be either zero or positive. D. All stocks can be valued using the dividend discount models. E. Stocks can have negative growth rates.

E. Stocks can have negative growth rates.

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming neither Sue nor Neal withdraw any money from their accounts prior to retiring? A. Sue will have less money when she retires than Neal. B. Neal will earn more interest on interest than Sue. C. Neal will earn more compound interest than Sue. D. If both Sue and Neal wait to age 70 to retire, they will have equal amounts of savings. E. Sue will have more money than Neal at age 60.

E. Sue will have more money than Neal at age 60.

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond? A. Discount bond. B. Yield to maturity equal to the current yield. C. Currently selling at par. D. Current yield greater than coupon rate. E. Yield to maturity less than the coupon rate.

E. Yield to maturity less than the coupon rate.