Finance 3130
The value of a bond investment, which provides fixed interest payments, will increase when discounted at a 8% rate rather than at a 11% rate
True
Tim has a $100 in a bank account paying 2% interest per year. At the end of 5 years, Tim's bank account balance will be $110 if interest is not compounded but will be greater than $110 if interest is compounded
True
Tim invested $1,000 in a mutual fund paying 8% per year. John invested $500 in the same fund. If both Tim and John keep their money invested for the same period of time, Tim will end up with twice as much money as John
True
Total risk equals systematic risk plus unsystematic risk
True
Variation in the rate of return of an investment is a measure of the riskiness of that investment
True
When solving a problem involving an annuity due, you must select the "beg" or beginning mode on your financial calculator
True
When using a financial calculator, cash outflows generally have to be entered as negative numbers, because a financial calculator sees money "leaving your hands"
True
Convertible bonds are debt securities that can be converted into a firm's stock at a prespecified price
True
The same underlying formula is used for computing both the future value and present value
True
The required rate of return for an asset is equal to the risk-free rate plus a risk premium
True
A car manufacturer offers either $2,000 cash back or zero percent financing for 5 years. A rational consumer will always take the cash back because money received today is worth more than money received in the future
False
A company with AAA bond rating will command a higher interest rate on its bonds than a company with a lesser BBB bond rating
False
A return of 12% compounded annually is the same as a return of 1% per month
False
As the required rate of return of an investment decreases, the market price of the investment decreases
False
If the interest rate is positive, then the present value of an annuity will be less than the present value of an ordinary annuity
False
Proper diversification generally results in the elimination of risk
False
When solving time value of money problems on a financial calculator, you must select the "end mode" when you enter the final years cash flow
False
A certificate of deposit that pays 9.8% compounded monthly is better than a similar certificate of deposit that pays 10% compounded only once per year
True
A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity
True
According to the CAPM for each unit of Beta an asset's required rate increases by the market's risk premium
True
An example of an annuity is the interest received from bonds
True
Beta is a measurement of the relationship between a security's returns and the general market's returns
True
Bill saves $3,000 per year in his IRA starting at age 25 and continuing to age 65, when he retires. The amount Bill has in his IRA at age 65 can be characterized as the future value of an annuity
True
Bond prices are inversely related to market interest rates
True
If a bond has market value that is higher than its par value, then the required return on the bond must be less than the bond's coupon rate
True
If a bond sells for its par value, the coupon interest rate and yield to maturity are equal
True
If the future value of an annuity is known, then the present value of the annuity can be found using the present value of a lump sum formula, even if the amount of each annuity payment is unknown
True
If we invest money for 10 years at 8 percent interest, compounded semiannually, we are really investing money for 20 six-month periods, and receiving 4 percent interest each period
True
In general, the required rate of return is a function of (1) Time value of money, (2) The risk of an asset, and (3) the investor's attitude toward risk
True
It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year
True
Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation
True
The YTM is the discount rate that equates the present value of the interest and principal payments with the current market price of the bond
True
The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment
True
The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity.
True
The future value of an annuity will increase if the interest rate goes up, but the present value of the same annuity will decrease as the interest rate goes up
True
The par value of a corporate bond indicates the payment that the issuer promises to make the bondholder at maturity
True
The present value of a deferred annuity can be calculated in two steps (1) calculate the future value of the annuity, and (2) calculate the present value of the amount determined in step (1)
True
