Finance Exam #2

Early bond redemption

A sinking fund is managed by a trustee for which one of the following purposes?

Has more interest rate risk than a comparable coupon bond

A zero coupon bond:

Call premium

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

Maturity

A bond's principal is repaid on the ___ date:

Prohibits the bond issuer from redeeming callable bonds prior to a specified date

A deferred call provision:

Sukuk

A highly illiquid bond that pays no interest but might entitle its holder to rental income from an asset is most apt to be:

Interest on interest

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $0.64 he earned in interest the second year is referred to as:

Face value

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

Compounding

Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as:

Present value

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:

Pay interest that is federally tax free

Municipal bonds:

He earned a lower interest rate than he expected

Phillippe invested $1,000 ten years ago and expected to have $1,800 today. He has neither added nor withdrawn any money since his initial investment. All interest was reinvested and compounded annually. As it turns out, he only has $1,680 in his account today. Which one of the following must be true?

In registered form

Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being used:

Discount rate

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as:

Discounting

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

Spread

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

Compound interest

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

Coupon rate decreases and the time to maturity increases

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

Discounted cash flow valuation

The process of determining the present value of future cash flows in order to know their value today is referred to as:

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

Which one of the following relationships is stated correctly?

Interest rate risk

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

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

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

Yield to maturity < coupon rate

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Decrease in the interest rate

Which one of these will increase the present value of a set amount to be received sometime in the future?

Future value

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Later; sooner; higher

Your goal is to have $1million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire ___ rather than ___ and earn a ___ rate of interest, then you can deposit a smaller lump sum today.

Increase

Your grandmother has promised to give you $10,000 when you graduate from college. If you spend up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will: