Finance Exam 2 study guide

bird-in-hand theory

$1 in dividends today is worth more than promised future dividends

If the 7s of 2005 are offered at 102:23, then the price of a $1,000 bond would be:

$1,027.19 $1,000 + $20 + $10(23/32) = $1,027.19

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

$1,082.00

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

$1,082.00 Price = (.09 × $1,000) {(1/.07) - [1/.07(1.07)5]} + $1,000/1.075 Price = $1,082.00

If an investor purchases a 3%, two-year TIPS and the CPI increases 3% over each of the next two years, how much does the investor receive at maturity?

$1,092.73 1,030 x (1.03)2 = 1,092.73.

What price will be paid for a U.S. Treasury bond with an ask price of 135:20?

$1,356.25

Today you deposit $1000 in an account paying 6% interest. At the end of years 1, 2, & 3 you will deposit $100 in that account. How much will you have at the end of year 4?

$1,599.94 $1000(1.06)^4 + $100(1.06)^3 + $100(1.06)^2 + $100(1.06)^1

By how much did the price of a $1,000 par-value bond increase if The Wall Street Journal shows a change of +6 from the previous day?

$1.875 6/32 x 10 = $1,875

What is the amount of the annual coupon payment for a bond that has six years until maturity, sells for $1,050, and has a yield to maturity of 9.37%?

$105.00

By how much will a bond increase in price over the next year if it currently sells for $925, has five years until maturity, and an annual coupon rate of 7%?

$12.55

What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000?

$135,406.20 Price = 1.354062 × $100,000 = $135,406.20

How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity, only to see market interest rates increase to 12% one year later? (Hint: How much would the price change from a year earlier?)

$19.93 Price = 1,000/(1.10)30 = 57.31 New Price = 1,000/(1.12)29= 37.38 Difference = 19.93

By how much did the price of a $1,000 par-value bond decrease if The Wall Street Journal shows a change of -12 from the previous day?

$3.75 12/32 x 10 = $3.75

A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount of the next interest payment?

$50 Coupon payment = (.10 × $1,000)/2 = $50

You will receive $100 in 1 year, $200 in 2 years & $300 in 3 years. If you can earn a 7.5% rate of interest, what is the present value of this stream of cash flows?

$507.58 $100/(1.075)^1 + $200/(1.075)^2 + $300/(1.075)^3

If you purchase a five-year, zero-coupon bond for $500, how much could it be sold for three years later if interest rates have remained stable?

$757.86

How much does the $1,000 to be received upon a bond's maturity in four years add to the bond's price if the appropriate discount rate is 6%?

$792.09 $1,000/(1.06)4 = $792.09

How much should you be prepared to pay for a 10-year bond with a 6% coupon, semi-annual payments, and a semi-annually compounded yield of 7.5%?

$895.78

How much should you be prepared to pay for a 10-year bond with a 6% coupon and a yield to maturity to maturity of 7.5%?

$897.04

If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant?

$925.39

If a four year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth one year from now if interest rates are constant?

$925.39

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%?

$927.90

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%?

$927.90 Price = (.10 × $1,000) {(1/.12) - [1/.12(1.12)5]} + $1,000/1.125 Price = $927.90

Two years ago bonds were issued with 10 years until maturity, selling at par, and a 7% coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds?

$928.84

If you purchase a three-year, 9% coupon bond for $950, how much could it be sold for two years later if interest rates have remained stable?

$981.56

Compound growth means that value increases after t periods by:

(1 + growth rate)^t

What are valid interest compounding periods?

-Daily -Weekly -Monthly -Annually -Continuously -Quarterly -Semiannually

What are annuities?

-Installment loan payments -Monthly rent payments in a lease

With semi-strong form market efficiency:

-all historical information on past prices is reflected in the current stock price. -all currently published information is reflected in the current stock price.

Indicate the three bond features or bond types will allow the firm to pay a lower coupon rate.

-convertible -mortgage -senior

probabilities

-each possible outcome must have a non negative prob -prob is a statistical tool for estimating furure outcomes -sum of all prob = 100%

variance

-is essentially the variability from the average -the larger the variance the greater the dispersion -variance describes how spread out a set of numbers or values is around its mean or average

diversification

-spreading wealth over a variety of investment opportunities -common investment strategy -not putting all your eggs in one basket

What is the yield to maturity for a bond paying $100 annually that has six years until maturity and sells for $1,000?

10.0%

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

10.0% Since the bond is selling at par, the yield to maturity must equal the coupon rate which is: Coupon rate = $100/$1,000 = .10, or 10%

An investor buys a five-year, 9% coupon bond for $975, holds it for one year and then sells the bond for $985. What was the investor's rate of return?

10.26% (90 + 10)/975 = 10.26%

What price was reported in the financial press for a bond that was sold to an investor for $1,045.63?

104:18

What is future value of $100 invested at 10% for 1 years?

110

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19?

4.53% Rate of return = [$1,037.19 + (.065 × $1,000) - $1,054.47]/$1,054.47 = .0453, or 4.53%

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?

5.00% Rate of Return = ($70.00 - $17.28)/$1,054.47 = $52.72/$1,054.47 = 5%

An investor buys a ten-year, 7% coupon bond for $1,050, holds it for one year and then sells it for $1,040. What was the investor's rate of return?

5.71% (70 - 10)/1,050 = 5.71%

If a bond offers an investor 11% in nominal return during a year in which the rate of inflation was 4%, then the investor's real return was:

6.73% 1 + real return = 1.11/1.04 real return = 6.73%

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and five years remaining until maturity, then sells the bond after one year for $1,085?

6.82% (90 - 15)/1,100 = 6.82%

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?

7.14% Current yield = $60/(.84 × $1,000) = .0714, or 7.14%

You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?

7.52% Rate of return = [$1,015.16 + (.06 × $1,000) - $1,000]/$1,000 = .0752, or 7.52%

What is the coupon rate for a bond with three years until maturity, a price of $1,053.46, and a yield to maturity of 6%?

8%

What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750?

8.0% $60/750 = 8%

How much would an investor need to receive in nominal return if she desires a real return of 4% and the rate of inflation is 5%?

9.20% 1.04 = 1 + nominal return/1.05 9.2% = nominal return

What is the yield to maturity of a bond with the following characteristics? Coupon rate is 8% with semi-annual payments, current price is $960, three years until maturity.

9.57%

What price was quoted to an investor who paid $982.50 for a $1,000 par value bond?

98:08 980 + (8/32 x 10) = 982.50

Which of the following bonds would be considered to be of investment-grade?

A Baa-rated bond.

The coupon rate of a bond equals:

A percentage of its face value

What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 6%?

A price increase of $53.47

Beta Brothers uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC?

A reduction in the market risk premium

The cash flows from a bond can be viewed as two distinct cash flow streams which are;

A single sum equivalent to the par value received at maturity, and An annuity of periodic interest payments.

Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk?

A zero-coupon bond with 30 years until maturity.

Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually, and the first payment occurs one year from now? A. $1,067,477.62 B. $1,128,433.33 C. $1,487,320.09 D. $1,250,000.00

A. $1,067,477.62 PV = $100,000 {(1/.08) - [1/.08(1.08)25]} PV = $1,067,477.62

Miller's Hardware plans on saving $42,000, $54,000, and $58,000 at the end of each year for the next three years, respectively. How much will the firm have saved at the end of the three years if it can earn 4.5% on its savings? A. $160,295.05 B. $158,098.15 C. $167,508.33 D. $165,212.57

A. $160,295.05 FV = ($42,000 × 1.0452) + ($54,000 × 1.045) + $58,000 FV = $160,295.05

Prizes are often not "worth" as much as claimed. Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today. Assume an interest rate of 7%. A. $2,833,898.81 B. $2,911,015.68 C. $2,609,144.14 D. $2,738,304.13

A. $2,833,898.81 Annual payment = $5,000,000/20 = $250,000 PV = ($250,000 {(1/.07) - [1/.07(1.07)20]}) × (1.07) PV = $2,833,898.81

You're ready to make the last of four equal, annual payments on a $1,000 loan with a 10% interest rate. If the amount of the payment is $315.47, how much of that payment is accrued interest? A. $28.68 B. $31.55 C. $100.00 D. $315.47

A. $28.68 $315.47 - ($315.47/1.1) = $28.68

What is the present value of a four-year annuity of $100 per year that begins 2 years from today if the discount rate is 9%? A. $297.22 B. $323.97 C. $356.85 D. $272.68

A. $297.22 PV = {$100[(1/.09) - 1/.09(1.09)4]}/1.09 PV = $297.22

How much must be saved at the end of each year for the next 10 years in order to accumulate $50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings every year. A. $3,291.00 B. $3,587.87 C. $4,500.33 D. $4,587.79

A. $3,291.00 Payment = $50,000/[(1.0910 - 1)/.09] Payment = $3,291.00

How much must be invested today in order to generate a 5-year annuity of $1,000 per year, with the first payment 1 year from today, at an interest rate of 12%? A. $3,604.78 B. $3,746.25 C. $4,037.35 D. $4,604.78

A. $3,604.78 PV = $1,000{(1/.12) - [1/.12(1.125)]} PV = $3,604.78

What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3? A. $5,022.10 B. $5,144.03 C. $5,423.87 D. $5,520.00

A. $5,022.10 PV = $1,000/1.08 + $2,000/1.082 + $3,000/1.083 PV = $5,022.10

How much more would you be willing to pay today for an investment offering $10,000 in 4 years rather than in 5 years? Your discount rate is 8%. A. $544.47 B. $681.48 C. $740.74 D. $800.00

A. $544.47 Difference = FV/(1 + r)t - 1 - FV/(1 + r) Difference = $10,000/1.084 - $10,000/1.085 Difference = $544.47

Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year. The annual interest rate is 12% and payments begin in one month. What is the present value of this 2-year loan? A. $6,246.34 B. $6,389.78 C. $6,428.57 D. $6,753.05

A. $6,246.34 PV = {$200 {(1/.01) - [1/.01(1.01)12]}} + ({$400 {(1/.01) - [1/.01(1.01)12]}/1.0112)} PV = $6,246.34

On the day you retire you have $1,000,000 saved. You expect to live another 25 years during which time you expect to earn 6.19% on your savings while inflation averages 2.5% annually. Assume you want to spend the same amount each year in real terms and die on the day you spend your last dime. What real amount will you be able to spend each year? A. $61,334.36 B. $79,644.58 C. $79,211.09 D. $61,931.78

A. $61,334.36 Real rate = (1.0619/1.025) - 1 = .036 $1,000,000 = PMT {(1/.036) - [1/.036(1.036)25]} PMT = $61,334.36

What will be the monthly payment on a home mortgage of $75,000 at 12% interest, to be amortized over 30 years? A. $771.46 B. $775.90 C. $1,028.61 D. $1,034.53

A. $771.46 Payment = $75,000/[(1/.01) - 1/.01(1.01)360] Payment = $771.46

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%? A. $927.90 B. $981.40 C. $1,000.00 D. $1,075.82

A. $927.90 Price = $100 ( 1/.12 - 1/.12(1.12)^5) + $1,000 / (1.12)^5 Price = $100 (8.333 - 4.7286) + 567.43 Price = 360.47 + 567.43 = 927.90

A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _____ and an APR of ____. A. 16.08%; 15.00% B. 14.55%; 16.08% C. 12.68%; 15.00% D. 15.00%; 14.55%

A. 16.08%; 15.00% EAR = (1 + .0125)12 - 1 = .1608, or 16.08% APR = 1.25% × 12 = 15.00%

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19? A. 4.53% B. 5.33% C. 5.16% D. 4.92%

A. 4.53% Rate of Return = ($65.00 - $17.28)/$1,054.47 Rate of Return = $4.53

Given a set future value, which of the following will contribute to a lower present value? A. Higher discount rate B. Fewer time periods C. Less frequent discounting D. Lower discount factor

A. Higher discount rate

What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments? A. The APR is lower than the annually compounded rate. B. The APR is higher than the annually compounded rate. C. The APR equals the annually compounded rate. D. The answer depends on the interest rate.

A. The APR is lower than the annually compounded rate.

What happens to a discount bond as the time to maturity decreases? A. The coupon rate increases. B. The bond price increases. C. The coupon rate decreases. D. The bond price decreases.

A. The coupon rate increases.

Assume a bond is currently selling at par value. What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate? A. The price of the bond will increase. B. The coupon rate of the bond will increase. C. The par value of the bond will decrease. D. The coupon payments will be adjusted to the new discount rate.

A. The price of the bond will increase.

The numerator of the rate of return formula for bond consists of the following:

A. coupon income. B. bond price change. Both A and B.

Inflation can be defined as

An overall general rise in prices

An annuity forwhich the cash flow occurs at the beginning of each period.

Annuity Due

What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding? A. 10.00% B 10.47% . C. 10.52% D. 11.05%

B 10.47% EAR = [1 + (.10/12)] 12 - 1 = .1047, or 10.47%

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an interest rate of 10% and cash flows at the end of each period. A. $297.29 B. $1,486.44 C. $1,635.08 D. $2,000.00

B. $1,486.44 PVPerpetuity = $1,000/.10 = $10,000 PVAnnuity = $1,000[1/.10 - 1/.10(1.10)20] PVAnnuity = $8,513.56 Difference = $10,000 - 8,513.56 = $1,486.44

You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of year 3, and $6,000 at end of year 5. What is the present value of these cash flows at an interest rate of 7%? A. $9,731.13 B. $10,412.27 C. $10,524.08 D. $11,524.91

B. $10,412.27 PV = FV/(1 + r)t PV = $1,000 + $2,000/1.071 + $4,000/1.073 + $6,000/1.075 PV = $10,412.27

What is the present value of $100 to be deposited today into an account paying 8%, compounded semiannually for 2 years? A. $85.48 B. $100.00 C. $116.00 D. $116.99

B. $100.00

How much interest can be accumulated during one year on a $1,000 deposit paying continuously compounded interest at an APR of 10%? A. $100.00 B. $105.17 C. $110.50 D. $115.70

B. $105.17 Interest = $1,000 × e.1 - $1,000 Interest = $1,000 × 1.10517 - $1,000 Interest = $105.17

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate? A. $130.00 B. $138.83 C. $169.00 D. $353.34

B. $138.83 Interest = $1,000(e.13) - $1,000 = $138.83

What is the present value of your trust fund if you have projected that it will provide you with $50,000 on your 30th birthday (7 years from today) and it earns 10% compounded annually? A. $25,000.00 B. $25,657.91 C. $28,223.70 D. $29,411.76

B. $25,657.91 PV = FV/(1 + r)t PV = $50,000/1.107 PV = $25,657.91

A corporation has promised to pay $1,000 20 years from today for each bond sold now. No interest will be paid on the bonds during the 20 years, and the bonds are discounted at an interest rate of 7%, compounded semiannually. Approximately how much should an investor pay for each bond? A. $70.00 B. $252.57 C. $629.56 D. $857.43

B. $252.57 PV = FV/(1 + r)t PV = $1,000/[1 + (.07/2)]20 × 2 PV = $252.57

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years, during which time the fund will earn 6% interest with monthly compounding? A. $361,526.14 B. $388,017.16 C. $402,766.67 D. $414,008.24

B. $388,017.16 Monthly interest rate = .06/12 = .005 PV = $2,500 {(1/.005) - [1/.005(1.005)12 × 25]} PV = $388,017.16

The salesperson offers, "Buy this new car for $25,000 cash or, with an appropriate down payment, pay $500 per month for 48 months at 8% interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment. A. $1,000.00 B. $4,519.04 C. $5,127.24 D. $8,000.00

B. $4,519.04 PV = $500 × {[1/(.08/12)] - [1/(.08/12)(1 + (.08/12)48)]} PV = $20,480.96 Down payment = $25,000 - 20,480.96 = $4,519.04

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due? A. $10 B. $61.40 C. $10 × Number of years in annuity stream D. $6.14 × Number of years in annuity stream

B. $61.40 PVAD = PVOA × (1 + r) Difference = [PVOA × (1 + r)] - PVOA Difference = $614(1.1) - $614 = $61.40

How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years? A. $87,200.00 B. $675,764.89 C. $736,583.73 D. $802,876.27

B. $675,764.89 FV = $2,000 {[(1 + .09)40 - 1]/.09} FV = $675,764.89

How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest compounded annually? A. $70.00 B. $80.14 C. $105.62 D. $140.00

B. $80.14 $1000.00 × (1.07)2 = $1,144.90 after 2 years $1,144.90 × .07 = $80.14

How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually? A. 9.81 years B. 14.27 years C. 22.01 years D. 25.00 years

B. 14.27 years

After reading the fine print in your credit card agreement, you find that the "low" interest rate is actually an 18% APR, or 1.5% per month. What is the effective annual rate? A. 18.47% B. 19.56% C. 18.82% D. 19.41%

B. 19.56% EAR = 1.01512 - 1 = .1956, or 19.56%

If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate? A. 1.04% B. 4.17% C. 5.00% D. 8.19%

B. 4.17% FVAD = FVOA × (1 + r) $25,000 = $24,000 × (1 + r) r =.0417, or 4.17%

If inflation in Wonderland averaged about 3% per month in 2013, what was the annual rate of inflation? A. 36.00% B. 42.58% C. 40.09% D. 41.27%

B. 42.58% (1.03)12 - 1 = .4258, or 42.58%

What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually? A. 5.00% B. 5.66% C. 6.00% D. 9.46%

B. 5.66% 1 + real interest rate = (1 + nominal interest rate)/(1 + inflation) 1 + real interest rate = 1.12/1.06 Real interest rate = 5.66%

Your retirement account has a current balance of $50,000. What interest rate would need to be earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually? A. 5.02% B. 7.24% C. 9.80% D. 10.07%

B. 7.24% Financial calculator: n = 30; PV = -50,000; PMT = -6,000; FV = 1,000,000; CPT i = 7.24%

In calculating the present value of $1,000 to be received 5 years from today, the discount factor has been calculated to be .7008. What is the apparent interest rate? A. 5.43% B. 7.37% C. 8.00% D. 9.50%

B. 7.37% FV = PV(1 + r)t 1 = .7008(1 + r)5 r = .0737, or 7.37%

If a borrower promises to pay you $1,900 nine years from now in return for a loan of $1,000 today, what effective annual interest rate is being offered if interest is compounded annually? A. 5.26% B. 7.39% C. 9.00% D. 10.00%

B. 7.39% FV = PV × (1 + r)t $1,900 = $1,000 × (1 + r)9 r = 1.91/9 - 1 r = .0739, or 7.39%

Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with semiannual compounding? A. 8.0% with monthly compounding B. 8.5% with semiannual compounding C. The depositor would be indifferent. D. The time period must be known to select the preferred account.

B. 8.5% with semiannual compounding EAR = [1 + (.08/12)]12 - 1 = 8.30% EAR = [1 + (.085/2)]2 - 1 = 8.68% The depositor will prefer the option with the higher EAR (effective annual rate).

A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment. What is the loan's APR? A. 6% B. 9% C. 11% D. 12%

B. 9% $25,000 - 4,000 = $522.59 {(1/r) - [1/r(1 + r)48]} Using a financial calculator, r = .0075 APR = .0075 × 12 APR = .09, or 9%

What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments? A. 9.00% B. 9.38% C. 9.81% D. 10.94%

B. 9.38% EAR = [1 + (.09/12)]12 - 1 = .0938, or 9.38%

Which one of the following will increase the present value of an annuity, other things equal? A. Increasing the interest rate B. Decreasing the interest rate C. Decreasing the number of payments D. Decreasing the amount of the payment

B. Decreasing the interest rate

Which one of the following factors is fixed and thus cannot change for a specific perpetuity? A. Present value B. Payment amount C. Interest rate D. Discount rate

B. Payment amount

The coupon rate of a bond equals: A. its yield to maturity. B. a defined percentage of its face value. C. the yield to maturity when the bond sells at a discount. D. the annual interest divided by the current market price.

B. a defined percentage of its face value.

Nominal U.S. Treasury bond yields: A. are constant over time. B. are equal to the real yields. C. include a default premium. D. include an inflation premium.

B. are equal to the real yields.

The APR on a loan must be equal to the effective annual rate when: A. compounding occurs monthly. B. compounding occurs annually. C. the loan is for less than one year. D. the loan is for more than one year.

B. compounding occurs annually.

Investors who purchase bonds having lower credit ratings should expect: A. lower yields to maturity. B. higher default possibilities. C. lower coupon payments. D. higher purchase prices.

B. higher default possibilities.

Assume you are making $989 monthly payments on your amortized mortgage. The amount of each payment that is applied to the principal balance: A. decreases with each succeeding payment. B. increases with each succeeding payment. C. is constant throughout the loan term. D. fluctuates monthly with changes in market interest rates.

B. increases with each succeeding payment.

The concept of compound interest refers to: A. earning interest on the original investment. B. payment of interest on previously earned interest. C. investing for a multiyear period of time. D. determining the APR of the investment.

B. payment of interest on previously earned interest.

The yield curve depicts the current relationship between:

Bond yields and maturity

Which of the following identifies the distinction between a U.S. Treasury bond and a Treasury note?

Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.

A bond's yield to maturity takes into consideration:

Both current yield and price changes of a bond.

3. How does a bond dealer generate profits when trading bonds?

By maintaining bid prices lower than ask prices

How does a bond dealer generate profits when trading bonds?

By maintaining bid prices lower than ask prices

How does a bond dealer generate profits when trading bonds? By retaining the bond's next coupon payment By lowering the bond's coupon rate upon resale By maintaining bid prices lower than ask prices By maintaining bid prices higher than ask prices

By maintaining bid prices lower than ask prices

Three thousand dollars is deposited into an account paying 10% annually to provide three annual withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second payment has been withdrawn? A. $1,326.97 B. $1,206.34 C. $1,096.69 D. $587.32

C. $1,096.69 FVYear 1 = PV(1 + r) - Withdrawal FVYear 1 = $3,000(1.1) - $1,206.34 FVYear 1 = $2,093.66 FVYear 2 = FVYear 1 (1 + r) - Withdrawal FVYear 2 = $2,093.66(1.1) - $1,206.34 FVYear 2 = $1,096.69

You invested $1,200 three years ago. During the three years, you earned annual rates of return of 4.8%, 9.2%, and 11.6%. What is the value of this investment today? A. $1,498.08 B. $1,512.11 C. $1,532.60 D. $1,549.19

C. $1,532.60 FV = PV(1 + r)t FV = PV(1 + r)t (1 + r)t (1 + r)t FV = $1,200(1.048)1 (1.092)1 (1.116)1 FV = $1,532.60

How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just credited to the account for interest? A. $88 B. $100 C. $112 D. $200

C. $112 The investment will again pay $100 plus interest on the previous interest: $100 × 1.12 = $112

A loan officer states, "Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest. Both mortgages are for $100,000 and have monthly payments. What is the difference in total dollars that will be paid to the lender under each loan? (Round the monthly payment amounts to 2 decimal places.) A. $89,211 B. $98,406 C. $112,410 D. $124,300

C. $112,410 $100,000 = PMT([1/(.09/12)] - 1/{(.09/12)[1 + (.09/12)]30 × 12}) PMT = $804.62 $100,000 = PMT([1/(.085/12)] - 1/{(.085/12)[1 + (.085/12)]15 × 12}) PMT = $984.74 Total difference = ($804.62 × 12 × 30) - ($984.74 × 12 × 15) = $112,410

What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is made today? A. $9,655.65 B. $10,814.33 C. $12,112.05 D. $13,200.00

C. $12,112.05 PVAD = PVOA × (1 + r) PVAD = {$3,000[1/.12 - 1/.12(1.12)5]} × 1.12 PVAD = $12,112.05

With $1.5 million in an account expected to earn 8% annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today? A. $112,148.50 B. $120,000.00 C. $123,371.44 D. $133,241.15

C. $123,371.44 $1,500,000 = PmtOA {(1/.08) - [1/.08(1.08)30]} PMTOA = $133,241.15 PMTAD = PMTOA/(1 + r) PMTAD = $133,241.15/1.08 PMTAD = $123,371.44

What is the future value of $10,000 on deposit for 5 years at 6% simple interest? A. $7,472.58 B. $10,303.62 C. $13,000.00 D. $13,382.26

C. $13,000.00 FV = PV + (PV × r × t) ($10,000) + [($10,000 × .06) × 5] = $13,000.00

How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for 3 years? A. $107.69 B. $133.10 C. $134.49 D. $313.84

C. $134.49

Your real estate agent mentions that homes in your price range require a payment of $1,200 per month for 30 years at 9% interest. What is the size of the mortgage with these terms? A. $128,035.05 B. $147,940.29 C. $149,138.24 D. $393,120.03 PV = $1,200[(1/.0075) - 1/.0075(1.0075)360] PV = $149,138.24

C. $149,138.24

$50,000 is borrowed, to be repaid in three equal, annual payments with 10% interest. Approximately how much principal is amortized with the first payment? A. $2,010.60 B. $5,000.00 C. $15,105.74 D. $20,105.74

C. $15,105.74 Payment = $50,000/[1/.1 - 1/.1(1.1)3] Payment = $20,105.74 Principal payment = $20,105.74 - ($50,000 × .1) Principal payment = $15,105.74

How much must be deposited today in an account earning 6% annually to accumulate a 20% down payment to use in purchasing a car one year from now, assuming that the car's current price is $20,000, and inflation will be 4%? A. $3,774.61 B. $3,782.20 C. $3,924.53 D. $4,080.08

C. $3,924.53 Down payment needed = ($20,000 × 1.04) × .2 = $4,160 PV = FV/(1 + r)t PV = $4,160/(1.06) PV = $3,924.53

A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate. What is its present value? A. $33,333.33 B. $37,681.16 C. $38,333.33 D. $65,217.39

C. $38,333.33 PV = $5,000 + FV/r PV = $5,000 + $5,000/.15 PV = $5,000 + $5,000/.15 PV = $38,333.33

Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000, $35,000, and $42,000 over the next three years with the first payment of $28,000 occurring one year from today. What is this contract worth today at a discount rate of 7.25%? A. $88,311.08 B. $89,423.91 C. $90,580.55 D. $91,341.41

C. $90,580.55 PV = $28,000/1.0725 + $35,000/1.07252 + $42,000/1.07253 PV = $90,580.55

You are considering the purchase of a home that would require a mortgage of $150,000. How much more in total interest will you pay if you select a 30-year mortgage at 5.65% rather than a 15-year mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places.) A. $86,311.18 B. $78,487.92 C. $99,595.80 D. $102,486.68

C. $99,595.80 $150,000 = PMT([1/(.0565/12)] - 1/{(.0565/12)[1 + (.0565/12)]30 × 12}) PMT = $865.85 $150,000 = PMT([1/(.049/12)] - 1/{(.049/12)[1 + (.049/12)]15 × 12}) PMT = $1,178.39 Total difference = ($865.85 × 12 × 30) - ($1,178.39 × 12 × 15) = $99,595.80

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000? A. 6.0% B. 8.5% C. 10.0% D. 12.5%

C. 10.0% $1,000 =$100 [1/i - 1/i(1+i)^6] + $1,000/ (1+i)^6

"Give me $5,000 today and I'll return $10,000 to you in 5 years," offers the investment broker. To the nearest percent, what annual interest rate is being offered? A. 12.29% B. 13.67% C. 14.87% D. 12.84%

C. 14.87% FV = PV(1 + r)t $10,000 = $5,000(1 + r)5 r = 21/5 - 1 r = .1487, or 14.87%

What is the APR on a loan that charges interest at the rate of 1.4% per month? A. 10.20% B. 14.00% C. 16.80% D. 18.16%

C. 16.80% APR = 1.4% × 12 = 16.80%

What APR is being earned on a deposit of $5,000 made 10 years ago today if the deposit is worth $9,848.21 today? The deposit pays interest semiannually. A. 3.56% B. 6.76% C. 6.89% D. 7.12%

C. 6.89% FV = PV (1 + r)t $9,848.21 = $5,000 [1 + (r/2)]10 × 2 r = 6.89%

What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period? A. 7.36% B. 7.50% C. 7.64% D. 8.01%

C. 7.64% 1 + nominal rate = (1 + real rate)(1 + inflation rate) Nominal rate = (1.04 × 1.035) - 1 Nominal rate = 7.64%

A furniture store is offering free credit on purchases over $1,000. You observe that a big-screen television can be purchased for nothing down and $4,000 due in one year. The store next door offers an identical television for $3,650 but does not offer credit terms. Which statement below best describes the cost of the "free" credit? A. 8.75% B. 9.13% C. 9.59% D. 0%

C. 9.59% FV = PV(1 + r)t $4,000 = $3,650(1 + r) r = .0959, or 9.59%

How many monthly payments remain to be paid on an 8% mortgage with a 30-year amortization and monthly payments of $733.76, when the balance reaches one-half of the $100,000 mortgage? A. Approximately 268 payments B. Approximately 180 payments C. Approximately 91 payments D. Approximately 68 payments

C. Approximately 91 payments PV = PMT [(1/r) - 1/r(1 + r)t] $50,000 = $733.76{[1/(.08/12)] - 1/(.08/12) [1 + (.08/12)]t} t ≈ 91

A cash-strapped young professional offers to buy your car with four, equal annual payments of $3,000, beginning 2 years from today. Assuming you're indifferent to cash versus credit, that you can invest at 10%, and that you want to receive $9,000 for the car, should you accept? A. Yes; present value is $9,510.08 B. Yes; present value is $11,372.67 C. No; present value is $8,645.09 D. No; present value is $7,461.17

C. No; present value is $8,645.09 PV = $3,000{(1/.1) - [1/(.1 × 1.14)]}/1.1 PV = $8,645.09

What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence? A. The real cost is constant. B. The real cost is increasing. C. The real cost is decreasing. D. The price index must be known to answer this question.

C. The real cost is decreasing.

A bond's yield to maturity takes into consideration: A. current yield but not any price changes. B. price changes but not the current yield. C. both the current yield and any price changes. D. neither the current yield nor any price changes.

C. both the current yield and any price changes.

Real interest rates: A. always exceed inflation rates. B. can decline to zero but no lower. C. can be negative, zero, or positive. D. traditionally exceed nominal rates.

C. can be negative, zero, or positive.

Other things being equal, the more frequent the compounding period, the: A. higher the annual percentage rate. B. lower the annual percentage rate. C. higher the effective annual interest rate. D. lower the effective annual interest rate.

C. higher the effective annual interest rate.

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will: A. increase by $51.54. B. decrease by $51.54. C. increase by $53.46. D. decrease by $53.46.

C. increase by $53.46. PV = $80 [1/.06 - 1/.06I(1.06)^3] + $1,000/(1.06)^3 PV = $80 [16.667 - 13.994] + $1,000/(1.06)^3 PV = $213.84 + $839.63 PV = $1,053.47 Price change = $1,053.47 - $1,000 = $53.46

Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold. If inflation averaged 4% annually during the period, then over his career his purchasing power: A. remained on par with inflation. B. increased by nearly 1% annually. C. increased by nearly 2% annually. D. decreased.

C. increased by nearly 2% annually. FV = PV(1 + r)t 10 = 1(1 + i)40 r = 5.93% Real rate = (1.0593/1.04) - 1 = .0186, or 1.86%

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor: A. receives 97.162% of the stated coupon payments. B. receives $971.62 upon the maturity date of the bond. C. pays 97.162% of face value for the bond. D. pays $10,971.62 for a $10,000 face value bond.

C. pays 97.162% of face value for the bond.

When the yield curve is upward-sloping, then: A. short-maturity bonds offer the highest coupon rates. B. long-maturity bonds are priced above par value. C. short-maturity bonds yield less than long-maturity bonds. D. long-maturity bonds increase in price when interest rates increase

C. short-maturity bonds yield less than long-maturity bonds.

A market that enables suppliers and demanders of long term funds to make transactions

Capital Market

Periodic receipts of interest by the bondholders are known as:

Coupon payments

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

Coupon rate

Which one of the following is fixed for the life of a given bond? Coupon rate Yield to maturity Current yield Current price

Coupon rate

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

Coupon rate.

What causes bonds to sell for a premium? Long periods until maturity Investment-quality ratings Speculative-grade ratings Coupon rates that exceed market rates

Coupon rates that exceed market rates

Which of the following would not be associated with a zero-coupon bond?

Current yield

What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to maturity of 9.37%? A. $98.64 B. $95.27 C. $101.38 D. $104.97

D. $104.97 1,050 = pmt [1/.0937 - 1/.0937(1.0937)^6] + 1000/(1.0937)^6 = 104.97

Eighteen years from now, 4 years of college are expected to cost $150,000. How much more must be deposited into an account today to fund this expense if you could only earn 8% rather than the 11% you had hoped to earn on your savings? A. $12,211.18 B. $13,609.21 C. $14,006.41 D. $14,614.03

D. $14,614.03 Additional deposit = $150,000/1.0818 - $150,000/1.1118 Additional deposit = $14,614.03

If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with monthly payments of $965.55, how much interest is paid over the life of the loan? A. $120,000 B. $162,000 C. $181,458 D. $227,598

D. $227,598 Interest = ($965.55 × 12 × 30) - $120,000 = $227,598

Assume the total expense for your current year in college equals $20,000. How much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount? A. $952.46 B. $1,600.00 C. $1,728.08 D. $3,973.11

D. $3,973.11 PV = $20,000/(1.08)21 PV = $3,973.11

What is the discount factor for $1 to be received in 5 years at a discount rate of 8%? A. .4693 B. .5500 C. .6000 D. .6806

D. .6806 PV = FV/(1 + r)t PV = 1/1.085 PV = .6806

What is the APR on a loan with an effective annual rate of 15.26% and weekly compounding of interest? A. 14.35% B. 14.49% C. 13.97% D. 14.22%

D. 14.22% APR = [(1.1526)1/52 - 1] × 52 = .1422, or 14.22%

If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments, what is the annual percentage rate? A. 4.02% B. 10.02% C. 14.50% D. 15.19%

D. 15.19% APR = [(1.1608).25 - 1] × 4 APR = .1519, or 15.19%

What will be the approximate population of the United States, if its current population of 300 million grows at a compound rate of 2% annually for 25 years? A. 413 million B. 430 million C. 488 million D. 492 million

D. 492 million FV = PV(1 + r)t FV = 300 million × (1.02)25 FV = 492.2 million ≈ 492 million

Would you prefer a savings account that paid 7% interest compounded quarterly, 6.8% compounded monthly, 7.2% compounded weekly, or an account that paid 7.5% with annual compounding? A. 7% compounded quarterly B. 6.8% compounded monthly C. 7.2% compounded weekly D. 7.5% compounded annually

D. 7.5% compounded annually EAR = [1 + (.07/4)]4 - 1 = .0719, or 7.19% EAR = [1 + (.068/12)]12 - 1 = .0702, or 7.02% EAR = [1 + (.072/52)]52 - 1 = .0746, or 7.46% EAR = APR = 7.5%

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk? A. A zero-coupon bond with 20 years until maturity B. A coupon-paying bond with 20 years until maturity C. A floating-rate bond with 20 years until maturity D. A zero-coupon bond with 30 years until maturity

D. A zero-coupon bond with 30 years until maturity

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate? A. The interest rate is very high. B. The investment period is very long. C. The compounding is annually. D. This is not possible with positive interest rates.

D. This is not possible with positive interest rates.

A stream of equal cash payments lasting forever is termed: A. an annuity. B. an annuity due. C. an installment plan. D. a perpetuity.

D. a perpetuity.

If interest is paid m times per year, then the per-period interest rate equals the: A. effective annual rate divided by m. B. compound interest rate times m. C. effective annual rate. D. annual percentage rate divided by m.

D. annual percentage rate divided by m.

The present value of a perpetuity can be determined by: A. multiplying the payment by the interest rate. B. dividing the interest rate by the payment. C. multiplying the payment by the number of payments to be made. D. dividing the payment by the interest rate.

D. dividing the payment by the interest rate.

An interest rate that has been annualized using compound interest is termed the: A. simple interest rate. B. annual percentage rate. C. discounted interest rate. D. effective annual interest rate.

D. effective annual interest rate.

When an investment pays only simple interest, this means: A. the interest rate is lower than on comparable investments. B. the future value of the investment will be low. C. the earned interest is nontaxable to the investor. D. interest is earned only on the original investment.

D. interest is earned only on the original investment.

Cash flows occurring in different periods should not be compared unless: A. interest rates are expected to be stable. B. the flows occur no more than one year from each other. C. high rates of interest can be earned on the flows. D. the flows have been discounted to a common date.

D. the flows have been discounted to a common date.

An amortizing loan is one in which: A. the principal remains unchanged with each payment. B. accrued interest is paid regularly. C. the maturity of the loan is variable. D. the principal balance is reduced with each payment.

D. the principal balance is reduced with each payment.

will increase the present value of an annuity, other things equal?

Decreasing the interest rate

Which of the following will increase the present value of an annuity, other things equal? Increasing the interest rate. Decreasing the interest rate. Decreasing the number of payments. Decreasing the amount of the payment.

Decreasing the interest rate.

U.S. Treasury bond yields do not contain a:

Default premium

The current yield of a bond can be calculated by:

Dividing the annual coupon payments by the price.

Which of the following is correct for a bond priced at $1,100 that has ten years remaining until maturity, and a 10% coupon, with semiannual payments?

Each payment of interest equals $50.

If the coupon rate is lower than current interest rates, then the yield to maturity will be:

Equal to the coupon rate.

Many investors may be drawn to municipal bonds because of the bonds':

Exemption from federal taxes

A bond's PAR VALUE can also be called its:

FACE value

What is the future value of a series of $2000 end of year deposits into an IRA account paying 5% interest, over a period of 35 years? --financial calculator needed

FV=$180,640.61 n=35 i=5 PV=0 PMT=2000

A bond's par value can also be called its:

Face value

A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

False

A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.

False

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

False

When riskier corporations issue bonds that include a default premium, the promised yield will sometimes be:

Greater than the actual yield.

Investors who own bonds having lower credit ratings should expect:

Higher default possibilities.

Given a set future value, which of the following will contribute to a lower present value?

Higher discount rate

Given a set future value, which of the following will contribute to a lower present value? Higher discount rate Fewer time periods Less frequent discounting Lower discount factor

Higher discount rate

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

Increase over time, reaching par value at maturity.

Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?

Increasing interest rates; bonds sold before maturity.

Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond's:

Interest payments increse

The existence of an upward-sloping yield curve suggests that:

Interest rates will be increasing in the future.

The value of a callable bond:

Is limited by its call price.

If a bond is priced at par value, then:

Its coupon rate equals its yield to maturity.

Which of the following is correct for a bond currently selling at a premium to par?

Its current yield is lower than its coupon rate.

The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of these may have caused this price increase?

Market interest rates decreased.

Financial Markets in which preownded securites (those that are not new issues) are traded

Money Market

Suppose a 30-year maturity bond currently selling for $1,040 is callable in 10 years at a call price of $1,060. If its yield to maturity is 8.14%, its yield to call is:

More than 8.14%

The purpose of a floating-rate bond is to:

Offer rates adjusted to current market conditions.

future value

PV * (1 + r)^n

more likely to be responsible for a firm having low PVGO?

Payout is very high.

When an investor purchases a $1,000 par value bond that was quoted at 97.16, the investor:

Pays 97.5% of face value for the bond

Capital losses will automatically be the case for bond investors who buy:

Premium bonds

Problems that occur when managers place personal goals ahead of the goals of shareholders

Principal Agency Problem

A bond with 10 years until maturity, an 8% coupon, and an 8% yield to maturity increased in price to $1,107.83 yesterday. What apparently happened to interest rates?

Rates decreased by 1.5%

Which of the following statements best describes the real interest rate? Real interest rates exceed inflation rates. Real interest rates can decline only to zero. Real interest rates can be negative, zero, or positive. Real interest rates traditionally exceed nominal rates.

Real interest rates can be negative, zero, or positive.

describes the real interest rate?

Real interest rates can be negative, zero, or positive.

Which of the following is correct concerning real interest rates?

Real interest rates, if positive, indicate increased purchasing power.

The chance that actual outcomes may differ from those expected

Risk

Requiring compensation to bear risk

Risk Adverse

The primary governement agency responsible for enforcing federal securities laws

Securities Exchange Commission

The Securities Exchange Act of 1934 created the:

Securities Exchange Commission (SEC).

When market interest rates exceed a bond's coupon rate, the bond will:

Sell for more than par value.

When the yield curve is upward-sloping, then:

Short-maturity bonds yield less than long-maturity bonds.

not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting?

Short-term debt used to finance seasonal current assets.

TRUE or FALSE The discount factor refers to the present value of a $1 future payment

TRUE

TRUE or FALSE The nominal interest rate can be defined as an interest rate quoted today by a financial institution on a loan or investment, such as an APR or a periodic rate

TRUE

TRUE or FALSE? The time value of money functions that are provided by your financial calculator are also available as functions in an Excel spreadsheet

TRUE

An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

The 20-year bond will decrease more in price.

An investor holds two bonds, one with five years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

The 20-year bond will decrease more in price.

Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond?

The CCC bond will offer a higher promised yield to maturity.

organized security exchanges

The New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) are both known as

Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?

The bond is selling at a discount to par value.

What happens to a discount bond as the time to maturity decreases?

The bond price increases.

Which of the following is correct when a bond investor's rate of return for a particular period equals the bond's coupon rate?

The bond price remained unchanged during the period.

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

The bond's maturity value is lower than the bond's price.

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

The bond's price will decline each year.

The current yield tends to understate a bond's total return when the bond sells for a discount because:

The bond's price will increase each year.

What causes bonds to sell for a premium compared to face value?

The bonds have a higher than market coupon rate.

Which of the following will not happen for an investor who owns TIPS during a period of inflation?

The coupon payment will increase in real terms.

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%?

The coupon rate remains at 8%.

What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%?

The coupon rate remains at 8%.

For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,

The expected rate of return must be equal to the required rate of return; that is, = r.

The interest rate per period is most properly defined as

The interest rate that is applied to the current balance every compounding period

over-the-counter market

The market where small unlisted securities are traded

Where does a "convertible bond" get its name?

The option of converting into shares of common stock.

Which of the following factors will change when interest rates change?

The present value of a bond's payments

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond increases

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond increases.

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond increases.

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures? - The rate of return will be higher than the yield to maturity. - There is no predetermined relationship between the rate of return and the yield to maturity. - The rate of return will equal the yield to maturity. - The rate of return will be lower than the yield to maturity.

The rate of return will be lower than the yield to maturity.

The real interest rate can be defined as

The real change in value of an investment (or a real cost of a loan) after adjustment for inflation

If the expected rate of return on a stock exceeds the required rate,

The stock is a good buy.

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

There is no predetermined relationship between the rate of return and the yield to maturity.

What is the relationship between an investment's rate of return and its yield to maturity for an investor that does not hold a bond until maturity?

There is no predetermined relationship.

Bond ratings measure a bond's credit risk.

True

Bonds that have a Standard & Poor's rating of BBB or better are considered to be investmentgrade bonds.

True

Even when the yield curve is upward-sloping, investors might rationally stay away from longterm bonds.

True

When the market interest rate exceeds the coupon rate, bonds sell for less than face value to provide enough compensation to investors.

True

Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the purchase price and the payment of face value at maturity.

True

Nominal cash payments should be discounted using a nominal interest rate

True regarding the present value of a stream of cash payments

Real cash payments should be discounted using a real interest rate

True regarding the present value of a stream of cash payments

Assume a bond has been owned by four different investors during its 20-year history. Which one of the following is most apt to have been different for each of these owners? Yield to maturity Par value Coupon frequency Coupon rate

Yield to maturity

Assume that a bond has been owned by four different investors during its 20-year history. Which of the following is not likely to have been shared by these different owners?

Yield to maturity

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

Yield to maturity

A "convertible bond" provides the option to convert:

a bond into shares of common stock.

The coupon rate of a bond equals:

a defined percentage of its face value.

problem with using the dividend growth model is that is produces

a negative expected return whenever a firm cuts dividends

The coupon rate of a bond equals:

a percentage of its face value

The weighted average cost of capital for a given capital budget level is

a weighted average of the marginal cost of each relevant capital component which makes up the firm's target capital structure.

equity markets

are quite dynamic in terms of processing trades and incorporating information in prices and thus are considered very efficient markets

Joseph signs a contract with a company that will pay him $25,000. Following the principles of the time value of money, Joseph would be best off if he received payment:

at the beginning of the project

The slope and intercept of this line cannot

be controlled by the financial manager.

The __________ price is the highest price that a market maker offers to pay for a security and the __________ price is the lowest price at which a security is offered for sale.

bid, ask

convertible

bond feature allowing conversion to a fixed number of shares of common equity

callable

bond feature that gives the firm the right to force investors to sell the bond back to the firm

A bond's yield to maturity takes into consideration:

both the current yield and any price changes.

stock repurchase

buying your own common equity

examples of annuities

car payment, house payments, annual $1,000 contribution to retirement account

Which of these are examples of annuities? car payments house payments electric bill lump sum received as a gift annual $1,000 contribution to retirement account Variable interest received on bank CD

car payments house payments annual $1,000 contribution to retirement account

stock split

commonly a 2-for-1

default premium

compensates the investor for the additional risk that the loan will not be repaid in full

a crisis in the financial sector often spills over into other industries because when financial institutions borrowing ______, activity in most other industries _______.

contract; slows down

Under which of the following legal forms of organization is ownership readily​ transferable? partnerships sole proprietorships corporations limited partnerships

corporations

1. Periodic receipts of interest by the bondholder are known as:

coupon payments

Periodic receipts of interest by the bondholder are known as: the default premium. the coupon rate. coupon payments. a zero-coupon.

coupon payments.

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

coupon rate

Will increase the PV of an investment

decrease the i rate

underwriter

designs the structure of the IPO, markets the IPO, and assists with the necessary filings for an IPO.

Discounting a future value at interest rate "r" over time "t" is termed a _____ calculation

discounted cash-flow

average tax

divide taxes by taxable income

The current yield of a bond can be calculated by:

dividing the annual coupon payments by the price.

indenture

document that provides details on the bond's features and covenants -written document between the bond issuers and bondholder

An interest rate that has been annualized using compound interest is termed the: simple interest rate. annual percentage rate. discounted interest rate. effective annual interest rate.

effective annual interest rate.

A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses is called a(n) ________. futures market forex market efficient market stock market

efficient market

A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses is called

efficient markets

Investment banks are institutions that

engage in trading and market making activities

putable bond

essentially the reverse of a callable bond

par value

face value

A bond's par value can also be called its: market value. coupon payment. face value. present value.

face value.

Which of the following is an example of agency cost? payment of interest failure of making the best investment decision payment of income tax costs incurred for setting up an agency

failure of making the best investment decision

Is a forum in which suppliers and demanders of funds can transact business directly

financial markets

Which of the following is a forum in which suppliers and demanders of funds can transact business directly? financial markets financial institutions

financial markets

If the liquidation value of a corporation exceeds the market value of the equity, then the:

firm has no value as a going concern

A traditional (non-growing) annuity consists of a _____ stream of cash flows for a fixed period of time

fixed

dividend payout ratio

fraction of earnings paid out in dividends

The value in t years of an investment made today at interest rate r is called the _______ of your investment

future value

6. If the coupon rate is lower than current interest rates, then the yield to maturity will be:

higher than the coupon rate

Other things being equal, the more frequent the compounding period, the

higher the effective annual interest rate.

Other things being equal, the more frequent the compounding period, the: higher the APR. lower the APR. higher the effective annual interest rate. lower the effective annual interest rate.

higher the effective annual interest rate.

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will:

increase by $53.46.

An increase in the risk-free rate is likely to

increase the marginal costs of both debt and equity financing.

A perpetuity is a constant stream of cash flows for a _______ period of time

infinite

coupon rate

interest rate paid as a percentage of par value

british console bond

is a perpetuity

compound interest

is simply the interest earned in subsequent periods on the interest earned in prior periods

seasoned equity offering

is the process by which a public firm issues new shares.

True of a secondary market

it is a market in which preowned securities are traded

maturity

length of time until the bond is redeemed

Which of the following is a strength of a corporation? limited liability less government regulation low taxes low organization costs

limited liability

Investors want to

maximize return and minimize risk

at its most basic level the function of financial intermediaries is to

move money from lenders to borrowers and back again

Calculator keys & their correct functions

n= number of periods i= interest rate expressed as a % PV= Present Value FV= Future Value PMT= Constant recurring payment

As a key participant in financial transactions individuals are

net suppliers of funds because they save more money then they borrow

the number of periods for a consumer loan is equal to

number of years times compounding periods per year

annuity due pymt

occur at the begining

ordinary annuity pymt

occur at the end of the period

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor:

pays 97.162% of face value for the bond.

Capital losses will automatically be the case for bond investors who buy:

premium bonds.

the problem of motivating one party to act in the best interest of another party is known as the

principal agent problem

One definition of return

profit (or loss) / original cost

glass segal act

prohibited institutions that took deposits from engaging in activities such as security underwriting and trading which separated commercial and investment banks

mortgage back securities

represent claims on the cash flows generated by a pool of homeloans

The SML relates

required returns to firms' market risk

amortized loan

requires both principal and i pymt as you go by making equal payments each period

systematic risk

risk that can not be diversified away

When market interest rates exceed a bond's coupon rate, the bond will

sell for less than par value

When market interest rates exceed a bond's coupon rate, the bond will:

sell for less than par value.

The primary goal of the financial manager is to maximize

shareholder wealth

The primary goal of the financial manager is to maximize; shareholder wealth societal benefit earnings per share revenue

shareholder wealth

Which of the following forms of organizations is the easiest to form? partnerships sole proprietorships corporations limited partnerships

sole proprietorships

Which of the following legal forms of organization has the ease of dissolution? partnerships sole proprietorships corporations limited partnerships

sole proprietorships

Real-world investments often involve many payments received or paid over time. Managers refer to this as a

stream of cash flows

Trends of past stock market prices would be considered useful or even essential to a(n):

technical analyst.

Weak-form market efficiency implies

that recent trends in stock prices would be of no use in selecting stocks

Finance is the system of verifying, analyzing, and recording business transactions the art and science of managing money the art of merchandising product and services the science of production, distribution, and consumption of goods and services

the art and science of managing money

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

the bond's price will decline each year.

The constant growth model takes into consideration

the capital gains earned on a stock.

The Annual Percentage Rate (APR) on a loan or investment is properly defined as

the interest rate per period multiplied by the number of compounding periods per year

The highest interest rate will always result in

the lowest present value, regardless of how many years in the future the value is expected to be received

Your broker suggests that you can make consistent, excess profits by purchasing stocks on the 20th of the month and selling them on the last day of the month. If this is true, then

the market violates even weak-form efficiency.

residual dividend policy

the practice of paying dividends with only the amount remaining after accepting all positive NPV projects

An amortizing loan is one in which

the principal balance is reduced with each payment.

An amortizing loan is one in which: (Best Answer) payments are made monthly. accrued interest is paid regularly. the maturity of the loan is known. the principal balance is reduced with each payment.

the principal balance is reduced with each payment.

the form of business organization in the US that has the greatest amount of capital is

the publicly traded corporation

The Securities Act of 1933 deals primarily with:

the sale of new securities.

dividend signaling

the theory that management conveys information about the firm through dividend payment

Which of the following is the best measure to ensure that management decisions are in the best interests of the stockholders? tie management pay to the level of dividends per share tie management pay to the performance of the company's common stock price remove management perks fir managers who are inefficient

tie management pay to the performance of the company's common stock price

debenture

unsecured bond

discount loan

when you pay off the principal and all of the interest at one time at the maturity date of the loan

The money market is a market

which brings together suppliers and demanders of short term funds

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

yield to maturity

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

yield to maturity.