Finance Exam 2
Lowest future value assuming everything else is held constant?
Annual
Annuity Present Value
C × [(1 − Present value factor)/r].
_______ value is the cash value of an investment sometime in the future.
Future
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be reinvested, yielding a greater amount in the future.
EAR Formula
[1 + (Quoted rate/m)]m − 1
The interest rate that is most commonly quoted by a lender is referred to as the:
annual percentage rate.
The idea behind ______ is that interest is earned on interest.
compounding
The written agreement between the corporation and the lender detailing the terms of the debt issue is the ______.
indenture
The concept of the time value of money is based on the principle that a dollar today is worth __________ a dollar promised at some time in the future.
more than
Interest earned on the original principal amount invested is called _____.
simple interest
Which of the following terms apply to a bond?
Coupon rate Par value Time to maturity
Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:
Discounting
EAR is
The interest rate stated as though it were compounded once per year.
A perpetuity is defined as:
unending equal payments paid at equal time intervals.
The loan balance on partial amortization loans declines so slowly because the ___.
payments are mostly interest
In general, if you invest for one period at an interest rate of r, your investment will grow to 1 (minus/plus) r.
plus
The formula for a present value factor is
1/(1+r)t
In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years.
2 to 30
What is the process of paying off loans by regularly reducing the principal?
Amortization
Effective Annual Interest Rate
EAR = (1 + r)^n
FV of a lump sum:
FV = PV(1 + r)t
Formula for the future value of an annuity?
FV=C{[(1+r)t-1]/r}
Given the same APR, more frequent compounding results in _____.
Higher EARs
Which three of the following are common shapes for the term structure of interest rates?
Humped Upward sloping Downward sloping
The federal government can raise money from financial markets to finance its deficits by ___.
Issuing bonds
To find the PV of a lump sum, we use:
PV = FV / (1 + r)t
The basic present value equation is:
PV = FVt/(1+r)t
Which of the following institutions issue bonds that are traded in the bond market?
State governments The federal government Public corporations
APR is
The interest rate per period multiplied by the number of periods in the year.
Which of the following are usually included in a bond's indenture?
The total amount of bonds issued The repayment arrangements
When the U.S. government wants to borrow money for the long-term (more than one year) it issues:
Treasury notes and treasury bonds
The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called _____.
compounding
A bond's _______ rate is the stated interest payment made on a bond.
coupon
The _______ rate is the rate used to calculate the present value of the future cash flows.
discount
Calculating the present value of a future cash flow to determine its value today is called _____.
discounted cash flow valuation
The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.
effective annual
A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.
level
A bond's ______ is the number of years until the face value is due to be repaid.
maturity
There is a(n) ______ relationship between market interest rates and bond values.
negative
The discount rate is also called the ________.
rate of return
Bond ratings are based on the probability of default risk, which is the risk that ___.
the bond's issuer may not be able make all the required payments
Which of the following are common protective covenants?
the firm cannot merge with any other firm the firm must limit dividends to equity holders the firm must maintain working capital at or above a specified level
Most investments involve _____ cash flows.
multiple
The ________ value is the current value of future cash flows discounted at the appropriate discount rate.
present
An annuity due is a series of payments that are made ____.
at the beginning of each period
Annuity present value factor
{1-[1/(1+r)t]}/r
Amortization is the process of paying off loans by regularly reducing the _________.
principal
The _____ rate is used to find the EAR.
quoted
Which of the following methods can be used to calculate present value?
A time value of money table An algebraic formula A financial calculator
Which of these are required to calculate the current value of a bond?
Applicable market rate Coupon rate Par value Time remaining to maturity
Which of the following processes can be used to calculate future value for multiple cash flows?
Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up
Which of the following is true about a typical multiple-year bond's coupon?
It's a fixed annuity payment.
All junk bonds typically have which of these features?
Less than investment-grade rating High probability of default
Which of the following should be valued using a perpetuity formula?
Preferred stock A consol (bond that pays interest only and does not mature) Cash flows from a product whose sales are expected to remain constant forever
APR is also called the _______ rate.
stated
What information is needed to compute a bond's yield-to-maturity?
The bond's current price Coupon rate Time to maturity
What is an interest-only loan?
it's a loan which the borrower pays interest periodically and repays the principle when the bond matures
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
one year
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r).
ordinary
A typical investment has a large cash_______ at the beginning and then a cash ________.
outflow, inflows
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
