FIN 2303 exam 2

What is the EAR if the APR is 5% and compounding is quarterly?

slightly above 5.09%

When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.

annual percentage rates

The ________ is a market derived interest rate used to discount the future cash flows of the bond.

yield to maturity

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.

yield to maturity

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.

you will be able to buy more goods or services

The ________ is the expiration date of the bond.

maturity date

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

long-term debt

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________.

the credit rating increases, the default risk decreases, and the required rate of return decreases

Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.

The annual interest or coupon payment is equal to the coupon rate multiplied by the par value of the bond. Here that is (0.08) × ($1,000) = $80.

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE? The bank is lending money to you, but not borrowing money from you. The bank is borrowing money from you without a promise to repay that money with interest. The bank is technically renting money from you with a promise to repay that money with interest.

The bank is technically renting money from you with a promise to repay that money with interest.

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

number of compounding periods per year

Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?

Callable bond

The ________ is the interest rate printed on the bond.

coupon rate

Krypton Inc. wants to raise $3 million by issuing 10-year zero coupon bonds with a face value of $1,000. Their investment banker informs them that investors would use a 9.25% percent discount rate on such bonds. How many bonds would the firm have to issue to raise $3 million?

FV: 1,000 N: 10 x 2 = 20 PMT: (1,000x0%)/2 = 0 I/Y: 9.25 PV: -404.85 = 3,000,000 / 404.85 = 7,411 bonds issued

Which of the statements below is TRUE? The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms.

The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

coupon rate; discount to

A basis point is ________.

one-hundredth of a percentage point

TRUE/FALSE: In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.

False

Which of the below is NOT a major component of interest rates?

Historical interest rates

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

default premium

Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving?

4%

MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE? The bond market currently requires a rate (yield) less than the coupon rate. All of the above are true. The coupon rate is greater than the yield to maturity. The bonds are selling at a premium to the par value.

All of the above are true.

Which of the following statements is FALSE? Although an APR is quoted on an annual basis, interest can be paid quarterly. The APR can be referred to as a promised annual percentage rate. The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.

Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.

Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________.

FV: 1,000 N: 20 I/Y: 10 PMT: (1,000x8%) = 80 = PV: 829.73

The ExecUfind Corporation has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond?

FV: 1,000 N: 20 x 2 = 40 I/Y: 12% / 2% = 6% PMT: (1,000x10%)/2 = PV: 849.54

Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 8.00%. What is your investment worth in one year?

PV: -1,000 PMT: 0 I/Y: 8 N: 4 solve for FV: $1,082.43

The Fisher Effect involves which of the items below?

Nominal rate, the real rate, and inflation

You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30-year payment schedule. What is the annual annuity payment under this schedule?

PV: -200,000 FV: 0 I/Y: 3.91 N: 30 Solve for PMT: $11,439.96

Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par value. The firm has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds?

FV: 1,000 PMT: PV: N: = I/Y:

Which of the statements below is FALSE? The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. The real interest rate is the reward for waiting. Nominal interest rates are the sum of two major components: the real interest rate and expected inflation. The prices of goods and services tend to decrease over time because of inflation.

The prices of goods and services tend to decrease over time because of inflation.

TRUE/FALSE: The most common shape for a yield curve is upward sloping.

True

The ________ is the regular interest payment of the bond.

coupon

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

fixed-income

Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.

notes; bonds; bills

"Junk" bonds are a street name for ________ grade bonds.

speculative

Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? When interest rates go up, bond prices go up. A bond selling at a premium means that the coupon rate is greater than the yield to maturity. A bond selling at a discount means that the coupon rate is less than the yield to maturity. When the yield to maturity and coupon rate are the same, the bond is called a par value bond.

When interest rates go up, bond prices go up. When interest rates go up, bond prices fall.

Which of the following are issued with the shortest time to maturity?

treasury bills

The ________ is the face value of the bond.

par value