FIN 301 Exam 2

A. Future Value

1.) 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? A. Future value B. Present value C. Principal amount D. Discounted value E. Invested principal

C. Pay interest that is federally tax free

10. Municipal bonds: A. Are totally risk free B. Generally have higher coupon rates than corporate bonds C. Pay interest that is federally tax free D. Are rarely callable E. Are free of default risk

C. Later; Sooner; High

10.) Your goal is to have $1 million 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. A. Sooner, Later, Low B. Sooner, Later, High C. Later, Sooner, High D. Later, Sooner, Low E. Today, Later, High

D. Has more interest rate risk than a comparable coupon bond

11.) A zero coupon bond: A. Is sold at a large premium B. Pays interest that is tax deductible to the issuer at the time of payment C. Can only be issued by the U.S. Treasury D. Has more interest rate risk than a comparable coupon bond E. Provides no taxable income to the bondholder until the bond matures

D. Decrease in the interest rate

11.) Which one of these will increase the present value of a set amount to be received sometime in the future? A. Increase in the time until the amount is received B. Increase in the discount rate C. Decrease in the future value D. Decrease in the interest rate E. Decrease in both the future value and the number of periods

B. He earned a lower interest rate than he expected

12.) 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 He has neither added nor withdrawn any money since his initial investment.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 of the following must be true? A. He earned simple interest rather than compound interest B. He earned a lower interest rate than he expected C. He did not earn any interest on interest as expected D. He ignored the Rule of 72 which caused his account to decrease in value E. The future value interest factor turned out to be higher than he expected

B. Interest rate risk

12.) Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A. Real rate risk B. Interest rate risk C. Default risk D. Liquidity risk E. Taxability risk

E. Sukuk

13.) A highly illiquid bond that pays no interest but might entitle its holder to rental income from an asset is most apt to be a: A. NoNo bond B. Put bond C. Contingent callable bond D. Structured note E. Sukuk

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

13.) Which one of the following statements correctly defines a time value of money relationship? A. Time and future values are inversely related, all else held constant. B. Interest rates and time are positively related, all else held constant. C. An increase in a positive discount rate increases the present value. D. An increase in time increases the future value given zero rate of interest. E. Time and present value are inversely related, all else held constant.

C. $4,719

14. Al invested $3,630 in an account that pays 6 percent simple interest. How much money will he have at the end of five years? A. $4,910 B. $5,056 C. $4,719 D. $4,678 E. $5,299

E. Spread

14.) 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: A. Equilibrium B. Premium C. Discount D. Call price E. Spread

E. $14,077.16

15.) Marti's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much will the collection be worth in 2025? A. $13,611.18 B. $18,987.56 C. $14,122.01 D. $11,218.27 E. $14,077.16

D. 7.22 percent

15.) The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity? A. 6.97 percent B. 6.92 percent C. 6.88 percent D. 7.22 percent E. 7.43 percent

B. $929.42

16.) Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000? A. $949.70 B. $929.42 C. $936.48 D. $902.60 E. $913.48

B. $3,632.88

16.) This morning, DJ's invested $225,000 to help fund future projects. How much additional money will the firm have three years from now if it can earn an annual interest rate of 4 percent rather than 3.5 percent? A. $3,391.90 B. $3,632.88 C. $3,008.17 D. $4,219.68 E. $3,711.08

B. 12.53 years

17.) World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? A. 12.26 years B. 12.53 years C. 18.49 years D. 24.37 years E. 25.05 years

E. $4,117.64

17.) You have a savings account valued at $1,500 today that earns an annual interest rate of 8.7 percent. How much more would this account be worth if you wait to spend the entire balance in 25 years rather than in 20 years? A. $6,306.16 B. $4,658.77 C. $3,311.18 D. $6,907.17 E. $4,117.64

A. -1.79 percent

18.) A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent? A. -1.79 percent B. -1.38 percent C. -1.64 percent D. 1.79 percent

B. $48,740.95

18.) Twenty years from now, you want to spend $175,000 for a fancy car. How much must you deposit as a lump sum today to achieve this goal at an annual interest rate of 6.6 percent. A. $54,208.16 B. $48,740.95 C. $57,911.08 D. $40,019.82 E. $51,446.60

C. 7.49 percent

19.) Do-Well bonds have a face value of $1,000 and are currently quoted at $867.25. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds? A. 7.45 percent B. 7.67 percent C. 7.49 percent D. 8.03 percent E. 8.47 percent

E. $3,381.39 less

19.) Duane and Thad plan on retiring 27 years from today and plan to have the same amount saved at that time. In preparation for this, Duane is depositing $15,000 today at an annual interest rate of 5.2 percent. How will Thad's deposit amount vary from Duane's if Thad also makes a deposit today but earns an annual interest rate of 6.2 percent? A. $4,118.42 more B. $4,333.33 less C. $3,417.09 more D. $4,274.12 less E. $3,381.39 less

B. Compounding

2.) 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: A. Simplifying B. Compounding C. Aggregating D. Accumulating E. Discounting

D. $50.75

20.) A Treasury bond is quoted as 99.6325 asked and 99.1250 bid. What is the bid-ask spread in dollars on a $10,000 face value bond? A. $25.38 B. $5.75 C. $5.08 D. $50.75 E. $2.54

C. 5.61 percent

20.) Assume the total cost of college education will be $245,000 when your child enters college in 15 years. You presently have $108,000 to invest for this purpose. What rate of interest must you earn to cover the cost of your child's college education? A. 5.79 percent B. 5.50 percent C. 5.61 percent D. 6.25 percent E. 6.81 percent

C. 7.90 percent

21.) Sixty years ago, your mother invested $4,500. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment? A. 6.67 percent B. 11.71 percent C. 7.90 percent D. 10.40 percent E. 12.02 percent

C. $364.11

21.) You are purchasing a 15-year, zero-coupon bond. The yield to maturity is 6.85 percent and the face value is $1,000. What is the current market price? Assume semiannual compounding. A. $406.67 B. $408.18 C. $364.11 D. $321.50 E. $358.47

B. One year ago, Saul's investment was worth less than Trek's investment

22.) Four years ago, Saul invested $500. Three years ago, Trek invested $600. Today these two investments are each worth $800. Assume each account continues to earn its respective rate of return. Which one of the following statements is correct concerning these investments? A. Three years from today, Trek's investment will be worth more than Saul's B. One year ago, Saul's investment was worth less than Trek's investment C. Trek earns a higher rate of return than Saul D. Trek has earned an average annual interest rate of 9.86 percent. E. Saul has earned an average annual interest rate of 12.64 percent.

C. 12.81 years

23.) You're trying to save to buy a new $68,000 sports car. Currently, you have saved $36,840 which is invested at 4.9 percent annual interest. How many years will it be before you purchase the car, assuming the price of the car remains constant? A. 9.67 years B. 17.18 years C. 12.81 years D. 16.91 years E. 10.84 years

C. $47,076.06

24.) Angela expects to save $500 a year and a earn an average annual return of 5.2 percent. How much will her savings be worth 35 years from now? A. $51,317.82 B. $57,702.57 C. $47,076.06 D. $44,868.92 E. $56,063.66

B. Face value

25.) 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? A. Coupon B. Face value C. Discount D. Yield E. Dirty price

C. Maturity

26.) A bond's principal is repaid on the _______ date. A. Coupon B. Yield C. Maturity D. Dirty E. Clean

E. Yield to maturity < Coupon rate

27.) Which one of these equations applies to a bond that currently has a market price that exceeds par value? A. Market value < Face value B. Yield to maturity = Current yield C. Market value = Face value D. Current yield > Coupon rate E. Yield to maturity < Coupon rate

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

28.) Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at discount. B. The call price must equal the par value C. An increase in market rates increases the market price of a bond. D. Decreasing the time to maturity increases the price of a discount bond, all else constant. E. Increasing the coupon rate decreases the current yield, all else constant.

C. Coupon rate decreases and the time to maturity increases

29.) The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A. Coupon rate increases B. Time to maturity decreases C. Coupon rate decreases and the time to maturity increases D. Time to maturity and coupon rate both decrease E. Coupon rate and time to maturity both increase

D. Interest on interest

3.) 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 $.64 he earned in interest the second year is referred to as: A. Free interest B. Bonus income C. Simple interest D. Interest on interest E. Present value interest

B. In registered form

30.) 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 issued: A. At par B. In registered form C. In street form D. As debentures E. As callable bonds

B. Early bond redemption

31.) A sinking fund is managed by a trustee for which one of the following purposes? A. Paying bond interest payments B. Early bond redemption C. Converting bonds into equity securities D. Paying preferred dividends E. Reducing bond coupon rates

C. Call premium

32.) A $1,000 face value bond can be redeemed early at the issuer's discretion fro $1,030, plus any accrued interest. The additional $30 is called the: A. Dirty price B. Redemption value C. Call premium D. Original-issue discount E. Redemption discount

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

33.) A deferred call provision: A. Requires the bond issuer to pay the current market price, minus any accrued interest, should the bond be called B. Allows the bond issuer to delay repaying a bond until after the maturity date should the issuer so opt C. Prohibits the issuer from ever redeeming bonds prior to maturity D. Prohibits the bond issuer from redeeming callable bonds prior to a specified date E. Requires the bond issuer pay a call premium that is equal to or greater than one year's coupon should the bond be called.

E. Compound interest

4.) The interest earned on both the initial principal and the interest reinvested from prior periods is called: A. Free interest B. Dual interest C. Simple interest D. Interest on interest E. Compound interest

C. Present value

5.) 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: A. Single amount B. Future value C. Present value D. Simple amount E. Compounded value

B. Discounting

6.) Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: A. Growth analysis B. Discounting C. Accumulating D. Compounding E. Reducing

E. Discount rate

7.) Steve just computed the present value of $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the: A. Current yield B. Effective rate C. Compound rate D. Simple rate E. Discount rate

C. Discounted cash flow valuation

8.) The process of determining the present value of future cash flows in order to know their value today is referred to as: A. Compound interest valuation B. Interest on interest valuation C. Discounted cash flow valuation D. Future value interest factoring E. Complex factoring

B. Increase

9.) Your grandmother has promised to give you $10,000 when you graduate from college. If you speed 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: A. Remain constant B. Increase C. Decrease D. Equal $10,000 E. Be less than $10,000