FIN exam 2 concepts

If you take out a loan from a bank, you will be charged ________.

for both principal and interest

The ________ is the written contract between the bond issuer and the bondholder.

indenture

With a bearer bond, whoever held it was entitled to the ________ and the ________.

interest payments; principal

John borrows $500,000 at an annual rate of 7.62% for a 10 year term. At the end of each year interest payments of $38,100 are paid. At the maturity of the loan the principal amount is repaid, in addition to an interest payment. What type of loan is this?

interest-only

The phrase "price to rent money" is sometimes used to refer to ________.

interset rates

To determine the interest paid each compounding period, take the advertised annual percentage rate and divide it by the _________ to get the appropriate periodic interest rate, often called the "period rate."

number of compounding periods per month

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

fixed-income

A finite series of equal payments that occur at regular intervals is called a(n) _________.

annuity

A company selling a bond is ________ money.

borrowing

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.

current yield

A ________ is an unsecured bond.

debenture

The actual rate paid or received after accounting for compounding is called the _________.

effective annual rate

The number of periods for a consumer loan (n) is equal to the ________.

number of years times compounding periods per year

A basis point is ________.

one-hundredth of a percentage point

A/An ________ is a series of equal end-of-the-period cash flows

ordinary annuity

The ________ is the face value of the bond.

par value

The main variables of the time value of money (TVM) equation are ________.

present value, future value, perpetuity, interest rate, and payment

When quoting rates on loans, the "Truth in Lending Law" requires the bank to state the rate as an APR, effectively understating the true cost of the loan when interest is computed more often than once a year.

true

The actual rate paid or received after accounting for compounding is called the

yield to maturity

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

A) When interest rates go up, bond prices go up

A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________.

Annuity due

Which of the following is NOT an example of annuity cash flows? A) The university tuition bill you pay every month that is always the same B) The grocery bill that changes every week C) The $3.50 you pay every morning for a bagel and coffee as you run to your first morning class D) All of these examples are annuity cash flows.

B) The grocery bill that changes every week.

Which of the following is NOT true regarding the total payment in an equal payment amortization table? A) The total payment for any period is equal to the principal plus interest payments for that same period. B) The total payment is calculated using the present value of an annuity formula rearranged to solve for the payment. C) The final total payment will be greater than the beginning principal for the final period, assuming a positive interest rate. D) All of these are true.

D) All of these are true.

Amortization tables are useful for each of the following reasons EXCEPT ________. A) Determining the principal balance due if the loan is being paid off early B) Determining how much of a total payment is interest and how much is principal for tax purposes C) Determining the regular periodic total payment D) All of these are useful purposes of an amortization table.

D) All of these are useful purposes of an amortization table.

Which of the following is NOT an example of annuity cash flows? A) Regular equal monthly rent payments B) Equal annual deposits into a retirement account C) The $50 of gasoline you put into your car every two weeks on pay day D) All of these examples are annuity cash flows.

D) All of these examples are annuity cash flows.

A bond may be issued by ________. A) companies B) state governments C) the federal government D) All of the above

D) all of the above

When a bond is first issued the corporation tries to set the coupon close to the yield. Which of the following is TRUE (holding all else equal)? A. Secured debt will have a higher coupon than a debenture. B. Subordinated debt will have a lower coupon that senior debt. C. A bond with a sinking fund will have a higher coupon than one without. D. A callable bond will have a higher coupon compared to a non-callable bond

D. A callable bond will have a higher coupon compared to a non-callable bond

An annuity is a series of ________.

equal cash payments at regular intervals across time

The coupon payment for an annual-coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond.

false

Zero-coupon bonds are priced at steep premiums

false

Theresa borrows $800 today in exchange for one payment of $1,000 five years from now. This is an example of a(n):

pure discount loan

Most U.S. corporate and government bonds choose to make ________ coupon payments.

semiannual

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

speculative

The difference between the price and the par value of a zero-coupon bond represents ________.

the accumulated interest over the life of the bond

Monthly interest on a loan is equal to ________.

the beginning balance times the monthly interest rate

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.

The "Truth in Savings Law" requires banks to advertise their rates on investments such as CDs and savings accounts as annual percentage yields (APY).

true

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