Finance 3101 Exam 1 True False

Compounding is the process used to find a PV.

False, FV

FVs represent what you need to invest later to have it grow into a specified earlier amount.

False, PVs

According to the Order of​ Operations, exponents are applied before the expression in​ parentheses, and addition and subtraction are to be completed before multiplication and division.

False, Parenthesis are applied first

For a given​ mean, a larger standard deviation means that actual returns that are far from the mean are less likely to occur.

False, more likely to occur

To change a decimal value to a​ percent, divide by 100.

False, multiply by 100

"PMT" in the PVA formula tells us the periodic mortgage payments for a​ fixed-rate fully amortized loan.

True

A simple percent change represents a change as part of the old or earlier value.

True

Capital losses always reduce the​ investor's rate of return.

True

Ceteris paribus​, as a debtor and for the same annual interest​ rate, you would prefer simple interest to compound interest.

True

Ceteris paribus​, bond prices move in the same direction as their coupon rates.

True

FVs represent the amount that an earlier amount will grow into.

True

For​ fixed-rate fully amortized mortgage​ loans, more of the fixed payment goes towards principal as we approach the end of the loan term.

True

Given the amount needed at the beginning of the retirement​ period, the annual deposits needed during the working period can be found by solving for​ "PMT" in the FVA formula.

True

If the top of a fraction is unchanged and the bottom of a fraction decreases by​ 5%, then the value of the whole fraction would increase by approximately​ 5%.

True

In the period 1950​ - 1999 changes in the inflation premium was the main factor causing nominal interest rates to change.

True

PVs are leftward on a time line and FVs are rightward on the time line.

True

The Fisher Effect illustrates the positive relationship between inflation and nominal interest rates.

True

The Fisher Effect is the relationship between three​ items: the nominal​ rate, the real​ rate, and inflation.

True

The YTM on a discount bond will be above its coupon rate.

True

The penalty for spending before earning is the interest rate from the point of view of the borrower.

True

The working capital management area deals with how much of a​ firm's assets should be held in​ cash, inventory and accounts receivable.

True

We can find the amount needed to pay off a​ fixed-rate fully amortized mortgage loan at any point in time by solving for the PV of the remaining payments.

True

We've discussed 3 different multiple cash flow patterns.

True

What is​ "discounted" from the FV is the interest part to arrive at the PV.

True

With compound​ interest, interest is earned every period on that​ period's starting amount.

True

that a company sets production and inventory levels on the new product is a _____________________________ decision.

Working capital management decision

A​ $1,000 par value bond with an annual coupon rate of​ 10% would pay​ $100 in interest every 6 months.

False

Ceteris​ paribus, as the frequency of compounding​ decreases, the EAR will exceed the APR by greater and greater amounts.

False

Ceteris​ paribus, the FV and the number of periods are inversely related.

False

If you buy a bond at par and hold it to​ maturity, you will experience a capital gain.

False

In a Normal​ Distribution, there is a​ 68% chance that an actual return will exceed the average return plus one standard deviation.

False

Interest rates were high in the late 1970s and early 1980s because of unusually high default premiums.

False

Nominal interest rates are the sum of two major​ components: the real interest rate and the maturity premium.

False

Premium bonds are always worth more than par value at maturity.

False

We can determine which​ "PMT" we're being asked to solve for by noting what the problem provides in terms of r and n.

False

We can find the nominal interest rate by subtracting the default and maturity premiums from the sum of the real rate and inflation.

False

You can earn a higher return by purchasing​ zero-coupon bonds at a premium.

False

The EAR will always be greater than the APR.

False

The capital budgeting area deals with how the firm should be financed.

False

The goal of the corporate financial manager is to maximize the​ firm's market share.

False

The number of years it would take an investment to double is approximately equal to the annual interest rate divided 72.

False

The principal part of a fixed mortgage loan payment can be found by multiplying the periodic interest rate by the ending balance for a given period.

False

There are a total of 5 variables in the basic TVM​ lump-sum formulas.

False

The​ right-hand side variables in the discount rate formula represent the 3 key factors determining stock prices.

False

"When given the annual withdrawals desired during the retirement​ period, the FVA tells us the amount we should have accumulated by the time we begin the retirement period.

False

A lump sum can be a​ one-time earlier but not a​ one-time. later cash flow

False

Annuities are unequal cash flows that go on for a finite period of time.

False

At​ maturity, investors must repay a​ bond's par value to the lender.

False

That a company chooses a new product to introduce into the market is a ____________________ decision.

Capital Budgeting

FVs are earlier values and PVs are later values.

PV are earlier values and FVs are later values

that a company chooses to sell a bond to finance the new product is a __________________________ decision.

capital structure