Finance Exam 2
How are EAR and APR related?
--when M=1 (annual compounding) EAR=APR --when m>1, EAR> APR
APY
Annual Percentage Yield
Which of the following statements is FALSE?
although an APR is quoted on an annual basis, interest can be paid monthly but never daily
the most common rate quoted is the
annual percentage rate/APR
When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.
annual percentage rates
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 regular interest payment of the bond.
coupon
The ________ is the interest rate printed on the bond.
coupon rate
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.
coupon rate; discount to
The ________ compensates the investor for the additional risk that the loan will not be repaid in full.
default premium
In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.
false
Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.
fixed income
Which of the below is NOT a major component of interest rates?
historical interest rates
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
The ________ is the expiration date of the bond.
maturity date
The Fisher Effect involves which of the items below?
nominal rate, the real rate, and inflation
Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.
notes; bonds; bills
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
The ________ is the face value of the bond.
par value
"Junk" bonds are a street name for ________ grade bonds.
speculative
Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?
the bank is technically renting money from you with a promise to repay that money with interest
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
Which of the following are issued with the shortest time to maturity?
treasury bills
EAR (effective annual rate) is the
true rate of return to the lender and true cost of borrowing to the borrower
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
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
