Ch. 3-6 Quiz

Severson has an annuity due that pays $400 per year for 20 years. What is the value of the cash flows 20 years from today if they are placed in an account that earns 7.50%? Note: You are asked to find the FV one year after the last cash flow is realized.

$18,621.01 (MODE= BEGIN N= 20 I/Y= 7.5 PV= 0 PMT= -400 CPT FV= 18,621.01)

Your firm intends to finance the purchase of a new construction crane. The cost is $2,500,000. How large is the payment at the end of year ten if the crane is financed at a rate of 7.50% as a discount loan?

$5,152,578.91 (MODE= END N= 10 I/Y= 7.5 PV= -2,500,000 PMT= 0 *CPT FV= 5,152,578.91)

If you borrow $40,000 at an annual interest rate of 11% for seven years, what is the annual payment (prior to maturity) on a fully amortized loan?

$8,488.61 (MODE= END N= 7 I/Y= 11 PV= -40,000 FV= 0 CPT PMT= 8,488.61)

A U.S. Treasury bill is currently selling at a discount basis of 4.25%. The par value of the bill is $100,000, and will mature in 180 days. What is the price of this Treasury bill?

$97,875.00 (Price = face value × [1 - (discount rate × (days to maturity/360)] = $100,000 × [1 - (.0425 × 180/360)] = $97,875.00)

After winning the lottery, you state that you are indifferent between receiving twenty $500,000 end-of-the-year payments (first payment one year from today), or a lump sum of $5,297,007 today. What interest rate are you using in your decision-making process such that you are indifferent between the two choices?

7.00% (MODE= END N= 20 PV= -5,297,007 PMT= 500,000 FV= 0 CPT I/Y= 7.00%)

Douglas Dynamics Inc. has outstanding $1,000 face value 8% coupon bonds that make semiannual payments, and have 14 years remaining to maturity. If the current price for these bonds is $987.24, what is the annualized yield to maturity?

8.15% (r= 4.077260% YTM= 4.077260% X 2 = 8.15% MODE= END P/Y= 2 C/Y= 2 N= 28 PV= -987.24 PMT= 40 FV= 1,000 CPT I/Y= 8.15

The borrowing rate for real estate is more than the borrowing rates for autos, boats, and VISA Reward credit cards.

False

Which of the following statements is TRUE? On many calculators the TVM key for a period is I/Y. On many calculators the TVM key for interest is Y/I; this is Interest per Year, or the APR rate. On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the APR rate. On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the EAR rate.

On many calculators the TVM key for interest is I/Y; this is Interest per Year, or the APR rate. (All other answers besides C have at least one word and/or fraction that disagree with the correct words found in C.)

Which of the statements below is FALSE? Monthly interest on a loan is equal to the beginning balance times the periodic interest rate. Reducing principal at a faster pace increases the overall interest paid on a loan. Reducing principal at a faster pace reduces the overall interest paid on a loan. The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher.

Reducing principal at a faster pace increases the overall interest paid on a loan.

Which of the statements below is FALSE? With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan. For the home loan, the collateral (the house) is an asset that will increase in value over time (in general), compared with a car loan in which the collateral (the car) decreases in value over time. A part of the default premium has to do with the frequency of default by the borrower. A personal credit card essentially has no collateral, so the potential loss is even higher if the customer defaults on his or her credit card payments.

With a car, the potential loss due to default is less than a house because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan. (With a HOUSE, the potential loss due to default is less than a car because the growing value of the asset should be sufficient to cover the outstanding balance (principal) of the loan.)

Bonds that pay interest tied to the earnings of the company are known as ________ bonds.

income

We can write the true relationship between the nominal interest rate and the real rate and expected inflation as ________.

r = (1 + r*) × (1 + h) - 1

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 ________ is the return the bondholder receives on the bond if held to maturity.

yield to maturity

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

$1,171.59 (MODE= END P/Y= 2 C/Y= 2 N= 40 I/Y= 10 PMT= -60 FV= -1,000 CPT PV= 1,171.59)

*Assume you just bought a new boat and now have a boat loan to repay. The amount of the principal is $68,000, the loan is at 6.75% APR, and the monthly payments are spread out over 7 years. What is the loan payment? Use a calculator to determine your answer.

$1,225.36 $1,081.01 $809.52 NOT $1,206.58

*If you borrow $40,000 at an annual interest rate of 11% for seven years, what is the annual payment (prior to maturity) on an interest-only type of loan?

$12,161.29 $6,000.00 NOT $8,333.33 $4,400.00

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

4% (We can see that an inflation rate of 2% is 4% less than our 6% investment rate. Thus, 4% is the real rate of your reward for saving.)

Becky is seeking to expand her stamp collection. Each year, stamps increase in price at a seven percent rate. She believes that if she invests her money for one year, she should be able to buy 24 stamps for what 23 stamps would cost today. What is her real interest rate or reward for waiting?

4.35% ((FV/PV)^(1/N) - 1 FV= 24 PV= 23 N= 1)

Douglas Dynamics Inc. has outstanding $1,000 face value 4% coupon bonds that make semiannual payments, and have 10 years remaining to maturity. If the current price for these bonds is $938.57, what is the annualized yield to maturity?

4.78% (MODE= END N= 20 PV= -938.57 PMT= 20 FV= 1,000 CPT I/Y= 4.78)

Which of the following choices will result in a greater future value at age 65? Choice number 1 is to invest $3,000 per year from ages 20 through 26 (a total of seven investments) into an account and then leave it untouched until you are 65 (another 39 years). Choice number 2 is to begin at age 27 and make $3,000 deposits into an investment account every year until you are 65 years old (a total of 39 investments). Each account earns an average of 10% per year. (The investments are end-of-year payments.)

Choice 2 is better than choice 1 because it has a FV of $1,204,343.33, which is greater than choice 1 FV of $1,171,042.63.

Which of the choices below is FALSE? A putable bond is essentially the reverse of a callable bond. When issuing a callable bond, the firm anticipates that interest rates will rise over the life of the bond. When issuing a putable bond, the firm anticipates that interest rates will rise over the life of the bond. When issuing a callable bond, the firm anticipates that interest rates will fall over the life of the bond.

When issuing a callable bond, the firm anticipates that interest rates will rise over the life of the bond.

APRs must be converted to the appropriate periodic rates when compounding is ________.

more frequent than once a year

Exotic bonds are ________ difficult to price than ordinary bonds and they attract ________ potential buyers.

more; fewer

A basis point is ________.

one-hundredth of a percentage point