FIN 3013 Exam 2
The above information is for a corporate bond issued by the Markel Corporation. What sort of bond is this? A) a high-risk bond B) an investment grade bond C) a speculative bond D) a high-yield bond
B) an investment grade bond
A car dealer offers you a BMW Z4 for payments of $400 a month for 60 months. There is a grace period of the first 2 months where you do not make any payments Thus, you therefore make 60 equal installments from t = 2 to t = 61. If the rate of interest charged by the dealer is 1% per month, what amount are you borrowing? A) $17,986 B) $17,804 C) $18,162 D) $18,357
First, find the present value of these payments at t = 1 as follows: PMT = 400; N = 60; I/YR = 1; FV = 0; PV = ? (17,982.01) Thus, these payments are equivalent to paying $17,982.01 one month from now. The PV of this is equal to $17,982.01/1.01 = $17,803.98
How much will be the coupon payments of a 20-year $500 bond with an 8% coupon rate and quarterly payments? A) $3.33 B) $10.00 C) $20.00 D) $40.00
B) $10.00 ($500 x 0.08) / 4 = $10
How much will the coupon payments be of a 30-year $10,000 bond with a 4.5% coupon rate and semiannual payments? A) $30 B) $225 C) $350 D) $450
B) $225 ($10,000 x 0.045) / 2 = $225
Which of the following statements regarding annuities is FALSE? A) PV of an annuity = c x 1/r x [1-1/(1+r)^N] B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. C) An annuity is a stream of N equal cash flows paid at regular intervals. D) Most car loans, mortgages, and some bonds are annuities.
B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.
An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 6%?
Calculate PV of a 10-year annuity discounted at 6% interest rate; PV = $11,040.13. PMT = 1,500 ; FV = 0; N = 10; I/YR = 6; PV = ?
Term in years: 2 5 10 30 Rate: 2.25% 3.125% 3.5% 4.375% The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in ten years' time, what is the present value (PV) of that cash flow? A) $80,051 B) $78,320 C) $73,512 D) $70,892
D) $70,892 Using FV = $100,000, find the present value (PV) at 3.5% for 10 years.
What is the present value (PV) of an investment that will pay $400 in one year's time, and $400 every year after that, when the interest rate is 5%? A) $2400 B) $3600 C) $7200 D) $8000
D) $8000 𝑷𝑽 𝒐𝒇 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 = 𝑪/𝒓 = 𝟒𝟎𝟎 / 𝟎. 𝟎𝟓 = $𝟖,𝟎𝟎𝟎
Given the term structure table above, the present value (PV) of receiving $1000 per year with certainty at the end of the next three years is closest to: A) $2737 B) $2723 C) $2733 D) $2744
A) $2737 PV = 1000 / (1.05) + 1000 / (1.048)^2 + 1000 / (1.046)^3 = 2737
What is the effective annual rate (EAR)? A) the amount of interest that will be earned at the end of one year. B) the ratio of the annual percentage rate to the number of compounding periods per year 7 C) the discount rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction) D) the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year
A) the amount of interest that will be earned at the end of one year.
An annuity of $2000 with 10 payments starts today (10 payments from t = 0 to t = 9). If the rate of interest is 6% per year, what is the future value of this annuity at t = 10? A) $26,403 B) $27,943 C) $21,154 D) $33,323
B) $27,943 PMT = 2,000; I/YR = 6; N = 10; PV = 0; FV =? (26,361.59); 26,361.59*1.06 = 27,943
An investor places $3000 in a bank account. The bank promises an interest rate of 8% in year 1, 9% in year 2 and 10% in year 3. What is the account balance at the end of 3 years? A) $4400.21 B) $3884.76 C) $3589.84 D) $2780.13 E) $2411.29
B) $3884.76 FV = $3,000*1.08*1.09*1.10 = $3,884.76
You plan to deposit $1,000 today (t = 0), and then follow it by 10 equal payments of $500 each year for the next 10 years (from t = 1 to t = 10), into your savings account. What will your account balance be 10 years from today (at t = 10)? Assume your account pays 6% per year interest on all deposits. A) $9,313.1 B) $7,824.2 C) $8,381.2 D) $7,899.2
C) $8,381.2 PV = -1,000; PMT = -500; N = 10; I/YR = 6; FV = ?
Which of the following best illustrates why a bond is a type of loan? A) The issuers of bonds regularly pay interest on the face value of the bond to the buyers of those bonds. B) When a company issues a bond, the buyer of that bond becomes a part owner of the issuing company. C) Federal and local governments issue bonds to finance long-term projects. D) When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance it will be repaid at a date in the future.
D) When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance it will be repaid at a date in the future.
A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 7% APR, what is the remaining balance on her loan?
FV = 0; PMT = 1,400; I/YR = 0.58333; N = 60; solve for PV = $70,703.
A Xerox DocuColor photocopier costing $42,000 is paid off in 60 monthly installments at 6.5% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?
PMT = 821.79; N = 24; I/YR = 0.54; FV = 0; PV = ? (18,488)
A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000. What is the interest rate being offered by the dealer?
PV = 120,000, N= 6, FV = 0; PMT = -25,000; Solve for interest rate (I/YR) to find 6.77%.
You are interested in purchasing a new automobile that costs $35,000. The dealership offers you a special financing rate of 6% APR (0.5% per month) for 48 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to:
PV = 35,000; I = 0.5; N = 48; FV = 0; Compute PMT = $821.98.
A bank offers a loan that will requires you to pay 6% interest compounded monthly. What is the EAR charged by the bank?
𝑬𝑨𝑹 = (𝟏 +𝑨𝑷𝑹/𝒎)^𝒎- 𝟏 𝑬𝑨𝑹 = (𝟏 +𝟎. 𝟎𝟔/𝟏𝟐 )^𝟏𝟐-𝟏 = 𝟎.𝟎𝟔𝟏𝟕 = 𝟔.𝟏𝟕%
Clarissa wants to fund a growing perpetuity that will pay $5000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 8%, how much does she need to fund this growing perpetuity?
𝑷𝑽 𝒐𝒇 𝒈𝒓𝒐𝒘𝒊𝒏𝒈 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 = 𝑪/𝒓 − 𝒈 = 𝟓𝟎𝟎𝟎 / (𝟎. 𝟎𝟖 − 𝟎. 𝟎𝟓) = $𝟏𝟔𝟔, 𝟔𝟔𝟔. 𝟔𝟕
Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $1000 in the first year, and will grow by 7% per year, forever. If the interest rate is 11%, how much must Martin provide to fund this bequest?
𝑷𝑽 𝒐𝒇 𝒈𝒓𝒐𝒘𝒊𝒏𝒈 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 = 𝟏𝟎𝟎𝟎 / (𝟎. 𝟏𝟏 − 𝟎. 𝟎𝟕) = $𝟐𝟓, 𝟎𝟎�
An annuity pays $50 per year for 20 years. What is the future value (FV) of this annuity at the end of those 20 years, given that the discount rate is 7%?
PMT = 50; PV = 0; I/YR = 7; N = 20; FV =? FV=2049.77
You are considering an investment that will pay $150 after 1 year, $500 after 2 years and $600 after 3 years. What is the present value of the cash flows if the appropriate discount rate is 10% per year? A) $1000.38 B) $1150.12 C) $1260.35 D) $1270.91
A) $1000.38 In your financial calculator enter cash flows one by one: 0, 150, 500, 600. I/YR = 10. Orange + NPV = ?
Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon? A) Most investment opportunities offer far greater risk than those offered by U.S. Treasury securities. B) The return from U.S. Treasury securities generally attracts less tax than the returns from other investments. C) The opportunity cost of capital for a given horizon is generally based on U.S. Treasury securities with that same horizon. D) U.S. Treasury securities are generally considered to be the best alternative to most investments.
A) Most investment opportunities offer far greater risk than those offered by U.S. Treasury securities.
You will receive payments of $500 each year and forever where the payments start at t = 8. Compute the present value of these payments at t = 0 if the rate of interest is 10% per year? A) $2,272 B) $2,301 C) $2,566 D) $2,639
C) $2,566 PV of this perpetuity at t = 7 = $500/0.10 = $5,000. Thus, this perpetuity is equivalent to receiving a lump-sum payment of $5,000 seven years from now. PV = $5,000/1.107 = $2,565.79
A house costs $138,000. It is to be paid off in exactly ten years, with monthly payments of $1,675. What is the APR of this loan? A) 7.52% B) 7.80% C) 8.00% D) 8.33%
C) 8.00% Calculate the monthly interest rate r, when PV = $138,000; N = 120; PMT = $1,675; Solve for monthly interest rate = 0.6674%, which multiplied by 12 gives an APR = 8%. PV = 138,000; PMT = -1,675; N = 120; FV = 0; I/YR = ? (0.6674) 𝑨𝑷𝑹 = 𝒓 × 𝒎 = 𝟎. 𝟔𝟔𝟕𝟒% × 𝟏𝟐 = 𝟖%
Consider a zero-coupon bond with a $1,000 face value and ten years left until maturity. If the bond is currently trading for $459, then what is the yield to maturity on this bond?
Calculate the discount rate that equates the PV of $1.000 in ten years to $459 FV = 1,000; PV = -459; PMT = 0; N =10; Compute I/YR = 8.098 or 8.1%.
Which of the following reasons for considering long-term loans inherently more risky than short-term loans most accurate? A) There is a greater chance that a borrower will default in a longer time-frame. B) The penalties for closing out a long-term loan early make them unattractive to many investors. C) Long-term loans typically have ongoing costs that accumulate over the life of the loan. D) Long-term loan values are much more sensitive to changes in market interest rates than short-term loan values.
D) Long-term loan values are much more sensitive to changes in market interest rates than short-term loan values.
You are considering purchasing a new home. You will need to borrow $250,000 to purchase the home. A mortgage company offers you a 15-year fixed rate mortgage (180 months) at 9% APR (0.75% per month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to:
PV = 250,000; I = 0.75; N = 180; FV = 0; Compute payment = $2,535.67
In which of the following situations would the reserve bank in a certain country be most likely to lower interest rates? A) The economy is growing slowly or not at all. B) Inflation is rising rapidly. C) The level of investment is very high. D) The level of unemployment is low.
A) The economy is growing slowly or not at all.
You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to: A) $71,429 B) $500,000 C) $166,667 D) This problem cannot be solved.
A) $71,429 𝑷𝑽 = 𝑪 / (𝒓 - 𝒈) = 𝟏𝟎, 𝟎𝟎𝟎 / (𝟎. 𝟎𝟔 − −𝟎. 𝟎𝟖) = 𝟏𝟎, 𝟎𝟎𝟎 / 𝟎. 𝟏𝟒 = $𝟕𝟏, 𝟒𝟐𝟗
What is the effective annual rate when the APR equals 15% for monthly compounding? A) 16.08% B) 15.00% C) 14.25% D) 13.38% E) 12.47%
A) 16.08%
Which of the following statements is FALSE? A) One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value. C) Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. D) The internal rate of return (IRR) of an investment in a bond (and holding it until its maturity) is given a special name, the yield to maturity (YTM).
B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
A corporate bond which receives a BBB rating from Standard and Poor's is considered A) a junk bond. B) an investment grade bond. C) a defaulted bond. D) a high-yield bond.
B) an investment grade bond.
In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r) + C2/(1 + r)2 + . . . . + Cn/(1 + r)n when determining the present value (PV) of a cash flow stream? A) when yield curves are flat B) when short-term and long-term interest rates vary widely C) when the inflation rate is high D) when the discount rate is high
B) when short-term and long-term interest rates vary widely
A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 4%?
The first step is to calculate the value of the perpetuity at year 4: PV at year 4 = 1000 / 0.04 = $25,000; Thus, this perpetuity is equivalent to a single cash flow of $25,000 four years from now. The next step is to calculate the PV of $25,000 received to be at year 4: PV = $25,000/(1.04)^4 = $21,370.10
A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond? A) a 10-year bond with a face value of $2000 and a coupon rate of 4.8% with monthly payments B) a 10-year bond with a face value of $2000 and a coupon rate of 5.8% with monthly payments C) a 10-year bond with a face value of $2009.67 and a coupon rate of 4.8% with monthly payments D) a 10-year bond with a face value of $2009.67 and a coupon rate of 5.8% with monthly payments
B) a 10-year bond with a face value of $2000 and a coupon rate of 5.8% with monthly payments ($9.67 x 12) / 2000 = 5.802%
Given that the inflation rate in 2006 was about 3.24%, while a short term municipal bond offered a nominal rate of 2.9%, which of the following statement is correct? A) The purchasing power of investors in these bonds grew over the course of the year. B) The real interest rate for investors in these bonds was greater than the rate of inflation. C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. D) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.
C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.
Why are the interest rates of U.S. Treasury notes less than the interest rates of equivalent corporate bonds? A) The U.S. government has a high credit spread. B) There is significant risk that the U.S. government will default. C) U.S. Treasury securities are widely regarded to be risk-free. D) U.S. Treasury securities are generally used to determine interest rates.
C) U.S. Treasury securities are widely regarded to be risk-free.
You purchase a car for $15,000. The car loan is financed with a 5% per year, 5-year loan with annual payments starting at time 1 (1 year from today) through time 5. Each payment reduces the principal by a certain amount until the loan is completely paid off. What is the interest component of the first payment? A) $750 B) $600 C) $530 D) $420 E) $395
A) $750 Interest = Loan Balance * interest rate = $15,000*0.05 = $750.
What is the real interest rate given a nominal rate of 8% and an inflation rate of 4.5%? A) 3.3% B) 4.5% C) 4.9% D) 8.0%
A) 3.3% (1 + nominal rate) / (1 + inflation rate) = 1 + real rate 1.08 / 1.045 = 1.03349; real rate = 3.349%
Jason plans on purchasing a house for $120,000. If a local bank is willing to lend the entire amount for a 30 year term at an APR of 7.2%, what is the monthly payment on the loan? A) $701.2 B) $814.5 C) $714.5 D) $823.2
B) $814.5 PV = -120,000; N = 360; I/YR = 7.2/12 = 0.6; FV = 0; PMT = ?
What, typically, is used to calculate the opportunity cost of capital on a risk-free investment? A) the best available expected return offered in any investment available in the market B) the interest rate on U.S. Treasury securities with the same term C) the interest rate of any investments alternatives that are available D) the best rate of return offered by U.S. Treasury securities
B) the interest rate on U.S. Treasury securities with the same term
Security: AAA AA A BBB BB Yield (%): 5.6 5.7 5.9 6.4 7.0 A mining company needs to raise $100 million in order to begin open pit mining of a coal seam. The company will fund this by issuing 30-year bonds with a face value of $1000 and a coupon rate of 6%, paid annually. The above table shows the yield to maturity for similar 30-year corporate bonds of different ratings. If the mining company's bonds receive an A rating, what will be their selling price? A) $947.22 B) $967.64 C) $1013.91 D) $1016.41
C) $1013.91 Calculate the PV of the bond with FV = $1000, I/YR = 5.9%, PMT = 60, and N = 30, which = $1,013.91.
You wish to buy a music system for $2000. Best Buy is offering to finance your purchase for 12 equal monthly installments at 2% per month for 12 months starting one month from today, and a final additional payment of $1000 after one year. What is your monthly payment if the first payment is due 1 month from today? A) $101.2 B) $110.3 C) $114.5 D) $123.2
C) $114.5 PV = 2,000; N = 12; I/YR = 2; FV = -1,000; PMT = ?
A perpetuity has a PV of $32,000. If the interest rate is 10%, how much will the perpetuity pay every year? A) $2909 B) $3100 C) $3200 D) $3520
C) $3200 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 = 𝑪 = 𝑷𝑽 × 𝒓 = 𝟑𝟐, 𝟎𝟎𝟎 𝒙 𝟎. 𝟏𝟎 = $𝟑,𝟐𝟎𝟎
Suppose the term structure of interest rates is shown below: Term 1 yr 2 yrs 3 yrs 5 yrs 10 yrs 20 yrs Rate (EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15% 40. What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? A) inverted; higher B) normal; higher C) inverted; lower D) normal; lower
C) inverted; lower
Jason bought a house ten years ago. His payments are $700 per month and the APR on the loan is 6% and the original term was 30 years. With 20 years remaining now, what is the principal component of the next payment (121st payment)? A) $217.1 B) $208.6 C) $225.3 D) $211.5
D) $211.5 PMT = 700; N = 20*12 = 240; I/YR = 6/12 = 0.5; FV = 0; PV = ? 97,706.54 The remaining loan balance at the end of 10 years (120 months) is $97,706.54. Interest payment on that remaining balance = $97,706.54*0.005 = $488.53 Principal payment = $700 - $488.53 = $211.47
Maturity (years) 1 2 3 4 5 Price $97.25 $94.53 $91.83 $89.23 $87.53 The above table shows the price per $100 face value of several risk-free, zero-coupon bonds. What is the yield to maturity of the three-year, zero-coupon, risk-free bond shown? A) 2.83% B) 2.85% C) 2.86% D) 2.88%
D) 2.88% FV = 100; PV = -91.83; N = 3; PMT =0; Solve for I/YR
The term structure of interest rates generally refers to: A) A graphical depiction of real rates vs. inflation rates. B) A graphical depiction of spot rates vs. coupon rates of bonds. C) A graph of spreads vs. rates. D) A graphical depiction of yield to maturity of government bonds vs. maturity.
D) A graphical depiction of yield to maturity of government bonds vs. maturity.
A given rate is quoted as 12% APR and has an EAR of 12.68%. What is the compounding frequency during the year? A) Annually B) Semiannually C) Quarterly D) Monthly E) Daily
D) Monthly
The monthly mortgage payment on your house is $960.34 starting one month from now. It is a 30 year mortgage at an APR of 6% compounded monthly. How much will still you owe the bank (loan outstanding) after making the required payments for 10 years? A) $115,301 B) $114,692 C) $119,298 D) $120,319 E) $134,045
E) $134,045 PMT = 960.34; N = 20*12=240; I/YR = 6/12 = 0.5; FV = 0; PV = ? (-134,045)
A firm issues ten-year bonds with a coupon rate of 6.5%, paid semiannually. The credit spread for this firm's ten-year debt is 0.8%. New ten-year Treasury notes are being issued at par with a coupon rate of 5%. What should the price of the firm's outstanding ten-year bonds be per $100 of face value?
FV = $100, I/YR = 2.9, PMT = 3.25, N = 20, PV = ?, which is equal to $105.26.
What is the yield to maturity of a ten-year, $1000 bond with a 5.2% coupon rate and semiannual coupons if this bond is currently trading for a price of $884?
FV = $1000, N = 20, PMT = (1,000*0.052)/2 = 26, PV = -$884, I/YR = 3.4095% per semiannual period; YTM = 3.4095 x 2 = 6.82%.
A risk-free, zero-coupon bond with a face value of $1,000 has 15 years to maturity. If the YTM is 5.8%, what is the price this bond will trade at?
Face value = $1,000, time to maturity = 15 years, and discount rate = 5.8%, PMT = 0. Calculate PV = $429.25.
What is the internal rate of return (IRR) of an investment that requires an initial investment of $10,000 today and pays $14,000 in one year's time?
Financial calculator solution: PV = -10,000, N= 1, and FV = 14,000; Solve for I/YR and find 40%.
Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $4,000 per year. If he can get a five-year loan with an interest rate of 7.5%, what is the maximum price he can pay for the car?
PMT = 4000, N= 5, I/YR = 7.5%, FV = 0; solve PV =$16,183.54.
Dan buys a property for $250,000. He is offered a 20-year loan by the bank, at an interest rate of 6% per year. What is the annual loan payment Dan must make?
PV = 250,000, N= 20, I/YR = 6%, FV = 0; Solve for PMT = $21,796.139.
Term in years: 1 2 3 4 5 Rate: 1.8% 2.25% 2.30% 2.66% 3.13% The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $4000 at the end of each year for the next four years?
PV of $4000 at 1.8% for 1 year = $3929.27; PV of $4000 at 2.25% for 2 years = $3825.90; PV of $4000 at 2.30% for 3 years = $3736.23; PV of $4000 at 2.66% for 4 years = $3601.26; Sum of these four PVs = $15,093.
You are prepared to make monthly payments of $200, beginning the end of this month, into an account that pays an interest of 12% quoted as an APR with monthly compounding. How many payments will you have made when your account balance reaches $50,000? A) 129.1 B) 125.9 C) 140.2 D) 123.2
B) 125.9 Monthly interest rate = 12%/12 = 1% PMT = -200; FV = 50,000; I/YR = 1; PV = 0; N = ?
A truck costing $112,000 is paid off in monthly installments over four years with 8% APR. After three years the owner wishes to sell the truck. What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck? A) $24,867 B) $28,678 C) $31,432 D) $87,255
C) $31,432 The first step is to calculate the monthly payment using a present value (PV) of $112,000 monthly interest rate of 8/12 = 0.67%, and 48 periods, which = $2,734.25. PV = -$112,000; FV = 0; I/YR = 0.67; N = 48; PMT = ? (2,734.25) The second step is to use that monthly payment to calculate the present value (PV) of 12 months remaining payment keeping the interest rate unchanged. PMT = 2,734.25; I/YR = 0.67; N = 12; FV = 0; PV = ? (31,432)
You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in ten years. If the bond is currently selling for $485.20, then the internal rate of return (IRR) for investing in this bond is closest to: A) 12% B) 8.0% C) 7.5% D) 10%
C) 7.5% PV = -485.20; FV = 1000; PMT = 0; N = 10; Compute I/YR = to find 7.5%.
Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the production of ceramic tile. The company funded this by issuing 15-year bonds with a face value of $1000 and a coupon rate of 6.2%, paid annually. The above table shows the yield to maturity for similar 15-year corporate bonds of different ratings issued at the same time. When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the following is most likely to be the rating these bonds received? A) AA B) A C) BBB D) BB
C) BBB Calculate the YTM of the bond: PV = -962.63; FV = $1000, PMT = 62, N = 15, which is I/YR = 6.6%; the table shows that the bonds received a BBB rating.
Which of the following statements is FALSE? A) Because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows. B) The effective annual rate indicates the amount of interest that will be earned at the end of one year. C) The annual percentage rate indicates the amount of simple interest earned in one year. D) The annual percentage rate indicates the amount of interest including the effect of compounding.
D) The annual percentage rate indicates the amount of interest including the effect of compounding.
Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower? A) The number of borrowers seeking funds is low. B) The expected inflation rate is expected to be low. C) The borrower is judged to have a low degree of risk. D) The investment will be for a long period of time.
D) The investment will be for a long period of time.
