FIN3403 Ch4-6 Quiz
True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.
False. The annuity present value factor equals one minus the present value factor all divided by the discount rate.
What is a bond's accrued interest?
It is interest that has been earned but not yet received by the current bondholder.
What does a Treasury yield curve show?
It shows the yield for different maturities of Treasury notes and bonds.
You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the ______ value on the financial calculator.
N
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
The 10-year bond.
If you are holding two bonds—one with a 5 percent coupon rate and the other with an 8 percent coupon rate—which one is more sensitive to interest rate risk, all other things being equal?
The bond with a 5 percent coupon rate.
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations.
The formula for the future value of an annuity factor is [(1 + r)t − 1]/r.
True
True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.
True
True or false: Current yield = Annual coupon payment/Price
True
True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.
True
True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.
True
True or false: Interest rates can be quoted in various ways.
True
True or false: Low-grade bonds may not be rated by major rating agencies.
True
True or false: The government sells Treasury notes and bonds to the public every month.
True
True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
True
True or false: The price you actually pay to purchase a bond will generally exceed the clean price.
True Invoice price = Clean price + Accrued interest
Which of the following is the simplest form of loan?
a pure discount loan
If bonds for AT&T are quoted at 115, they can be purchased:
at 115 percent of par value plus accrued interest.
An annuity due is a series of payments that are made ______.
at the beginning of each period
The amount an investment is worth after one or more periods is called the ______ value.
future
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ______.
increases
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
The nominal rate is found by adding the ______ and the real rate of return.
inflation
An ordinary annuity consists of a(n) ______ stream of cash flows for a fixed period of time.
level
A zero-coupon bond is a bond that ____.
makes no interest payments
A simple way to amortize a loan is to have the borrower pay the interest each period plus some fixed amount. This approach is common with _____-term business loans.
medium
Which of the following variables is not required to calculate the value of a bond?
original issue price of bond
The formula for the ______ value interest factor of an annuity is [1 − 1/(1 + r)t]/r.
present
Amortization is the process of paying off loans by regularly reducing the ______.
principal
The original amount of a loan is termed the loan ______.
principal
EAR = (1 + ______ rate/m)m − 1
quoted
The term structure of interest rates examines the ______.
relationship between short-term and long-term interest rates
With typical interest-only loans, the entire principal is:
repaid at some point in the future.
With _____ interest, the interest is not reinvested.
simple
What does a bond's rating reflect?
the ability of the firm to repay its debt and interest on time
A debenture is a(n) ______ bond, for which no specific pledge of property is made.
unsecured
Most of the time, a floating-rate bond's coupon adjusts ______.
with a lag to some base rate
True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
False
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years
Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?
(1 + quoted rate/m)m − 1
The formula for the present value of an annuity due is:
(1 + r) × (PV of an ordinary annuity).
What is a real rate of return?
- It is a rate of return that has been adjusted for inflation. - It is a percentage change in buying power.
What is the bid price?
- It is the price at which a dealer is willing to buy securities. - It is the price an investor will receive if he or she sells a bond to a dealer.
What are some features of the OTC market for bonds?
- OTC dealers are connected electronically. - The OTC has no designated physical location.
Which of the following are true of bonds?
- They are issued by both corporations and governments. -They are normally interest-only loans.
What is a corporate bond's yield to maturity (YTM)?
- YTM is the prevailing market interest rate for bonds with similar features. - YTM is the expected return for an investor who buys the bond today and holds it to maturity.
A key difference between interest payments and dividend payments is:
- dividends are not tax deductible. - interest is tax deductible.
What are the two major forms of long-term debt?
- public issue - private issue
Which of the following are the primary as well as easy ways used to perform financial calculations today?
- spreadsheet functions - financial calculator
Time value of money tables are not as common as they once were because:
- they are available for only a relatively small number of interest rates. - it is easier to use inexpensive financial calculators instead.
Which three of the following are common shapes for the term structure of interest rates?
- upward sloping -downward sloping -humped
Which of the following methods are used to calculate present value?
-a time value of money table -an algebraic formula -a financial calculator
Which formula below represents a present value factor?
1/(1 + r)^t
To find the present value of an annuity of $100 per year for 10 years at 10 percent per year using the tables, find a present value factor of 6.1446 and multiply it by ______.
100
If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.
5%
Crossover bonds can also be called ______ bonds.
5B
As an investor in the bond market, why should you be concerned about changes in interest rates?
Changes in interest rates cause changes in bond prices.
What is a bond's current yield?
Current yield = Annual coupon payment/Price
Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12 percent compounded quarterly to an EAR?
EFFECT(0.12,4)
Which of the following is not a difference between debt and equity?
Equity is publicly traded, while debt is not.
When calculating annuity present values using a financial calculator, the_____ amount is left blank. (Enter the abbreviation only.)
FV
Using the PV, discount rate, and _____, you can determine the number of periods. (Enter abbreviation only.)
FV (future value)
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV × (1 + r)^t
True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.
False
What are municipal bonds?
bonds that have been issued by state or local governments
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a ______.
call provision
The process of accumulating interest in an investment over time to earn more interest is called ______.
compounding
A bond's _____ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders.
coupon
Calculating the present value of a future cash flow to determine its worth today is commonly called ______ valuation.
discounted cash flow (DCF)
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.
effective
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the ______ of each period.
end
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the ______ of the period.
end
A limitation of bond ratings is that they ______.
focus exclusively on default risk
