Finance Chapter 2 Exam

You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

APR = 12 * ((1.16781^(1/12) -1 )) APR = .1561, or 15.61%

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ____ loan.

Amortizized

Which one of these statements is correct?

Bonds often provide tax benefits to issuers.

Tanveer preferred stock has a dividend yield of 5.2 percent. The stock is currently priced at $43.40 per share. What is the amount of the annual dividend?

C = $43.40(.052) C = $2.26

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

Compounding

Which one of the following relationships applies to a par value bond?

Coupon rate = Current yield = Yield to maturity

Which one of the following actions will increase the present value of an amount to be received sometime in the future?

Decrease the Interest Rate

Your local pawn shop lends money at an annual rate of 24 percent compounded weekly. What is the effective annual rate being charged on these loans?

EAR = (1 + .24/52)^52 − 1 EAR = .2705, or 27.05%

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years?

FV = $6,220 + ($6,220)(.11)(40) FV = $33,588

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years?

FV = $6,220 + ($6,220)(.11)(40) FV = $33,588

Claire's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much is the collection expected to be worth in 2025?

FV = 50(1.076^77) FV = 14,077.16

Assume you own a violin currently valued at $64,000. If the value increases by 2.5 percent annually, how much will the violin be worth 15 years from now?

FV = 64,000(1.025^15) FV = 92,691.08

A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42?

The current yield exceeds the coupon rate.

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Zero Coupon

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

simple interest

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

A bond has a face value of $1,000. It can be redeemed early at the issuer's discretion for $1,015, plus any accrued interest. The additional $15 is called the:

call premium

Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:

convert the bond into equity shares.

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

discount rate

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the:

yield to maturity

The process of determining the present value of future cash flows in order to know their value today is referred to as:

discounted cash flow valuation

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:

discounting

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

Callable bonds generally:

have a sinking fund provision.

Jared invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

interest on interest

A bond's principal is repaid on the ________ date.

maturity

Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the:

present value

A deferred call provision:

prohibits the bond issuer from redeeming callable bonds prior to a specified date.

If a borrower receives money today and must repay the loan in a single lump sum on a future date, the loan is called a(n) ________ loan.

pure discount

With an interest-only loan the principal is

repaid in one lump sum at the end of the loan period.