Finance test 2 conseptual
The formula for the present value of an annuity due is _____.
(1 + r) × (PV of an ordinary annuity)
is the process of paying off loans by regularly reducing the principal.
Amortization
True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.
False
Which of the following are usually included in a bond's indenture?
The total amount of bonds issued The repayment arrangements
Which of the following is the formula for the EAR?
[1 + (Quoted rate/m)]^m − 1
The federal government can raise money from financial markets to finance its deficits by ___.
issuing bonds
A bond's time to is the number of years until the face value is due to be repaid.
maturity
The concept of the time value of money is based on the principle that a dollar today is worth __________ a dollar promised at some time in the future.
more than
True or false: A fixed payment loan is most common for consumers.
True
What is a premium bond?
when a bond sells for more then face value
A is an unsecured bond, for which no specific pledge of property is made.
debenture
A firm's bond rating sheds light on its _________ risk.
default
The longer the term, the (smaller/greater) the interest rate sensitivity.
greater
Which of the following variables are required to calculate the value of a bond?
Market yield Remaining life of bond Coupon rate
Which type of amortization is most commonly used in the real world for mortgages and car loans?
Fixed payment
You may use which of the following sets of inputs together to solve for the present value of an annuity using a financial calculator?
N, I/Y, PMT, PV
A bond with a BBB rating has a ______ than a bond with an A rating.
higher risk of default
The written agreement between the corporation and the lender detailing the terms of the debt issue is the
indenture
When comparing a 1-year bond's price to a 30-year bond's price, the 1-year bond's price is relatively (sensitive/insensitive) to interest rate changes.
insensitive
The relationship between bond prices and the market rate of interest is ____.
inverse; if the market rate of interest rises, bond prices will fall
If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______ $1,000.
less than
The APR is also called the Blank______ rate and it differs from the EAR.
stated
If a $1,000 par value bond is trading at a premium, the bond is _____.
trading for more than $1,000 in the market
Semiannual compounding means that interest is paid ______ per year.
two times
What is a corporate bond's yield to maturity (YTM)?
YTM is the expected return for an investor who buys the bond today and holds it to maturity. YTM is the prevailing market interest rate for bonds with similar features.
An annuity due is a series of payments that are made ____.
at the beginning of each period
For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always ______ the APR.
larger than
The U.S. Treasuries market is the _____ in the world in terms of trading volume.
largest
The percentage rate is the interest rate charged per period multiplied by the number of periods in a year.
annual
When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically called
bonds
A growing annuity has a(n) ____.
finite number of growing cash flows
A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
infinite
In a spreadsheet loan amortization schedule, to find the principal payment each month, you subtract the from the total payment.
interest
All else equal, the longer time period you have before you will need the money, the (less/more) you will need to deposit today to have the same amount in the future.
less
Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?
r = (1000/100)(1/10) - 1
The discount rate is also called the rate of
return
C/r is the formula for the present value of a(n) ____.
perpetuity
What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?
$100{[1 - (1/(1.10)20)]/0.10}
A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?
$5,000 per bond
There is a(n) ______ relationship between market interest rates and bond values.
negative
Protective covenants are classified into two types: and covenants.
negative,positive
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%?
Enter 400 for PMT, 10 for N, and 5 for I/Y. Solve for FV.
Which of the following is the formula for the future value of an annuity?
FV = C((1+r)t−1r)
n the Excel setup of a loan amortization problem, which of the following occurs?
The payment is found using PMT(rate, nper,-pv, fv). To find the principal payment each month, you subtract the interest payment from the total payment.
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.
compounding
The idea behind ______ is that interest is earned on interest.
compounding
The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called______
compounding
A bond's rate is the stated interest payment made on a bond.
coupon
The ____ rate is the rate used to calculate the present value of the future cash flows.
discount
The rate is the rate used to calculate the present value of the future cash flows.
discount
Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.
effective
The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.
perpetuity
If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.
present
The ______ value is the current value of future cash flows discounted at the appropriate discount rate.
present
The equation that results in the Blank______ value interest factor for a single deposit is as follows: 1(1+r)t
present
The formula for the ______ value interest factor of an annuity is {1-[1/(1+r)t]r}1-[1/(1+�)�]�.
present
If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.
present value factor
Interest earned on the original principal amount invested is called _____.
simple interest
If you own corporate bonds, you will be concerned about interest rate risk as it affects ____.
the market price of the bonds
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 does a Moody's bond rating of C typically indicate?
The issuer is in default
The future value factor for a(n) is found by taking the future value factor and subtracting one, then dividing this number by the interest rate.
annuity
The present value of a(n) of C dollars per period for t periods when the rate of return or interest rate, r, is given by: C × (1 − [1/(1 + r)t]r/)
annuity
The basic present value equation is:
PV = FVt(1+r)t
Which formula shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year?
$100{[1 − (1/(1.10)3)]/0.10}
True or false: When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.
False
Which of the following is equal to an effective annual rate of 12.36 percent?
12%, compounded semiannually
Which of the following processes can be used to calculate future value for multiple cash flows?
Calculate the future value of each cash flow first and then add them up Compound the accumulated balance forward one year at a time
Which of the following should be valued using a perpetuity formula?
Cash flows from a product whose sales are expected to remain constant forever Preferred stock A consol (bond that pays interest only and does not mature)
How frequently does continuous compounding occur?
Every instant
Given the same rate of interest, more money can be earned with compound interest than with simple interest.
True
The formula for the present value interest factor for annuities is: Annuity present value factor = {1-[1/(1+r)t]}r1-[1/(1+�)�]�.
True
The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called
compounding
If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be ____.
$1,220
What is the value of a bond if the present value of interest cash flows is $200 and the present value of the par value to be received when the bond matures is $750?
$950
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
A corporate bond's yield to maturity ____.
-changes over time -can be greater than, equal to, or less than the bond's coupon rate
Assuming the interest rate offered for a 10-year investment plan is same as for a 4-year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?
10-year investment
Which of the following is a perpetuity?
A constant stream of cash flows forever
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
What is a discount bond?
Discount bonds are bonds that sell for less than the face value
True or false: A bond's value is not affected by changes in the market rate of interest.
False
True or false: The APR is always the same as the EAR.
False
True or false: There is only one way to quote interest rates.
False
Which of the following show the inputs you would use in a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%?
In your financial calculator, enter 100 for PMT, 30 for N, and 5 for I/Y. Solve for PV.
Which of the following investments would result in a higher future value?Investment A - 12% APR for 10 yearsInvestment B - 12% APR for 12 years Multiple choice question.
Investment B
Which of the following is true about a typical multiple-year bond's coupon?
It is a fixed annuity payment.
Which of the following are true about a bond's face value?
It is also known as the par value. It is the principal amount repaid at maturity.
is the term that indicates preference in position over other lenders.
Junior
What are the two major forms of long-term debt?
Public issue and privately placed
Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?
The GE bond will lose more because it has a longer maturity.
Which is the largest security market in the world in terms of trading volume?
The U.S. Treasuries market
When using a financial calculator to find the interest rate, you may use the inputs N, PMT, and PV to find I/
Y
The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______.
[1 − (1/1.1030)]/.10]
Future value is the Blank______ value of an investment at some time in the future.
cash
Calculating the present value of a future cash flow to determine its value today is called _____.
discounted cash flow valuation
An annuity is____ an annuity for which the cash flows occur at the beginning of each period.
due
The equation that results in the Blank______ value interest factor for a single deposit is as follows: (1 + r)t
future
All other things being equal, the (lower/higher) the coupon rate, the greater the interest rate risk.
lower
A zero coupon bond is a bond that ____.
makes no interest payments
Amortization is the process of paying off loans by regularly reducing the _________.
principal
The _____ rate is used to find the EAR.
quoted
An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.
semiannually
Interest earned only on the original principal amount invested is called _____ interest.
simple
In case of default:
subordinated debt holders must give preference to other specified creditors
Which of the following are common protective covenants?
the firm must maintain working capital at or above a specified level the firm must limit dividends to equity holders the firm cannot merge with any other firm
The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.
uneven
The information needed to compute a bond's yield to maturity includes the bond's , coupon rate, and maturity date. (Enter one word per blank.)
value
Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?
$402.11
Which formula below represents a present value factor?
1/(1 + r)t
You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, which of the following show the steps you will apply using a financial calculator to solve for the number of months will it take to pay off your credit card?
Enter −50 for PMT, 1,200 for PV, and 1.5 for I/Y. Solve for N.
Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?
FV = $100 × (1.10)3
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
Assume you own a bond that was issued by a blue-chip company. If the market rate of interest rises, what will happen to the value of your bond?
The bond value will fall.
You own two bonds—one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?
The bond with the 5 percent coupon rate is more sensitive.
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.
[1 − (1/1.0820)]/.08
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
Most investments involve _____ cash flows.
multiple
The two major forms of long-term debt are issue and privately placed.
public
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $100 per year for 10 years at 15%?
Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV.
The greater the number of time periods, the (smaller/greater) the impact of compounding.
Greater
Which one of the following is the most important source of risk from owning bonds?
Market interest rate fluctuations
What information is needed to compute a bond's yield-to-maturity?
Coupon rate The bond's current price Time to maturity
Because of __________ and _________, interest rates are often quoted in many different ways.
tradition; legislation
The information needed to compute a bond's yield to maturity includes the bond's , coupon rate, and maturity date.
value
Which of the following methods can be used to calculate present value?
An algebraic formula A time value of money table A financial calculator
_____value is the cash value of an investment at some time in the_____
Future,Future
Given the same APR, more frequent compounding results in _____.
higher EARs
What is an interest-only loan?
it's a loan which the borrower pays interest periodically and repays the principle when the bond matures
A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.
level
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time
one year
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
one year
The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r).
ordinary
A typical investment has a large cash (inflow/outflow) at the beginning and then a cash (inflows/outflows) for many years.
outflow,inflows
The loan balance on _ amortization loans declines so slowly because the payments are mostly interest.
partial
The loan balance on partial amortization loans declines so slowly because the ___.
payments are mostly interest
If the market rate of interest rises, the value of the bond will (fall/rise).
Fall
Which of these are required to calculate the current value of a bond?
Coupon rate Applicable market rate Par value Time remaining to maturity
You are planning to buy a CD for $1,352. You will receive $1,500 in 2 years. Which inputs will you use in a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding?
Enter −1,352 for PV, 2 for N, and 1,500 for FV. Solve for I/Y.
Which of the following is not a difference between debt and equity?
Equity is publicly traded while debt is not
Which of the following terms apply to a bond?
Par value Coupon rate Time to maturity
What are the cash flows involved in the purchase of a 5-year zero coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.
Pay $800 today and receive $1,000 at the end of 5 years
In general, if you invest for one period at an interest rate of r, your investment will grow to 1
Plus
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change.
Which of these risks is addressed by bond ratings?
default risk
What is the definition of a bond's time to maturity?
It is the number of years until the face value is due to be repaid.
For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always (smaller/larger) than the APR.
Larger
When using a financial calculator to determine the number of payments on a loan, you may use the inputs I/Y, PMT, and PV to solve for _____.
N
Which of the following is true about a growing annuity?
The cash flows grow for a finite period. The cash flows grow at a constant rate.
