FIN 3101 Exam 1 Keen

The Fisher Effect is the relationship between three​ items: the nominal​ rate, the real​ rate, and inflation.

True

True or​ False: A simple percent change represents a change as part of the old or earlier value.

True

True or​ False: Capital losses always reduce the​ investor's rate of return.

True

True or​ False: Ceteris paribus​, as a debtor and for the same annual interest​ rate, you would prefer simple interest to compound interest.

True

True or​ False: Ceteris paribus​, bond prices move in the same direction as their coupon rates.

True

True or​ False: FVs represent the amount that an earlier amount will grow into.

True

True or​ False: For​ fixed-rate fully amortized mortgage​ loans, more of the fixed payment goes towards principal as we approach the end of the loan term.

True

True or​ False: Given the amount needed at the beginning of the retirement​ period, the annual deposits needed during the working period can be found by solving for​ "PMT" in the FVA formula.

True

True or​ False: If the top of a fraction is unchanged and the bottom of a fraction decreases by​ 5%, then the value of the whole fraction would increase by approximately​ 5%

True

True or​ False: In the period 1950​ - 1999 changes in the inflation premium was the main factor causing nominal interest rates to change.

True

True or​ False: PVs are leftward on a time line and FVs are rightward on the time line.

True

True or​ False: The Fisher Effect illustrates the positive relationship between inflation and nominal interest rates.

True

True or​ False: The penalty for spending before earning is the interest rate from the point of view of the borrower.

True

Five years​ ago, Simpson Warehouses Inc. issued twenty−five−year 10% annual coupon bonds with a​ $1,000 face value each. Since​ then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now​ 12%. Given this​ information, what is the price today for a Thompson Tarps​ bond?

$850.61

Portland Brewery Inc. recently issued 30−year ​$1,000 face​ value, 12% annual coupon bonds. The market discount rate for this bond is only​ 7%. What is the current price of this​ bond?

$1,620.45

Present value. A​ smooth-talking used-car salesman who smiles considerably is offering you a great deal on a​ "pre-owned" car. He​ says, "For only 5 annual payments of $2,800​, this beautiful 1998 Honda Civic can be​ yours." If you can borrow money at 7​%, what is the price of this​ car? Assume the payment is made at the end of each year. If you can borrow money at 7​%, what is the price of this​ car?

$11,480.55

Big House Nursery Inc. has issued 20−year $1,000 face​ value, 8% annual coupon​ bonds, with a yield to maturity of​ 10%. The current price of the bond is​ ________.

$829.73

Convert​ (a) 194.17% to a​ decimal; and​ (b) .4389 to a percent.

1.9417; 43.89%

You have​ $675 today which is enough to buy 375 bottles of Diet Pepsi. If the price of Diet Pepsi is expected to increase by​ 4% over the next​ year, what approximate nominal rate would you have to earn to be able to buy 400 bottles of Diet Pepsi next​ Year?

10.67%

If your investment doubles in 6​ 3/4 years, what approximate annual rate of return would you have​ earned? If you could earn an annual rate of​ 7.50%, approximately how long would it take for your investment to​ double?

10.67%; 9.60 years

A new CEO promises to increase company sales by​ 9% per year from its current level of​ $3,458,613 to a target level of​ $12 million. How long would it take for the new CEO to achieve his​ goal?

14 years

The Rogue Outfitters Corporation​ $1,000 par​ value, 15% annual coupon​ bonds, have 6 years remaining to maturity and are currently selling for​ $938.45. What is the​ firm's yield to maturity for these​ bonds?

16.70%

Assume a Normal distribution with an average return of​ 7% and a standard deviation of​ 2%. What is the probability of an actual return of​ (a) more than​ 11%; and​ (b) less than​ 5%?

2.5%; 16%

Solve for​ X: 7​ - (-​ 5) - 8​ = -6​ - (-​ 9) + 9​ - 2X.

4

Which Figures in Chapter 5 of our textbook illustrate the history of inflation and​ 3-month T-bill​ yields, respectively?

5.4; 5.5

Your scores on Exam​ #1 and Exam​ #2 were 82 and​ 88, respectively. Your score improved by​ _____%.

7.32%

Nominal interest rates are the sum of two major​ components: the real interest rate and the maturity premium.

False

True or False​: According to the Order of​ Operations, exponents are applied before the expression in​ parentheses, and addition and subtraction are to be completed before multiplication and division.

False

True or False​: Interest rates were high in the late 1970s and early 1980s because of unusually high default premiums.

False

True or​ False: A lump sum can be a​ one-time earlier but not a​ one-time later cash flow.

False

True or​ False: Annuities are unequal cash flows that go on for a finite period of time.

False

True or​ False: At​ maturity, investors must repay a​ bond's par value to the lender.

False

True or​ False: A​ $1,000 par value bond with an annual coupon rate of​ 10% would pay​ $100 in interest every 6 months

False

True or​ False: Ceteris​ paribus, as the frequency of compounding​ decreases, the EAR will exceed theAPR by greater and greater amounts.

False

True or​ False: Ceteris​ paribus, the FV and the number of periods are inversely related.

False

True or​ False: Compounding is the process used to find a PV.

False

True or​ False: FVs are earlier values and PVs are later values.

False

True or​ False: FVs represent what you need to invest later to have it grow into a specified earlier amount.

False

True or​ False: For a given​ mean, a larger standard deviation means that actual returns that are far from the mean are less likely to occur.

False

True or​ False: The working capital management area deals with how much of a​ firm's assets should be held in​ cash, inventory and accounts receivable.

True

True or​ False: We can find the amount needed to pay off a​ fixed-rate fully amortized mortgage loan at any point in time by solving for the PV of the remaining payments.

True

True or​ False: What is​ "discounted" from the FV is the interest part to arrive at the PV.

True

True or​ False: With compound​ interest, interest is earned every period on that​ period's starting amount.

True

True or​ False: ​ "PMT" in the PVA formula tells us the periodic mortgage payments for a​ fixed-rate fully amortized loan.

True

True or​ False: ​ We've discussed 3 different multiple cash flow patterns

True

Which of the following statements about the relationship between yield to maturity and bond prices is​ FALSE?

When interest rates go​ up, bond prices go up.

The process of​ planning, evaluating,​ selecting, and managing the financing of long−term operating projects of the company is termed​ ________.

capital budgeting

That a company chooses a new product to introduce into the market is a _____________________ ​decision, that a company chooses to sell a bond to finance the new product is a _______________ decision, and that a company sets production and inventory levels on the new product is a _________________ decision.

capital budgeting: capital structure: working capital management

When the​ ________ is less than the yield to​ maturity, the bond sells at​ a ________ the par value.

coupon​ rate; discount to

The primary goal of the financial manager is​ to:

maximize the current share price or equity value of the firm.

The __________________ is the sale of​ "used" stock in that the current owner sells it to a new owner and the proceeds go to the current​ owner, not the​ company, while the _______________________ is the market where the initial sale of common stock is made by a company and the proceeds of the sale go to the company for the newly

secondary market: primary market

Ten years ago Salmon Acqua Farming Inc. issued twenty−five−year 8% annual coupon bonds with a​ $1,000 face value each. Since​ then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now​ 7%. Given this​ information, what is the price today for such a​ bond?

​$1,091.08

You plan to buy a new car when you graduate in 2 years. The car you want currently costs​ $25,000 and car prices are expected to increase at an annual rate of​ 4% per year. What will your car cost by the time you​ graduate? Suppose you wait another 3 years after graduation to make your​ purchase?

​$27,040; $30,416

You borrow​ $200,000 for 18 years at an annual rate of​ 5.20%.. What would be your fixed QUARTERLY loan​ payment?

​$4,294

Your parents have promised you possible deposits of​ $1,050, $1,500 and​ $2,500 at the end of the next three​ years, respectively. If your parents can earn​ 6% per​ year, what size of a​ one-time deposit would they have to make today in order to keep their​ promise?

​$4,424.61

You invest​ $600 an an annual rate of​ 7% for fifteen years. How much more interest would you earn in year 11 with compound vs. simple interest and for the whole 15​ years?

​$40.62; $425.42

Your parents tell you that if you apply yourself and earn a minimum grade of B​ - in Finance​ 3101, they will reward you by depositing in your account​ $1,050 next​ year, $1,500 the following year and​ $2,500 the year after that. If you can earn an annual rate of​ 4%, how much would you have in your account immediately after your​ parents' final​ deposit?

​$5,195.68

If you borrow​ $100 today and repay with​ 6% simple interest one year from​ now, which of the following would be a correct time line​ entry?

​-$106 at year one.

Before going on a​ diet, Joe weighed 220 lbs. He now weighs 195 lbs. His weight has changed by​ _______%.

​-11.36%

A widget seller sold​ 1,035 widgets in 2007 and 687 in 2015. What was the annual rate of sales of widgets over this​ period?

​-4.99%

A fraction changes from​ 3/4 to​ 4/10. The numerator changed by​ _____%; the denominator changed by​ _____%; the value of the fraction changed by approximately​ _____%.

​33%; 150%;​ -117%

For an​ 18-year fixed payment loan for​ $200,000 with an annual interest rate of​ 5.20% and making QUARTERLY​ payments, what percent of your first payment would apply to the​ principal?

​39.45%

What is the EAR if the APR is​ 6% and compounding is​ quarterly?

​6.14%

You would like to increase your purchasing power next year by about​ 4%. If you expect prices to increase at a rate of​ 2% over the next​ year, what approximate increase would you need in your salary in order to achieve your desired increase in purchasing​ power?

6%

Present value .A​ smooth-talking used-car salesman who smiles considerably is offering you a great deal on a​ "pre-owned" car. He​ says, "For only 6 annual payments of $2,800​, this beautiful 1998 Honda Civic can be​ yours." If you can borrow money at 8​%, what is the price of this​ car? Assume the payment is made at the end of each year.

$12,944.06

Future value. Upstate University charges $17,000 a year in graduate tuition. Tuition rates are growing at 2​% each year. You plan to enroll in graduate school in six years. What is your expected graduate tuition in six years?

$19,144.76

Which rating of corporate bond yields in chapter 5 of our textbook is compared to yields on​ T-bills and​ T-bonds for the period 2000​ - 2013?

AAA

True or​ False: The YTM on a discount bond will be above its coupon rate.

True

True or​ False: You can earn a higher return by purchasing​ zero-coupon bonds at a premium.

False

True or​ False: ​ "When given the annual withdrawals desired during the retirement​ period, the FVA tells us the amount we should have accumulated by the time we begin the retirement period.

False

True or​ False: If you buy a bond at par and hold it to​ maturity, you will experience a capital gain.

False

True or​ False: In a Normal​ Distribution, there is a​ 68% chance that an actual return will exceed the average return plus one standard deviation

False

True or​ False: Premium bonds are always worth more than par value at maturity.

False

True or​ False: The EAR will always be greater than the APR.

False

True or​ False: The capital budgeting area deals with how the firm should be financed.

False

True or​ False: The goal of the corporate financial manager is to maximize the​ firm's market share.

False

True or​ False: The number of years it would take an investment to double is approximately equal to the annual interest rate divided 72.

False

True or​ False: The principal part of a fixed mortgage loan payment can be found by multiplying the periodic interest rate by the ending balance for a given period.

False

True or​ False: There are a total of 5 variables in the basic TVM​ lump-sum formulas

False

True or​ False: The​ right-hand side variables in the discount rate formula represent the 3 key factors determining stock prices.

False

True or​ False: To change a decimal value to a​ percent, divide by 100.

False

True or​ False: We can determine which​ "PMT" we're being asked to solve for by noting what the problem provides in terms of r and n

False

Future value.Upstate University charges $21,000 a year in graduate tuition. Tuition rates are growing at 3.25​% each year. You plan to enroll in graduate school in four years. What is your expected graduate tuition in four years?

$23,865.99

RadicaL CREATIONS Inc. just issued zero−coupon bonds with a par value of​ $1,000. If the bond has a maturity of 15 years and a yield to maturity of​ 10%, what is the current price of the bond assuming annual​ compounding?

$239.39

If you can earn​ 6% per​ year, how much would you have to invest today to be able to purchase the car in​ #3 in two​ years? In five​ years?

$24,066; $22,729

True or​ False: We can find the nominal interest rate by subtracting the default and maturity premiums from the sum of the real rate and inflation.

False

You deposit​ $150 at the end of each of the next 12 years earning​ 9.00% per year. What would your balance be at the end of the 12​ years?

$3,021.11

A financial planner recommends that you have accumulated​ $2.0 million by the time that you retire in 25 years. If you can earn an annual rate of return of​ 5%, how much must you invest for each of the next 25 years in order to achieve this​ goal?

$41,905

Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20−​year, 7% annual coupon bonds with a​ $1,000 par value. The firm has determined that these bonds would sell for​ $1,050 each. What is the yield to maturity for these​ bonds?

6.54%

Solve for the​ following: ​ (a) 18​ ÷ 23​ + (6​ - 2) ​ + 3 ​ = _______; and​ (b) 10​ + 1/2 ​ ÷ 1/6​ + 7​ = _______.

7.78; 20

A security that is selling for​ $3,000 and promises to pay annual interest or​ $250 forever would have an annual yield of

8.33%

What is the EAR if the APR is​ 10.52% and compounding is​ daily?

Slightly above​ 11.09%

Select the statements below which correctly describe the relationship between a company and the community within which it operates. If a company fails to maintain a good relationship with the​ community, employees may not be loyal to the company causing high turnover and increased personnel costs for recruiting and training: A. If a company fails to maintain a good relationship with the​ community, employees may not be loyal to the company causing high turnover and increased personnel costs for recruiting and training. B. If a company abuses local facilities such as​ roads, and in general does not participate in the economic advancement of the local​ community, facilities such as roads and utilities may not be repaired or modernized by the local community impacting the​ company's ability to produce a profit. Your answer is correct. C. If the firm pollutes local streams or destroys the quality of life through noise pollution or other types of​ pollution, the local community may sue the company for its damages and the best local workforce members may choose not to work for the company. Your answer is correct. D. Maintaining a good working relationship with the surrounding community is a good business practice. Your answer is correct. E. A good community relationship is embedded in the goal of maximizing current share price or the equity value of the company.

all of the above

That a company chooses a new product to introduce into the market is a ______________________ decision, that a company chooses to sell a bond to finance the new product is a __________________ decision, and that a company sets production and inventory levels on the new product is a ____________________ decision.

capital budgeting:capital structure :working capital management

Given the​ following: default premium​ = 0.50​ % pts.; inflation​ 3.75%; real rate​ = 1.25%; maturity premium​ = 1.15%​ pts., what would be the nominal​ rate?

​6.65%

For a nominal interest rate of​ 10% and inflation of​ 3%, according to the Fisher​ Effect, what would be the approximate real​ rate?

​7%