FIN 3320 exam 2
LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of the two investments?
9.38%; 10.25% A = ((1 + (0.09 / 12)) 12) - 1 = 9.38% Effective annual rate of Investment B = ((1 + (0.10 / 2)) 2) - 1 = 10.25%
Which of the following types of annuity best describes the mortgage or rent that you have to pay at the beginning of each month?
Annuity due
_____ can be negative if the value of the investment decreases during the period it is held.
Capital gains
If a stock pays a dividend of $10 and the investors need 8% return on their investment, then the investors should pay _____ for the stock.
$125
Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is closest to:
$2,314
Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. Using the equation method, what is the worth of the investment today?
$44,325
Which of the following factors will lead to an increase in interest rates?
. Federal deficit
Bill is considering investing $450 at the end of every month in a fixed income instrument. He will be receiving $27,000 at the end of 4 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment is closest to:?
11.04%
r* = real risk-free rate 4% Constant inflation premium (IP) 7% Maturity risk premium (MRP) 1% Default risk premium for AAA bonds (DRP) 3% Liquidity premium for long-term T-bonds (LP) 2% Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the rate on long-term Treasury bonds is _____.
14%
Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.)
16.0%
Assume that the real risk-free rate, r*, is 4 percent, and that inflation is expected to be 9% in Year 1, 6% in Year 2, and 4% thereafter. Also, assume that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 12%, what is the difference in the maturity risk premiums (MRPs) on the two bonds, i.e., what is MRP5 - MRP2?
2.1%
Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% in each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1% × (t - 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?
2.50%
If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, the length of time until it will take for her to accumulate $6,500 in her account is closest to:
23.02 years
You read in The Wall Street Journal that 30-day T-bills are currently yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums: Inflation premium 5% Liquidity premium 1% Maturity risk premium 2% Default risk premium 2% Based on these data, the real risk-free rate of return is:
3%.
Which of the following is the yield of a bond that offers a risk-free rate of 4% and a risk premium of 2%?
6%
Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in 8 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?
7.06%
A leading bank is coming up with an investment that pays 8 percent interest compounded semiannually. The investment's effective annual rate (EAR) is closest to:
8.16% Using your financial calculator, enter N= 2, I/Y = 4, PV = -1, PMT = 0; then solve for FV. FV = 1.0816; EAR = 1.0816 - 1.000 = 8.16 or 8.16%
Which of the following is true about the process of setting the offering price of an issue?
c. If the company is already publicly owned, the offering price will be based on the existing market price of the stock or the yield on the firm's existing bonds.
The change in the market value of an asset over some time period is called the _____.
capital gain
Zync Corporation offers a block of its securities for sale to the investment banker that submits the highest price of all interested investment bankers. This procedure is known as a _____.
competitive bid
The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.
compounding
The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.
discounting
Organizations that create various loans and investments from funds provided by depositors are known as _____.
financial intermediaries
The process by which commercial banks transform funds provided by savers into funds used by borrowers is called _____.
financial intermediation
The expenditure incurred by a company in connection with its initial public offer is called the _____.
flotation cost
If the Federal Reserve loosens money supply then:
interest rates will decrease.
If the U.S. runs a large foreign trade deficit, then the:
interest rates will increase.
The Federal Reserve purchases U.S. Treasury securities to:
loosen the money supply.
Ibiza Corporation has been investing $20,000 for the last four years in an investment scheme that is maturing at the end of the current year. It will be receiving $120,000 at the time of maturity. The $120,000 received at maturity is referred to as _____.
lump-sum amount
Zync Corporation decides that instead of simply offering a block of its debt securities for sale to the investment banker that submits the highest price, it should come up with a plan with a single investment banker. The procedure that the company has decided to follow is known as a _____.
negotiated deal
A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of payment represents a(n) _____.
ordinary annuity
An investor invested in a 10-year bond that makes a $50 coupon payment at the end of every six-month period until the bond matures. These coupon payments received by the investor can be referred to as a(an) _____.
ordinary annuity
A document describing a new security issue and the issuing company is called a(n) _____.
prospectus statement
During _____, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to increase the money supply, and as a result, interest rates decline.
recessions
A stock with a dual listing is _____.
registered to be traded in more than one capital market
The future value of an uneven cash flow stream is also referred to as its _____.
terminal value
Open market operations are operations in which:
the Federal Reserve buys or sells Treasury securities to expand or contract the U.S. money supply.
Other things constant, the larger the federal deficit,:
the higher the level of interest rates.
The difference between the issuing price of a debt or equity issue and the net proceeds of the issue received by the issuing firm is known as the _____.
underwriter's spread
A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of payment represents a(n) _____.
uneven cash flow stream
Multiple payments of different amounts over a period of time
uneven cash flows
The form of informational market efficiency that states that current market prices of securities reflect all information contained in past price movements is known as the _____.
weak-form efficiency
Andrea's opportunity cost rate is 12 percent compounded annually. The amount he must deposit in an account today if he wants to receive $2,100 at the beginning of each of the next seven years is closest to:
$10,734
Shekhar invests $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made?
$13,351.39
Adam plans to invest $1,500 today in a mutual fund. If he earns 12 percent interest compounded monthly, the amount his investment will grow to in 20 years is closest to:
$16,339
Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans. Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest compounded semiannually. The difference between the future values of the two investments if Mira's investment horizon is seven years is closest to:
$2,703.78
Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? The amount that must be deposited today is closest to:
$21,804
Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, the maximum amount he should be willing to pay for the investment today is closest to:
$23,089
If the opportunity cost rate is 8% and is compounded annually, the present value of $8,200 due to be received in 12 years is closest to:
$3,254---Present value = Future value / (1 + r)n = $8,200 / (1 + 0.08)12 = $3,254.
Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, the amount he must deposit in an account today is closest to:
$6,636
Kim has just graduated from law school. She had taken an education loan of $45,000, which now needs to be repaid in equal monthly installments over the next 6 years. The amount of the monthly loan payment, if the loan carries a simple annual interest of 5% is closest to:
$724.72 Using your financial calculator, enter N = 72, I/Y = 0.42, PV = 45,000, and FV = 0; then solve for PMT. PMT = -$725.55
Dwayne invests $4,700 in a savings account at the beginning of each of the next twelve years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth at the end of the 12th year?
$89,961.02
If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is closest to:
11.50%
Identify the form of market efficiency that proposes that all publically available information is of no use in selecting winning investments, but the investors can still make use of privately held information to earn abnormal return.
semistrong-form efficiency
Other things held constant,:
the "liquidity preference theory" would generally lead to an upward sloping yield curve
The payment of utility bills is an example of _____.
uneven cash flows
Which of the following are the correct classifications of informational efficiency?
Weak-form, semistrong-form, and strong-form
Primary markets are markets _____.
a. in which various organizations raise funds by issuing new securities
When a corporation wants to raise funds by issuing new stocks or bonds, it generally uses the services of _____.
an investment banker
The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.
annually
An annuity with payments that occur at the beginning of each period is known as a _____.
annuity due
multiple payments of the same amount over equal time periods
annuity due
Which of the following steps is a part of a company's Stage II decisions of raising capital?
Deciding whether to go for a best-efforts or underwritten issue
Which of the following terms refers to the process of converting an exchange that is a not-for-profit organization and is owned by its members, to a stock ownership organization?
Demutualization
Identify the various types of efficiencies that market efficiency refers to.
Economic efficiency and informational efficiency
Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)
Future value = Present value × (1 + r)n
_____ is the tendency of prices to increase over time.
Inflation
Treasury bills are issued by the U.S. government. In which type of financial market do outstanding, or already issued treasury bills trade?
Money market
Identify the correct expression for calculating the present value of an investment.
Present value = Future value / (1 + r)n
If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates?
Prices will decline and interest rates will rise.
Which form of informational market efficiency states that current market prices of securities reflect all pertinent information
Strong-form
If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond?
The yield on the 10-year bond is less than the yield on a 1-year bond.
Which of the following is true about financial institutions in the United States and those in other countries?
U.S. financial institutions have been much more heavily regulated as compared to their foreign counterparts with regard to expansion (branching) and the services that could be offered.
Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% in each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1% × (t - 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?
2.50%
Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. The number of months is will take her to have enough money to start college is closest to:
25.10 months
Paul wants to accumulate $14,500 in order to make the down payment for a new condo. Today he can start investing $2,500 annually in an investment account that pays 10 percent interest compounded annually. How long would it take him to have enough money to make the down payment?
4.80 years
Andrew purchased a stock for $175 and sold it for $250. If he earned a dividend income of $30, the stock's yield is:
60% 250-175=75 30=40% of 75 opposite of 40%=60%
Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3?
8%
Your uncle would like to restrict his interest rate risk and his default risk, but he would still like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle's criteria?
A AAA bond with 5 years to maturity.
Which of the following financial intermediaries operates as a not-for-profit organization?
Credit union
Which of the following steps is a part of a company's Stage I decisions of raising capital?
Deciding whether to go for a competitive bid or a negotiated deal with the investment bank
If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?
Investors expect interest rates to decrease in the future.
Which of the following statements about term life insurance is correct?
It is a relatively short-term contract that provides financial protection for a temporary period.
Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance.
N = 5, I/Y = 6, PV = -2,700
Which of the following is defined as the rate of return on the best available alternative investment of equal risk?
Opportunity cost rate
Which of the following statements is correct?
Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
Zinc Corporation, a large, well-known public company that frequently issues securities, files a master registration statement with the Securities and Exchange Commission (SEC) and then updates it with a short-form statement just prior to each individual offering. The company is making use of which of the following procedures?
Shelf registration
Which of the following financial intermediaries is also known as a savings and loan association?
Thrift institution
Which of the following is true about financial institutions in the United States and those in other countries?
U.S. financial institutions have been much more heavily regulated as compared to their foreign counterparts with regard to expansion (branching) and the services that could be offered.
A federal deficit occurs when:
a government's expenses are more than its tax revenues.
Pelican Corporation is planning to invest $12,000 for the next 8 years. It will have to pay the amount at the beginning of each year. This form of payment is known as a(n) _____.
annuity due
Mutual funds _____.
are investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds in the financial markets
A depository institution that is owned by its depositors, who are often members of a common organization or association, such as an occupation, a religious group, or a community is called a(an) _____.
credit union
When the economy is expanding too quickly and the Federal Reserve (Fed) wants to control future growth in the economy, the Fed will:
decrease the money supply.
When a business sells its stocks or bonds to investors without going through any type of intermediary or financial institution, this process is known as a(an) _____.
direct transfer
The process by which commercial banks transform funds provided by savers into funds used by borrowers is called _____.
financial intermediation
During periods of _____, the general tendency is toward higher interest rates.
inflation
The value of an asset is determined by discounting the future cash flows generated by the asset using the:
interest rate.
a single, or one-time, payment (received or made) that occurs either today or at some date in the future
lump-sum amount
William buys 20 shares of Zync Corporation at $18.5 per share. Zync pays dividend at the end of each year on the basis of profits made during the year. In its 25 years history, Zync has paid dividends every year without fail. William's initial investment and the receipt of dividend at the end of every year is referred to as _____ and _____, respectively.
lump-sum payment; uneven cash flows
