Finance 3101 Exam 1

True or False: When solving for the future value of a stream of unequal cash​ flows, it is important to add together the values BEFORE applying the future value formula to determine their future value.

False

True or​ False: Capital structure decisions deal with how much a firm should hold in inventory.

False

bond price

(par value x (1/(1+r)^n) ) + (annual coupon payment x (1- (1/(1+r)^n)/r)

Rule of 72

72/r = n to double, 72/n = r to double

Effective Annual Rate (EAR)

EAR = (1+ APR/m)^m -1

Future value of an ordinary annuity

FV = PMT x (((1+r)^n) -1)/r

FV of a lump sum

FV = PV x (1+r)^n

Quality Construction Products Inc. issued​ $1,000 face value 20−year bonds five years ago. These bonds are currently selling for​ $1,218.47. From this information we can conclude that the Quality Construction Products Inc.bonds have a yield−to−maturity greater than the coupon rate on these bonds.

False

True or False: A​ "Lump Sum" would involve cash flows occurring at two or more different time periods.

False

True or False: Ceteris​ paribus​, stocks that are perceived as being riskier would have higher prices.

False

True or False: Corporations can send cash back to creditors through the repurchase of stock.

False

True or False: The EAR is about​ 6.09% if the APR is​ 6.01% and compounding is monthly.

False

True or​ False: Borrowers are investors.

False

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

False

PV of a lump sum

PV = FV x 1/(1+r)^n

True or False: Ceteris paribus​, stocks that provide cash flows sooner would have higher prices.

True

True or False: Ceteris​ paribus​, stocks that are expected to provide larger future cash flows would have higher prices.

True

True or False: Consider a two−year investment: Given a constant and positive interest​ rate, the interest earned in the second year will be greater than the interest earned in the first year​ (assuming annual​ compounding).

True

True or False: In the​ "Cycle of​ Money" we​ discussed, there were 2 major types of investors.

True

True or False: To calculate how long it would take for an earlier amount to grow into a later​ amount, we would solve the​ lump-sum Time Value of Money formula for the variable​ "n".

True

The primary goal of the financial manager is​ to

maximize the current share price or equity value of the firm

waiting period (n) of a lump sum

n = ln (FV/PV)/ln (1+r)

interest rate (r) of a lump sum

r = (FV/PV)^(1/n) -1

Periodic interest rates

r = APR/m

True or False: Quality Construction Products Inc. issued​ $1,000 face value 20−year bonds five years ago. These bonds are currently selling for​ $1,218.47. From this information we can conclude that the Quality Construction Products Inc.bonds have a yield−to−maturity greater than the coupon rate on these bonds.

False

True or False: The coupon payment for an annual−coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond.

False

True or False: The discounting process adds the interest part to the future value to arrive at the present value.

False

True​ or​ False: With compound​ interest, interest is earned every period on only the original starting amount.

False

Calculating PMT from PV

PMT = PV/ (1-(1/(1+r)^n)/r)

True or False​:The variable​ "n" in the annuity formulas represents the number of​ "PMT"s.

True

annual coupon payment for bond prices

(par value x annual coupon rate)/(# of payments/yr)

True or​ False: For compounding periods more frequent than once a​ year, the APR will exceed the EAR.

False

True or​ False: Nominal interest rates are purchasing power rates.

False

True or​ False: Nominal interest rates can be viewed as the sum of the real rate and inflation premium minus the sum of the default and maturity premiums.

False

True or​ False: The maturity premium protects lenders from the risk that borrowers​ won't repay the loan as agreed.

False

True or​ False: The present value of an annuity is used in the formula to find the price of a​ zero-coupon bond.

False

True or​ False: The price of a multiple​ coupon-paying bond is equal to the PV of an uneven stream of multiple cash flows plus the PV of its par value.

False

True or​ False: The primary goal of corporate financial managers is to maximize a​ firm's profits.

False

True or​ False: To find the amount needed at the beginning of your retirement period that would enable you to make desired annual withdrawals from your​ account, you would solve for​ "PMT" in the FVA formula.

False

True or​ False: We can use the​ "Rate" function in Excel to find a​ bond's precise YTM and the​ "FV" function in Excel to find a​ bond's price.

False

​True​ or​ False​: At an annual growth rate of​ 5%, the approximate time it would take for an amount to double could be found by dividing 5 by 72.

False

​​True​ or​ False​: There is an inverse relationship between the present value and the discount​ rate, meaning that they move in the same direction.

False

Present Value of an Ordinary Annuity

PV = PMT x (1-(1/(1+r)^n)/r)

Perpetuity PV

PV = PMT/r

True or​ False: A​ bond's current yield represents its annual coupon payment as a percent of its current price.

True

True or​ False: Ceteris paribus​, the higher the inflation​ rate, the lower the real rate.

True

True or​ False: Lenders buy bonds.

True

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

True

True or​ False: The process used to find the precise YTM on a multiple​ coupon-paying bond is​ trial-and-error.

True

True or​ False: We can use the basic discount rate formula from chapter 3 to find the precise YTM on a​ zero-coupon bond.

True

True​ or​ False​: Capital budgeting decisions deal with into which​ long-term assets the firm should invest.

True

True​ or​ False​: Ceteris paribus​, as a​ lender, you would prefer compound interest over simple interest.

True

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

r for bond prices

r = YTM/m

The movement of money from lender to borrower and back again is known as​ ________.

the cycle of money

True or False: Present values are earlier values that appear rightward on a time line and future values are later values that appear leftward on a time line.

False

True or False: There are 3 basic Time Value of Money formulas covered in chapter 3 of our text.

False

True or False: The​ "Cycle of​ Money" we discuss deals with how investors borrow money from a corporation.

False

True or False​: Once you determine that you are solving for the​ "PMT" variable, the appropriate formula to use is determined by the values of ​ "r" and​ "n".

False

True or False​: The interest rate is viewed as a penalty from the perspective of the lender.

False

True or False​: To find the loan amount for a​ fixed-rate fully-amortized​ loan, solve for​ "PMT" in the PVA formula.

False

True or False​: With the PVA and PVP​ formulas, if the first​ "PMT" you use is for the end of period​ 8, then the formula will give you the value as of the end of period 9.

False

True or False​:The simple FV formula is to be used to solve for the PV of an uneven stream of cash flows.

False

True or​ False: Ceteris paribus​, Ba-rated bonds would have lower interest rates than would​ A-rated bonds.

False

True or​ False: To find the​ "PMT" in the FVA or PVA​ formulas, we calculate the value in the bracket and then multiply it by the FVA or PVA.

False

True or False​: Perpetuities are like annuities that go on forever.

True

True or False​: When solving for the FV of an uneven stream of cash​ flows, the appropriate exponents go down as you go from left to right on the time line of those cash flows

True