financial management test 2
Nan and Neal are twins. Nan invests 5,000 at 7 percent at age 25. Neal invests 5,000 at 7 percent at age 30. Both investments compound interest annually. Both twins retire at age 60 and neither adds funds nor withdrawals prior to retirement. Which statement is correct?
Nan will have more money than Neal at any age
Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?
interest rate risk
Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers?
pillar system
Five years ago Two Towers Inc. issued bonds that pay a 7 percent coupon. At issue these bonds were rated BBB, but today they are rated AAA. Which of the following is most likely based on this information?
the bonds carry a smaller default premium that when issued
Today you paid $361,000 for an investment that provides $13,300 a year forever. What rate of return are you earning on this investment? Assume the first payment is in one year.
3.68 percent : 13,300/361,000
One year ago, you invested $1,750. Today it is worth $1,815.48. What rate of interest did you earn?
3.74 percent
A sinking fund is managed by a trustee for which one of the following purposes?
Early bond redemption
Gugenheim, Inc. needs to finance the purchase of yet another masterpiece. To this end, the company is selling some bonds that were donated by a wealthy donor. The bonds have a 7.75 percent annual coupon. The yield to maturity is 4.275 percent and the bonds mature in 5 years. What is the market price of a $1,000 face value bond? Assume the next coupon is received in one year.
$1,153.51
Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, how much can he afford to borrow to purchase a car?
$11,697.88
Astro Burger announced today that it will begin paying annual dividends. The first dividend of $0.53 will be paid in one year. The second and third annual dividends will be $0.58 and $0.73, respectively. The forth annual dividend will be $1.03, and subsequent dividends will increase at 3.6 percent per year in perpetuity. If your required return is 10 percent, how much are you willing to pay today to buy this stock?
$13.60
A zero coupon bond with a face value of $1,000 is issued with an initial price of $630.66. The bond matures in 20 years. What is the implicit interest earned, in dollars, for the first year of the bond's life? Use semiannual compounding.
$14.71
The Great Indoors sells carpet and floor coverings. The company will pay stockholders a $0.90 quarterly dividend this afternoon. Investors anticipate that the company will increase this dividend by a constant 1.0% percent per quarter. If investors require a 20.00% annual return with quarterly compounding, what is the current stock price?
$23.62
You are borrowing $21,800 to buy a car. The terms of the loan call for monthly payments for five years at 8.25 percent interest. What is the amount of each payment?
$444.64
What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 25 annual payments?
$9417.69
While not true of common stock, preferred shares (check all that apply):
-typically don't get voting rights -get paid before bond holders in the event of bankruptcy -get to vote to elect the board of directors
While not true of common stock, preferred shares (check all that apply):
-typically don't get voting rights -represent a current liability to the company
Samson's Delights Co. common stock has an expected total return of 15.6 percent per year. The annual dividend is increasing at a constant 4.7 percent per year. The dividend yield must be:
10.90 percent
Your credit card company charges you 1.65 percent interest per month. What is the annual percentage rate on your account?
19.80 solved by 1.65 x 12
You took out a loan with an effective annual interest rate of 10 percent. What is the equivalent semi-annual (6 month) interest rate on this loan? Note: I don't want the APR, I want the EPR (the actual 6 month interest rate). What is the equivalent 18-month interest rate on this loan? Enter your answer as a percentage rounded to two decimals. Note: I don't want the APR, I want the actual 18-month interest rate.
6 month: 4.88 percent 18 month: solve by EPR = (1+ .10) ^ 1/2 - 1 (6 month) solve by EPR = (1+ .10) ^ 3/2 -1 (18 month)
The yield to maturity on a bond is currently 9.84 percent. The real rate of return is 3.29 percent. What is the rate of inflation?
6.34 percent
Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?
7.49 percent
You plan to invest $1,080 a year for 7 years at a 9 percent annually? How much will you have in 7 years? Assume the first investment is made in one year.
9936.47 solved by: 1080((1.09)^7-1))/0.09
Big Dom's Pawn Shop charges an interest rate of 26.4 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? (Do not round intermediate calcualtions. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) What is the effective annual rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
APR: 316.8 percent EAR: 1563.28 percent APR solved by .264 x 12 = 316.8 % EAR solved by (1 + 0.264) ^ 12 -1 = 1563.28%
An agent who arranges a transaction between a buyer and a seller of equity securities is called a:
broker
You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?
comparable real rate
The interest earned on both initial principal and the interest reinvested from prior periods is called
compound interest
Sam just opened a savings account paying 3.5 interest, compounded annually. After four years, the savings account will be worth 5,000. Assume there are no additional deposits or withdrawals. Given this, Sam:
could have deposited less money today and still had 5,000$ in four years if the account paid a higher rate of interest
A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?
cumulative
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?
default risk
Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:
dirty price
Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?
dirty price
Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the three years, the present value of this gift will:
increase
Interest rates that include an inflation premium are referred to as:
nominal rates
You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)
option b has a higher present value at Time 0
Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?
primary
The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:
protective covenants
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:
spread
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 icrease
which of the following statements correctly defines a time value of money relationships
time and present value are inversely related, all else held constant
A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?
two months interest
You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?
voting by proxy
