FINC 315- Time Value of Money Assesment

ABC bonds have a coupon rate of 9%, pay interest semiannually, and sell at par. Each of these bonds has a market price of ______ and interest payments of______

$1,000; $45

nominal rate of interest formula

=( 1 + real rate) * (1+ rate of inflation) -1

rate of inflation formula

=(1+ nom. rate)/(1 + real rate) -1

What does the spread between the bid and asked bond prices represent?

Dealer's profit

Assume you purchase a bond with a quoted price of 98.6208 on June 30. The bond pays interest on February 1 and August 1. The invoice price you pay for this purchase will equal

Dirty Price

Which types of loan repays the interest as an annuity and the principal as a lump sum?

Interest-only loans

An upward sloping yield curve indicates

LT raters are higher than medium term rates.

A bond has a coupon rate of 6 % and matures in 10 years. The next semiannual interest payment will be paid 1 month from now. Which one of the following do you know with certainty concerning this bond?

The dirty price is higher than the clean price.

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate

a discount; higher than

The interest rate charged per period multiplied by the number of periods per year is called the

annual percentage rate

Debentures

are a claim on assets not otherwise pledged as security

Protective covenants

are primarily designed to protect bondholders from future actions of the bond issuer

You are comparing two investments, A and B, with unequal annual cash flows and varying numbers of years. Which one of these statements is correct regarding this comparison? a)If A has the higher net present value at one discount rate, then A will have the higher net present value at all other discount rates. b) If B has a higher net present value, then B will have the higher net future value at any point in time, given a stated discount rate. c)The two projects cannot be compared since their time periods differ in length. d)The project with the greater number of years will have the higher present value.

b) If B has a higher net present value, then B will have the higher net future value at any point in time, given a stated discount rate.

Which one of the following will increase the present value of a finite stream of even cash flows? Assume a positive rate of return. a)moving every cash flow one time period into the future b) decreasing the amount of each cash flow c) increasing the cash flow in year 2 by $100 and lowering the cash flow in year 3 by $100 d) moving the year 1 cash flow to year 2 e) increasing the discount rate

c) Increasing the Time 2 cash flow by $100 and lowering the Time 3 cash flow by $100

Which of the following definitions is correct? a) negative covenant: a "thou shalt" agreement b) Premium bond: bond that sells for less than face value c) Dirty price: market price, excluding accrued interest d) Call provision: issuer's right to repurchase a bond prior to maturity e) Unfunded debt: long-term corporate debt

d) Call provision: issuer's right to repurchase a bond prior to maturity.

Which of the following statements is true concerning interest rates a) stated rate =effective annual rate b) banks most apt to prefer more frequent compounding on savings accounts c) APR increases as number of compounding periods per year increases d) EAR is the rate that applies if interest were charged annually e) for any positive rate of interest, the EAR will always exceed the APR

d) EAR is the rate that applies if interest were charged annually

Which one of these statements related to the time value of money is correct? Assume a positive rate of interest: a) a dollar increases in value the further into the future it is received b) the future value of an invested dollar is inversely related to the rate of interest c) the present value of a dollar to be received in 1 year is directly related to the interest rate d) a dollar received today is more valuable than a dollar received next month e) a dollar invested today will increase in value in a linear manner if interest earned is reinvested

d) a dollar received today is more valuable than a dollar received next month

According to the Fisher effect, a decrease in the rate of inflation will

decrease the nominal rate but not affect the real rate.

The ______ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

default risk

An interest rate expressed as if it were compounded once per year is called the

effective annual rate

bond prices are quoted as a percentage of the

face value

interest rate risk ______ as the time to maturity increases

increases at a decreasing rate

Given a firm with positive annual cash flows, which one of the following will increase the current value of that firm? (1 pt)

increasing the annual growth rate of the cash flows

The written, legally binding agreement between a corporate borrower and its lenders detailing all of the terms of a bond issue is called the

indenture

Which type(s) of loan repays the interest as an annuity and the principal as a lump sum?

interest-only loans

Assume a discount bond has a few years until maturity and a positive yield. All else constant, the bond's yield to maturity is

inversely related to the bond's market price

A discount bond has a coupon rate that

is less than the bond's yield to maturity

bond ratings...

only assess the possibility of default

A deferred call provision is designed to

prohibit the calling of a bond prior to a certain date

In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?

pure discount loan

The term structure of interest rates reflects the

pure time value of money for various lengths of time.

The increase you realize in buying power as a result of owning a bond is referred to as the ______ rate of return

real

bonds backed by assets with LT payments are referred to as

securitized bonds

A convertible bond can be exchanged for

shares of company stock

Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to:

taxes and potential defaults

Which statement applies to an amortized loan that requires fixed principal payments?

the loan payments will decrease over time.

The value of a firm is best defined as

total present value of all of the firm's future cash flows

_____ bonds pay interest that is taxed only at the federal level

treasury