Finance Exam II

Which of the following statements is true of amortization? A. Amortization solely refers to the total value to be paid by the borrower at the end of maturity. B. The amortization schedule represents only the interest portion of the loan. C. The computation of loan amortization is wholly based on the computation of simple interest. D. The amortization schedule provides the data of equated monthly payments for which the classification of principal and interest along with unpaid principal balance is provided. D.
Which of the following statements is true of amortization?A. With an amortized loan, a periodical payment of principal portion gradually decreases over a period. B. With an amortized loan, a bigger proportion of each month’s payment goes toward interest in the early periods. C. Amortization schedule represents only the interest portion of the loan. D. The computation of loan amortization is wholly based on the computation of simple interest. B.
Which of the following statements is true about the effective annual rate (EAR)?A. The EAR is the annualized interest rate using simple interest. It ignores the interest earned on interest associated with compounding periods of less than one year. B. The effective annual interest rate (EAR) is defined as the annual growth rates that do not take compounding into account. C. The EAR is the simple interest charged per period multiplied by the number of periods per year. D. The EAR is the interest rate actually paid (or earned) after accounting for compounding. D.
The true cost of borrowing is the:A. effective annual rate. B. quoted interest rate. C. periodic rate. D. annual percentage rate. A.
Which of the following statements is true of annual percentage rate (APR)?A. The APR is the true cost of borrowing and lending. B. The APR is similar to quoted interest rate which is a simple annual rate. C. The APR calculation adjusts for the effects of compounding and, hence, the time value of money. D. The APR takes compounding into account. B.
A consol, issued by the British government to finance the Napoleonic Wars is an example of:A. an ordinary annuity. B. annuity due. C. growing annuity. D. perpetuity. D.
The effective annual rate (EAR) will equal the annual percentage rate (APR) if interest is compounded:A. annually. B. quarterly. C. daily. D. monthly. A.
The amount borrowed on a loan equals:A. compounded value of the loan payments. B. discounted value of the loan payments. C. future value of the loan payments. D. sum of the loan payments. B.
Which of the following examples represents a growing annuity?A. A share of preferred stock B. A consol C. An inflation-adjusted 25-year lease D. A 30-year mortgage C.
The future value of an annuity is typically used when analyzing:A. loan amortization schedules. B. alternative capital budgeting proposals. C. the price of common stock. D. retirement plans. D.
A modern day example of a perpetuity is a:A. corporate bond. B. share of common stock. C. treasury bond. D. share of preferred stock. D.
Suppose three investments have equal lives and multiple cash flows. A high discount rate tends to favor:A. The investment with large cash flows late.B. The investment with even cash flows.C. None of the investments since they have equal lives.D. The investment with large cash flows early. D.
Which of the following classes of securities is likely to have the lowest corporate borrowing cost?A. AAA rated bonds.B. A rated bonds.C. BB rated bonds. D. C rated bonds. E. All of the above will have the same corporate borrowing cost. A.
Which one of the following statements is NOT true?A. The largest investors in corporate bonds are life insurance companies and pension funds. B. Corporate bonds are more marketable than the securities that have higher daily trading volumes. C. Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. D. The market for corporate bonds is thin compared to the market for corporate stocks. B.
Which one of the following statements about vanilla bonds is NOT true?A. They have fixed coupon payments. B. The bond’s coupon rate is calculated as the annual coupon payment divided by the bond’s face value. C. The face value, or par value, for most corporate bonds is $1,000. D. Coupon payments are usually made quarterly. D.
Which of the following statements is true of zero coupon bonds?A. Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. B. Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. C. The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. D. All of the above are true. D.
Which of the following statements is most true about zero coupon bonds?A. They typically sell for a higher price than similar coupon bonds. B. They typically sell at a deep discount below par when they are first issued. C. They are always convertible to common stock. D. They typically sell at a premium over par when they are first issued. B.
Which one of the following statements about bond is NOT true?A. The required rate of return, or discount rate, for a bond is the market interest rate called the bond’s yield to maturity. B. The expected future cash flows are estimated using the coupons that the bond will pay and the maturity value to be received. C. The value, or price, of any asset is the future value of its cash flows. D. To compute a bond’s price, one needs to calculate the present value of the bond’s expected cash flows. C.
Which one of the following statements is true of a bond’s yield to maturity?A. The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. B. It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. C. A bond’s yield to maturity changes daily as interest rates increase or decrease. D. All of the above are true. D.
Which of the following statements is true?A. If interest rates rise, bond prices will rise. B. If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond. C. For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds. D. If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. B.
Which of the following statements is NOT true?A. The risk that the lender may not receive payments as promised is called default risk. B. Investors must pay a premium to purchase a security that exposes them to default risk. C. U.S. Treasury securities are the best proxy measure for the risk-free rate. D. All of the above are true statements. B.
Which one of the following statements is NOT true?A. Yield curves show graphically how market yields vary as term to maturity changes. B. The relationship between yield to maturity and marketability is known as the term structure of interest rates. C. As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes. D. The shape of the yield curve is not constant over time. B.
Which of the following statements is true?A. Interest rate risk premium always adds an upward bias to the slope of the yield curve. B. If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping. C. Downward-sloping yield curve is the yield curve most commonly observed. D. Downward sloping yield curves typically appear in the early to mid-period of a business expansion. A.
Realized yield is:A. the interest rate at which the future value of the actual cash flows from a bond equals the bond’s price. B. the interest rate at which the future value of the expected cash flows from a bond equals the bond’s price. C. the interest rate at which the present value of the expected cash flows from a bond equals the bond’s price. D. the interest rate at which the present value of the actual cash flows from a bond equals the bond’s price. D.
In regard to interest rate risk, short-term bonds:A. have more interest rate risk than longer-term bonds. B. and longer-term bonds have no interest rate risk because their coupon interest rates are fixed. C. have less interest rate risk than longer-term bonds. D. and longer-term bonds have the same amount of interest rate risk because their coupon interest rates are fixed. C.
If the yield curve has a positive slope:A. interest rates are expected to be lower in the future. B. interest rates are expected to be more volatile in the future. C. interest rates are expected to be unchanged in the future. D. interest rates are expected to be higher in the future. D.
A bond will sell at a premium when its coupon interest rate:A. equals the market interest rate on similar bonds. B. varies more than the market interest rate on similar bonds. C. exceeds the market interest rate on similar bonds. D. is lower than the market interest rate on similar bonds. C.
The rate used to discount a bond’s cash flow stream in bond valuation is the:A. market interest rate. B. coupon interest rate. C. risk-free rate. D. prime interest rate. A.
A benefit of a callable bond is the:A. issuer may sell it for a higher price. B. issuer may replace it with a bond that has a higher coupon rate. C. bondholder may sell it for a higher price. D. issuer may replace it with a bond that has a lower coupon rate. D.
A bond pays a coupon interest rate of 7.5 percent. The market rate on similar bonds is 8.4 percent. The bond will sell at _____.A. a discount B. book value C. a premium D. par A.
Price of a bond is calculated by:A. discounting the sum of coupon payments and principal. B. adding the present value of principal payment and the present value of coupon payments. C. subtracting the present value of principal payment from the present value of coupon payments. D. discounting the difference between the principal payment and the coupon payments. B.
The yield to maturity for a bond is:A. calculated by dividing face value of the bond by market value. B. calculated by dividing market value of the bond by its face value. C. the interest rate on the bond, relative to its face value, when it is issued. D. the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. D.

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