Finance Exam 2 Study Set

Under which of the following conditions will a future value calculated with simple interest exceed a future value calculated with compound interest at the same rate? This is not possible with positive interest rates.
The concept of compound interest refers to: investing for a multiyear period of time.
When an investment pays only simple interest, this means: interest is earned only on the original investment.
Given a set future value, which of the following will contribute to a lower present value? Less frequent discounting
Cash flows occurring in different periods should not be compared unless: the flows have been discounted to a common date.
A stream of equal cash payments lasting forever is termed: a perpetuity
Which of the following factors is fixed and thus cannot change for a specific perpetuity? Cash payment of a perpetuity
The present value of a perpetuity can be determined by: Dividing the payment by the interest rate.
Which of the following will increase the present value of an annuity, other things equal? Decreasing the interest rate
An amortizing loan is one in which: the principal balance is reduced with each payment.
Which of the following characteristics applies to the amortization of a loan such as a home mortgage? The amortization increases with each payment.
Which of the following strategies will allow real retirement spending to remain approximately equal, assuming savings of $1,000,000 invested at 8%, a 25-year horizon, and 4% expected inflation? Spend approximately $63,000 annually.
An interest rate that has been annualized using compound interest is termed the: effective annual interest rate.
What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments? The APR is lower than the annually compounded rate.
What is the APR on a loan that charges interest at the rate of 1.4% per month? 16.80%
If interest is paid m times per year, then the per-period interest rate equals the: annual percentage rate divided by m.
Other things being equal, the more frequent the compounding period, the: higher the effective annual interest rate.
An APR will be equal to an effective annual rate if: compounding occurs annually.
Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold. If inflation averaged 4% annually during the period, how would you describe his purchasing power, on average? He “beat” inflation by slightly below 2% annually.
Which of the following statements best describes the real interest rate? Real interest rates can be negative, zero, or positive.
What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence? The real cost is decreasing.
The coupon rate of a bond equals: a percentage of its face value.
Periodic receipts of interest by the bondholder are known as: coupon payments.
Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond’s: interest payments increase.
The current yield of a bond can be calculated by: dividing the annual coupon payments by the price.
A bond’s par value can also be called its: face value
A bond’s yield to maturity takes into consideration: both current yield and price changes of a bond.
The discount rate that makes the present value of a bond’s payments equal to its price is termed the: yield to maturity.
What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%? The coupon rate remains at 8%.
Which of the following is fixed (e.g., cannot change) for the life of a given bond? Coupon rate
What price will be paid for a U.S. Treasury bond with an ask price of 135:20? $1,356.25
How does a bond dealer generate profits when trading bonds? By maintaining bid prices lower than ask prices
Which of the following would not be associated with a zero-coupon bond? Current yield
Where does a “convertible bond” get its name? The option of converting into shares of common stock
Which of the following identifies the distinction between a U.S. Treasury bond and a Treasury note? Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.
Many investors may be drawn to municipal bonds because of the bonds’: exemption from federal taxes.
Assume that a bond has been owned by four different investors during its 20-year history. Which of the following is not likely to have been shared by these different owners? Yield to maturity
What happens when a bond’s expected cash flows are discounted at a rate lower than the bond’s coupon rate? The price of the bond increases.
If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond’s price will be expected to: increase over time, reaching par value at maturity.
Which of the following is correct when a bond investor’s rate of return for a particular period equals the bond’s coupon rate? The bond price remained unchanged during the period.
What is the relationship between an investment’s rate of return and its yield to maturity for an investor that does not hold a bond until maturity? There is no predetermined relationship.
If the coupon rate is lower than current interest rates, then the yield to maturity will be: higher than the coupon rate.
The yield curve depicts the current relationship between: bond yields and maturity.
When the yield curve is upward-sloping, then: short-maturity bonds yield less than long-maturity bonds.
Which of the following is correct for a bond currently selling at a premium to par? Its current yield is lower than its coupon rate.
Capital losses will automatically be the case for bond investors who buy: premium bonds.
If a bond is priced at par value, then: its coupon rate equals its yield to maturity.
The existence of an upward-sloping yield curve suggests that: interest rates will be increasing in the future.
The current yield tends to overstate a bond’s total return when the bond sells for a premium because: the bond’s price will decline each year.
The current yield tends to understate a bond’s total return when the bond sells for a discount because: the bond’s price will increase each year.
The present value of a bond is positively related with: greater perceived liquidity.
During the banking crisis of 2007-2009 the U.S. government bailed out all of the corporations except: Lehman Brothers.
Which of the following factors will change when interest rates change? The present value of a bond’s payments
The purpose of a floating-rate bond is to: offer rates adjusted to current market conditions.
Which of the following bonds would be likely to exhibit a greater degree of interest rate risk? A zero-coupon bond with 30 years until maturity
Which of the following will not happen for an investor who owns TIPS during a period of inflation? The coupon payment will increase in real terms.
Which of the following is correct concerning real interest rates? Real interest rates, if positive, indicate increased purchasing power.
An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%? The 20-year bond will decrease more in price.
Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase? Increasing interest rates; bonds sold before maturity
When market interest rates exceed a bond’s coupon rate, the bond will: sell for less than par value.
How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%? 9.20% (1.04 = 1 + nominal return/1.05)
What causes bonds to sell for a premium compared to face value? The bonds have a higher than market coupon rate.
U.S. Treasury bond yields do not contain a: default premium.
When riskier corporations issue bonds that include a default premium, the promised yield will sometimes be: greater than the actual yield.
Investors who own bonds having lower credit ratings should expect: higher default possibilities.
Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond? The CCC bond will offer a higher promised yield to maturity.
Which of the following bonds would be considered to be of investment grade? A Baa-rated bond

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