FINA 320 Exam 2 UPDATED ACTUAL Questions And Correct Answers
C
Terms in this set (86)
Adams Enterprises' noncallable bonds currently sell for 6.58%
$1,180. They have a 15-year maturity, an annual coupon of
$85, and a par value of $1,000. What is their yield to
maturity?
Taussig Corp.'s bonds currently sell for $850. They have a 7.86%
6.35% annual coupon rate and a 20-year maturity, but
they can be called in 5 years at $1,067.50. Assume that no
costs other than the call premium would be incurred to
call and refund the bonds, and also assume that the yield
curve is horizontal, with rates expected to remain at
current levels into the future. Under these conditions,
what rate of return should an investor expect to earn if he
or she purchases these bonds?
You want to quit your job and return to school for an $31,900.38
MBA degree 3 years from now, and you plan to save
$9,600 per year, beginning immediately. You will make 3
deposits in an account that pays 5.2% interest. Under
these assumptions, how much will you have 3 years from
today?
,You plan to analyze the value of a potential investment The discount rate decreases.
by calculating the sum of the present values of its
expected cash flows. Which of the following would
increase the calculated value of the investment?
The cash flows are in the form of a deferred annuity, and
they total to $100,000. You learn that the annuity lasts for
10 years rather than 5 years, hence that each payment is
for $10,000 rather than for $20,000.
Incorrect:
The discount rate increases.
The riskiness of the investment's cash flows increases.
The total amount of cash flows remains the same, but
more of the cash flows are received in the later years,
and less are received in the earlier years.
The discount rate decreases.
Suppose you borrowed $45,000 at a rate of 8.5% and $37,405.54
must repay it in 5 equal installments at the end of each of
the next 5 years. How much would you still owe at the
end of the first year, after you have made the first
payment?
Suppose you inherited $460,000 and invested it at 8.25% $44,089.62
per year. How much could you withdraw at the beginning
of each of the next 20 years?
Your uncle will sell you his bicycle shop for $235,000, $4,594.73
with "seller financing," at a 6.0% nominal annual rate. The
terms of the loan would require you to make 12 equal
end-of-month payments per year for 4 years, and then
make an additional final (balloon) payment of $50,000 at
the end of the last month. What would your equal
monthly payments be?
Which of the following statements is CORRECT regarding An amortized loan is paid back in equal monthly, quarterly, or annual payments.
amortized loans
An amortized loan is paid back in equal monthly,
quarterly, or annual payments.
An amortized loan is paid back in one lump sum payment
at the end of the borrowing period.
An amortized loan is always more expensive than a lump
sum loan.
Each payment in an amortized loan consists of interest
only.
An amortized loan is paid back in uneven amounts, based
on the terms of the loan.
Your girlfriend just won the Florida lottery. She has the 7.03%
choice of $11,100,000 today or a 20-year annuity of
$1,050,000, with the first payment coming one year from
today. What rate of return is built into the annuity?
Disregard taxes.
, Which of the following statements is CORRECT, assuming If an investment pays 10% interest, compounded quarterly, its effective annual rate
positive interest rates and holding other things constant? will be greater than 10%.
bank loan's nominal interest rate will always be equal to
or greater than its effective annual rate.
A 30-year, $150,000 amortized mortgage will have larger
monthly payments than an otherwise similar 20-year
mortgage.
Incorrect:
Banks A and B offer the same nominal annual rate of
interest, but A pays interest quarterly, and B pays
semiannually. Deposits in Bank B will provide the higher
future value if you leave your funds on deposit.
The present value of a 5-year, $250 annuity due will be
lower than the PV of a similar ordinary annuity.
If an investment pays 10% interest, compounded
quarterly, its effective annual rate will be greater than
10%.
A $150,000 loan is to be amortized over 7 years, with The proportion of each payment that represents interest versus repayment of
annual end-of-year payments. Which of these statements principal would be higher if the interest rate were higher.
is CORRECT?
The proportion of each payment that represents interest
versus repayment of principal would be higher if the
interest rate were higher.
The annual payments would be larger if the interest rate
were lower.
The proportion of each payment that represents interest
as opposed to repayment of principal would be higher if
the interest rate were lower.
The proportion of interest versus principal repayment
would be the same for each of the 7 payments.
If the loan were amortized over 10 years rather than 7
years, and if the interest rate were the same in either
case, the first payment would include more dollars of
interest under the 7-year amortization plan.
The real risk-free rate is expected to remain constant at The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.
3% in the future, a 2% rate of inflation is expected for the
next 2 years, after which inflation is expected to increase
to 4%, and there is a positive maturity risk premium that
increases with years to maturity. Given these conditions,
which of the following statements is CORRECT?
The conditions in the problem cannot all be true—they
are internally inconsistent.
The yield on a 5-year Treasury bond must exceed that on
a 2-year Treasury bond.
The yield on a 2-year T-bond must exceed that on a 5-
year T-bond.
The yield on a 7-year Treasury bond must exceed that of
a 5-year corporate bond.
The Treasury yield curve under the stated conditions
would be humped rather than have a consistent positive
or negative slope.
C
Terms in this set (86)
Adams Enterprises' noncallable bonds currently sell for 6.58%
$1,180. They have a 15-year maturity, an annual coupon of
$85, and a par value of $1,000. What is their yield to
maturity?
Taussig Corp.'s bonds currently sell for $850. They have a 7.86%
6.35% annual coupon rate and a 20-year maturity, but
they can be called in 5 years at $1,067.50. Assume that no
costs other than the call premium would be incurred to
call and refund the bonds, and also assume that the yield
curve is horizontal, with rates expected to remain at
current levels into the future. Under these conditions,
what rate of return should an investor expect to earn if he
or she purchases these bonds?
You want to quit your job and return to school for an $31,900.38
MBA degree 3 years from now, and you plan to save
$9,600 per year, beginning immediately. You will make 3
deposits in an account that pays 5.2% interest. Under
these assumptions, how much will you have 3 years from
today?
,You plan to analyze the value of a potential investment The discount rate decreases.
by calculating the sum of the present values of its
expected cash flows. Which of the following would
increase the calculated value of the investment?
The cash flows are in the form of a deferred annuity, and
they total to $100,000. You learn that the annuity lasts for
10 years rather than 5 years, hence that each payment is
for $10,000 rather than for $20,000.
Incorrect:
The discount rate increases.
The riskiness of the investment's cash flows increases.
The total amount of cash flows remains the same, but
more of the cash flows are received in the later years,
and less are received in the earlier years.
The discount rate decreases.
Suppose you borrowed $45,000 at a rate of 8.5% and $37,405.54
must repay it in 5 equal installments at the end of each of
the next 5 years. How much would you still owe at the
end of the first year, after you have made the first
payment?
Suppose you inherited $460,000 and invested it at 8.25% $44,089.62
per year. How much could you withdraw at the beginning
of each of the next 20 years?
Your uncle will sell you his bicycle shop for $235,000, $4,594.73
with "seller financing," at a 6.0% nominal annual rate. The
terms of the loan would require you to make 12 equal
end-of-month payments per year for 4 years, and then
make an additional final (balloon) payment of $50,000 at
the end of the last month. What would your equal
monthly payments be?
Which of the following statements is CORRECT regarding An amortized loan is paid back in equal monthly, quarterly, or annual payments.
amortized loans
An amortized loan is paid back in equal monthly,
quarterly, or annual payments.
An amortized loan is paid back in one lump sum payment
at the end of the borrowing period.
An amortized loan is always more expensive than a lump
sum loan.
Each payment in an amortized loan consists of interest
only.
An amortized loan is paid back in uneven amounts, based
on the terms of the loan.
Your girlfriend just won the Florida lottery. She has the 7.03%
choice of $11,100,000 today or a 20-year annuity of
$1,050,000, with the first payment coming one year from
today. What rate of return is built into the annuity?
Disregard taxes.
, Which of the following statements is CORRECT, assuming If an investment pays 10% interest, compounded quarterly, its effective annual rate
positive interest rates and holding other things constant? will be greater than 10%.
bank loan's nominal interest rate will always be equal to
or greater than its effective annual rate.
A 30-year, $150,000 amortized mortgage will have larger
monthly payments than an otherwise similar 20-year
mortgage.
Incorrect:
Banks A and B offer the same nominal annual rate of
interest, but A pays interest quarterly, and B pays
semiannually. Deposits in Bank B will provide the higher
future value if you leave your funds on deposit.
The present value of a 5-year, $250 annuity due will be
lower than the PV of a similar ordinary annuity.
If an investment pays 10% interest, compounded
quarterly, its effective annual rate will be greater than
10%.
A $150,000 loan is to be amortized over 7 years, with The proportion of each payment that represents interest versus repayment of
annual end-of-year payments. Which of these statements principal would be higher if the interest rate were higher.
is CORRECT?
The proportion of each payment that represents interest
versus repayment of principal would be higher if the
interest rate were higher.
The annual payments would be larger if the interest rate
were lower.
The proportion of each payment that represents interest
as opposed to repayment of principal would be higher if
the interest rate were lower.
The proportion of interest versus principal repayment
would be the same for each of the 7 payments.
If the loan were amortized over 10 years rather than 7
years, and if the interest rate were the same in either
case, the first payment would include more dollars of
interest under the 7-year amortization plan.
The real risk-free rate is expected to remain constant at The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.
3% in the future, a 2% rate of inflation is expected for the
next 2 years, after which inflation is expected to increase
to 4%, and there is a positive maturity risk premium that
increases with years to maturity. Given these conditions,
which of the following statements is CORRECT?
The conditions in the problem cannot all be true—they
are internally inconsistent.
The yield on a 5-year Treasury bond must exceed that on
a 2-year Treasury bond.
The yield on a 2-year T-bond must exceed that on a 5-
year T-bond.
The yield on a 7-year Treasury bond must exceed that of
a 5-year corporate bond.
The Treasury yield curve under the stated conditions
would be humped rather than have a consistent positive
or negative slope.
