BNAD 301 EXAM 4 QUESTIONS AND ANSWERS
calculating yield formula - CORRECT ANSWER✅✅yield = ($X/market price)^1/T - 1
calculating price formula - CORRECT ANSWER✅✅market price = $X/(1+yield)^T
calculating future value formular - CORRECT ANSWER✅✅future value = initial investment x (1+yield)^T
calculating price (many payments) formula - CORRECT ANSWER✅✅MP = X1/(1+Y)^T1 + X2/(1+Y)^T2 +...
XN/(1+Y)TN
capital - CORRECT ANSWER✅✅anything created by humans (excluding babies) that provides useful
services in the future
types of capital - CORRECT ANSWER✅✅physical, human, knowledge
investment - CORRECT ANSWER✅✅process of creating capital
depreciation - CORRECT ANSWER✅✅process by which existing capital naturally decays and loses its
value through time
present value - CORRECT ANSWER✅✅calculated from its expected stream and a hypothetical discount
rate (analogous to interest rate) using the general price/yield formula
calculating present value formula - CORRECT ANSWER✅✅PV = X0 + X1/(1+R)^T1 + X2/(1+R)^T2 +...
XN/(1+R)TN
opportunity cost of funds (OCF) - CORRECT ANSWER✅✅the rate of return that the firm could get from
the next best use of the same funds
, investment decisions using PV - CORRECT ANSWER✅✅the firm should make the investment if the PV is
positive
higher R usually reduces PV because: - CORRECT ANSWER✅✅1. negative cash flows tend to occur in
early years and positive cash flows in later years
2. higher values of R shrink the present value of every term
3. The present values of cash flows in later years are more sensitive to R
internal rate of return - CORRECT ANSWER✅✅delivering the stream of expected cash payments
present value rule - CORRECT ANSWER✅✅an investment is profitable it its present value, setting R
equal to the (risk-adjusted_ OCF, is positive
hurdle rate rule - CORRECT ANSWER✅✅an investment is profitable if its internal rate of return exceeds
the (risk-adjusted) OCF, also called the hurdle rate
risk-adjusted opportunity cost of funds - CORRECT ANSWER✅✅the rate of return that the firm could
get if it made the next best use of the same funds, with similar risk; often presents a much higher hurdle
than the unadjusted OCF
calculating internal rate of return formula - CORRECT ANSWER✅✅absolute value of X1/X0
interest rates ___, investment ____ - CORRECT ANSWER✅✅fall; rise
savings/consumption decision - CORRECT ANSWER✅✅a fundamental decision for any consumer is how
much of their wealth or income to spend on current consumption
when savings, consumers hace 3 basic choices: - CORRECT ANSWER✅✅1. buy paper assets (financial)
2.buy existing capital assets (financial)
3.create new capital (capital)
calculating yield formula - CORRECT ANSWER✅✅yield = ($X/market price)^1/T - 1
calculating price formula - CORRECT ANSWER✅✅market price = $X/(1+yield)^T
calculating future value formular - CORRECT ANSWER✅✅future value = initial investment x (1+yield)^T
calculating price (many payments) formula - CORRECT ANSWER✅✅MP = X1/(1+Y)^T1 + X2/(1+Y)^T2 +...
XN/(1+Y)TN
capital - CORRECT ANSWER✅✅anything created by humans (excluding babies) that provides useful
services in the future
types of capital - CORRECT ANSWER✅✅physical, human, knowledge
investment - CORRECT ANSWER✅✅process of creating capital
depreciation - CORRECT ANSWER✅✅process by which existing capital naturally decays and loses its
value through time
present value - CORRECT ANSWER✅✅calculated from its expected stream and a hypothetical discount
rate (analogous to interest rate) using the general price/yield formula
calculating present value formula - CORRECT ANSWER✅✅PV = X0 + X1/(1+R)^T1 + X2/(1+R)^T2 +...
XN/(1+R)TN
opportunity cost of funds (OCF) - CORRECT ANSWER✅✅the rate of return that the firm could get from
the next best use of the same funds
, investment decisions using PV - CORRECT ANSWER✅✅the firm should make the investment if the PV is
positive
higher R usually reduces PV because: - CORRECT ANSWER✅✅1. negative cash flows tend to occur in
early years and positive cash flows in later years
2. higher values of R shrink the present value of every term
3. The present values of cash flows in later years are more sensitive to R
internal rate of return - CORRECT ANSWER✅✅delivering the stream of expected cash payments
present value rule - CORRECT ANSWER✅✅an investment is profitable it its present value, setting R
equal to the (risk-adjusted_ OCF, is positive
hurdle rate rule - CORRECT ANSWER✅✅an investment is profitable if its internal rate of return exceeds
the (risk-adjusted) OCF, also called the hurdle rate
risk-adjusted opportunity cost of funds - CORRECT ANSWER✅✅the rate of return that the firm could
get if it made the next best use of the same funds, with similar risk; often presents a much higher hurdle
than the unadjusted OCF
calculating internal rate of return formula - CORRECT ANSWER✅✅absolute value of X1/X0
interest rates ___, investment ____ - CORRECT ANSWER✅✅fall; rise
savings/consumption decision - CORRECT ANSWER✅✅a fundamental decision for any consumer is how
much of their wealth or income to spend on current consumption
when savings, consumers hace 3 basic choices: - CORRECT ANSWER✅✅1. buy paper assets (financial)
2.buy existing capital assets (financial)
3.create new capital (capital)
