TCU FINANCE EXIT EXAM QUESTIONS & ANSWERS
Calculate the present value or future value of a lump (single) sum. - Answers - o PV =
FV / (1+i)^n
o FV = PV(1+i)^n
Find number of periods or interest rate for lump sum cash flow if given PV and FV -
Answers - Calculator time(see above relationships)
Calculate PV or FV of an annuity and of an annuity due - Answers - Remember to set
TVM: PMT:end/beginning
If solving for FV, set PV to 0
If solving for PV, set FV to 0
PMT=annual payment
FV=0 or solve for
i=market rate
PV=0 or solve for
Find PMT, interest rate, or number of payments in annuity or annuity due problem with
annual or non-annual payments - Answers - Remember to adjust for non-annual
payments
Find the PV, PMT, or interest rate for a perpetuity - Answers - Perpetuity:
PV=PMT/interest rate
Calculate the effective annual rate for an interest rate compounded more than one time
per year - Answers - o ((1+ i/n)^n) - 1
o I = stated annual interest rate
o N = number of periods
Prepare a loan amortization table - Answers - Monthly payment: Calculator: solve for
PMT using PV=principal and FV=0
Pay attention to annuity or annuity due
For each payment, multiply interest rate times remaining principle to determine interest
portion of payment. The remaining amount goes towards principle.
Understand the effect of time and interest rate on present and future values of a cash
flow - Answers - • The further out in time, the less the PV becomes
• The higher the discount rate, the lower the PV becomes
Calculate the price of a bond - Answers - o PV of interest payments
-Find annual coupon rate, or semiannual
-Find semiannual discount rate, or the bonds with similar maturities
-Multiple time to maturity by 2
, o PV of principal amount
Calculate the yield to maturity of a bond - Answers - o The yield to maturity is the
discount rate that equates the bond's current price with its stream of promised future
cash flows.
o On calculator, solve for I/Y, and then multiply by two if semiannual to get annual yield
Understand the impact of time to maturity on changes in bond prices as yield changes
(check) - Answers - o A longer term bond needs to have a higher interest rate to be
valuable due to more risk; also, as a bond approaches maturity, its price will converge
with its face value
o When interest rates rise, the price of outstanding bonds fall. When interest rates fall,
the price of outstanding bonds rise
*A change in yield produces a bigger change in a 10bond vs a 5 year note
Explain bond duration - Answers - o The weighted average period of time before the
price of a bond is repaid by its cash flows. Zero-coupon bond duration=its time to
maturity.
o Importance is that it predicts how sharply the market price of a bond will change as a
result of changes in interest rates(or other factors of volatility)
Calculate the price of preferred stock - Answers - The price of preferred stock =
preferred dividend / required return on the stock
Calculate the expected return of preferred stock (check this) - Answers - expected
return = preferred dividend/price of the preferred stock
Calculate the value of common stock using the dividend discount model, earnings
model, and firm's free cash flows. (check) - Answers - Dividend discount model: Value
of stock = Dividend per share / (Discount rate - Dividend growth rate)
Earnings model:
Free cash flows:
Calculate the expected return of common stock - Answers - - (Return x Percentage of
possibility)
- The amount one would anticipate receiving on an investment that has various known
or expected rates of return. For example, if one invested in a stock that had a 50%
chance of producing a 10% profit and a 50% chance of producing a 5% loss, the
expected return would be 2.5% (0.5 x 0.1 + 0.5 x -0.05).
Calculate the current yield (dividend yield) of stock - Answers - Current yield = dividend
/ market price of stock
Calculate the present value or future value of a lump (single) sum. - Answers - o PV =
FV / (1+i)^n
o FV = PV(1+i)^n
Find number of periods or interest rate for lump sum cash flow if given PV and FV -
Answers - Calculator time(see above relationships)
Calculate PV or FV of an annuity and of an annuity due - Answers - Remember to set
TVM: PMT:end/beginning
If solving for FV, set PV to 0
If solving for PV, set FV to 0
PMT=annual payment
FV=0 or solve for
i=market rate
PV=0 or solve for
Find PMT, interest rate, or number of payments in annuity or annuity due problem with
annual or non-annual payments - Answers - Remember to adjust for non-annual
payments
Find the PV, PMT, or interest rate for a perpetuity - Answers - Perpetuity:
PV=PMT/interest rate
Calculate the effective annual rate for an interest rate compounded more than one time
per year - Answers - o ((1+ i/n)^n) - 1
o I = stated annual interest rate
o N = number of periods
Prepare a loan amortization table - Answers - Monthly payment: Calculator: solve for
PMT using PV=principal and FV=0
Pay attention to annuity or annuity due
For each payment, multiply interest rate times remaining principle to determine interest
portion of payment. The remaining amount goes towards principle.
Understand the effect of time and interest rate on present and future values of a cash
flow - Answers - • The further out in time, the less the PV becomes
• The higher the discount rate, the lower the PV becomes
Calculate the price of a bond - Answers - o PV of interest payments
-Find annual coupon rate, or semiannual
-Find semiannual discount rate, or the bonds with similar maturities
-Multiple time to maturity by 2
, o PV of principal amount
Calculate the yield to maturity of a bond - Answers - o The yield to maturity is the
discount rate that equates the bond's current price with its stream of promised future
cash flows.
o On calculator, solve for I/Y, and then multiply by two if semiannual to get annual yield
Understand the impact of time to maturity on changes in bond prices as yield changes
(check) - Answers - o A longer term bond needs to have a higher interest rate to be
valuable due to more risk; also, as a bond approaches maturity, its price will converge
with its face value
o When interest rates rise, the price of outstanding bonds fall. When interest rates fall,
the price of outstanding bonds rise
*A change in yield produces a bigger change in a 10bond vs a 5 year note
Explain bond duration - Answers - o The weighted average period of time before the
price of a bond is repaid by its cash flows. Zero-coupon bond duration=its time to
maturity.
o Importance is that it predicts how sharply the market price of a bond will change as a
result of changes in interest rates(or other factors of volatility)
Calculate the price of preferred stock - Answers - The price of preferred stock =
preferred dividend / required return on the stock
Calculate the expected return of preferred stock (check this) - Answers - expected
return = preferred dividend/price of the preferred stock
Calculate the value of common stock using the dividend discount model, earnings
model, and firm's free cash flows. (check) - Answers - Dividend discount model: Value
of stock = Dividend per share / (Discount rate - Dividend growth rate)
Earnings model:
Free cash flows:
Calculate the expected return of common stock - Answers - - (Return x Percentage of
possibility)
- The amount one would anticipate receiving on an investment that has various known
or expected rates of return. For example, if one invested in a stock that had a 50%
chance of producing a 10% profit and a 50% chance of producing a 5% loss, the
expected return would be 2.5% (0.5 x 0.1 + 0.5 x -0.05).
Calculate the current yield (dividend yield) of stock - Answers - Current yield = dividend
/ market price of stock
