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##### FIN 534 Quiz 7

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FIN 534 Quiz 7;Question 1;Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.;Answer;Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).;Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).;Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).;Investment D pays $2,500 at the end of 10 years (just one payment).;Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).;2 points;Question 2;Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?;Answer;The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.;A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.;A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.;If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.;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.;2 points;Question 3;You plan to analyze the value of a potential investment 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?;Answer;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.;The discount rate decreases.;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 increases.;2 points;Question 4;A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?;Answer;The periodic interest rate is greater than 3%.;The periodic rate is less than 3%.;The present value would be greater if the lump sum were discounted back for more periods.;The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.;The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.;2 points;Question 5;Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?;Answer;The monthly payments will decline over time.;A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.;The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.;The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.;Exactly 10% of the first monthly payment represents interest.;2 points;Question 6;Which of the following statements is CORRECT?;Answer;A time line is not meaningful unless all cash flows occur annually.;Time lines are not useful for visualizing complex problems prior to doing actual calculations.;Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.;Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.;Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.;2 points;Question 7;You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?;Answer;The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.;The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.;The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.;The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.;If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.;2 points;Question 8;Which of the following statements is CORRECT?;Answer;The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.;If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.;The cash flows for an annuity due must all occur at the ends of the periods.;The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.;If some cash flows occur at the beginning;of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.;2 points;Question 9;Which of the following statements is CORRECT?;Answer;The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.;If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.;If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.;The proportion of the payment that goes toward interest on a fully amortized loan increases over time.;An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.;2 points;Question 10;A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?;Answer;The annual payments would be larger if the interest rate were lower.;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 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 each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.;The proportion of interest versus principal repayment would be the same for each of the 7 payments.;2 points;Question 11;Which of the following statements is CORRECT?;Answer;A time line is not meaningful unless all cash flows occur annually.;Time lines are useful for visualizing complex problems prior to doing actual calculations.;Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.;Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.;Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.;2 points;Question 12;Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?;Answer;The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.;A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.;A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.;If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.;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.;2 points;Question 13;Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?;Answer;The periodic rate of interest is 1.5% and;the effective rate of interest is 3%.;The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.;The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.;The periodic rate of interest is 3% and the;effective rate of interest is 6%.;The periodic rate of interest is 6% and the;effective rate of interest is also 6%.;2 points;Question 14;Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.);Answer;The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.;Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.;Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.;The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.;The outstanding balance declines at a slower rate in the later years of the loan?s life.;2 points;Question 15;You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?;Answer;Bank 1, 6.1% with annual compounding.;Bank 2, 6.0% with monthly compounding.;Bank 3, 6.0% with annual compounding.;Bank 4, 6.0% with quarterly compounding.;Bank 5, 6.0% with daily (365-day) compounding.;2 points;Question 16;Which of the following statements is CORRECT?;Answer;If the maturity risk premium were zero and interest rates were expected to decreasein the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.;Liquidity premiums are generally higher on Treasury than corporate bonds.;The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.;Default risk premiums are generally lower on corporate than on Treasury bonds.;Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.;2 points;Question 17;Which of the following statements is CORRECT?;Answer;If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.;The total yield on a bond is derived from dividends plus changes in the price of the bond.;Bonds are riskier than common stocks and therefore have higher required returns.;Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.;The market value of a bond will always approach its par value as its maturity date approaches, provided the bond?s required return remains constant.;2 points;Question 18;You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?;Answer;The price of Bond B will decrease over time, but the price of Bond A will increase over time.;The prices of both bonds will remain unchanged.;The price of Bond A will decrease over time, but the price of Bond B will increase over time.;The prices of both bonds will increase by 7% per year.;The prices of both bonds will increase over time, but the price of Bond A will increase by more.;2 points;Question 19;Which of the following statements is NOT CORRECT?;Answer;If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.;All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.;If a bond is selling at its par value, its current yield equals its yield to maturity.;If a bond is selling at a premium, its current yield will be greater than its yield to maturity.;All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.;2 points;Question 20;Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows;% A = 9.64%;% %;The differences in rates among these issues were most probably caused primarily by;Answer;Real risk-free rate differences.;Tax effects.;Default risk differences.;Maturity risk differences.;Inflation differences.;2 points;Question 21;Which of the following statements is CORRECT?;Answer;If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.;On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.;On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.;If a coupon bond is selling at par, its current yield equals its yield to maturity.;The current yield on Bond A exceeds the current yield on Bond B, therefore, Bond A must have a higher yield to maturity than Bond B.;2 points;Question 22;A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is NOT;CORRECT?;Answer;The bond?s expected capital gains yield is positive.;The bond?s yield to maturity is 9%.;The bond?s current yield is 9%.;If the bond?s yield to maturity remains constant, the bond will continue to sell at par.;The bond?s current yield exceeds its capital gains yield.;2 points;Question 23;Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?;Answer;Because of the call premium, the required rate of return would decline.;There is no reason to expect a change in the required rate of return.;The required rate of return would decline because the bond would then be less risky to a bondholder.;The required rate of return would increase because the bond would then be more risky to a bondholder.;It is impossible to say without more information.;2 points;Question 24;Which of the following statements is CORRECT?;Answer;All else equal, senior debt generally has a lower yield to maturity than subordinated debt.;An indenture is a bond that is less risky than a mortgage bond.;The expected return on a corporate bond will generally exceed the bond's yield to maturity.;If a bond?s coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.;Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.;2 points;Question 25;Which of the following statements is CORRECT?;Answer;If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where = 5%, the bond would sell at a premium over its $1,000 par value.;If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd=5 %, we could be sure that the bond would sell at a premium above its $1,000 par value.;Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.;Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.;Reinvestment rate risk is worse from an investor?s standpoint than interest rate price risk if the investor has a short investment time horizon.;2 points;Question 26;Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?;Answer;10-year, zero coupon bond.;20-year, 10% coupon bond.;20-year, 5% coupon bond.;1-year, 10% coupon bond.;20-year, zero coupon bond.;2 points;Question 27;Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond?;Answer;Exactly equal to 6%.;It could be less than, equal to, or greater than 6%.;Greater than 6%.;Exactly equal to 8%.;Less than 6%.;2 points;Question 28;A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?;Answer;The bond sells at a price below par.;The bond has a current yield greater than 8%.;The bond sells at a discount.;The bond?s required rate of return is less than 7.5%.;If the yield to maturity remains constant, the price of the bond will decline over time.;2 points;Question 29;Which of the following statements is CORRECT?;Answer;One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.;Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.;If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.;Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.;Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.;2 points;Question 30;Which of the following statements is CORRECT?;Answer;A zero coupon bond's current yield is equal to its yield to maturity.;If a bond?s yield to maturity exceeds its coupon rate, the bond will sell at par.;All else equal, if a bond?s yield to maturity increases, its price will fall.;If a bond?s yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.;All else equal, if a bond?s yield to maturity increases, its current yield will fall.

Paper#78103 | Written in 18-Jul-2015

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