534 FIN Test 3
Question 1
Which of the
following statements
is
CORRECT?
Answer
Correct
Answer:
If a loan has a nominal annual rate of 8%, then the effective rate will never be le
than 8%.
Question 2
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
Time lines can be constructed to deal with situations where some of the cash flows
occur annually but others occur quarterly.
Question 3
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
Correct
Answer:
A rational investor would be willing to pay more for DUE than for ORD, so their
market prices should differ.
Question 4
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
Correct Answer:
The discount rate
Question 5
Your bank account
pays a 6% nominal
rate of interest. The
interest is
compounded
quarterly. Which of
the following
statements is
CORRECT?
Answer
Correct
Answer:
The periodic rate of interest is 1.5% and the effective rate of interest is greater th
6%.
Question 6
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
Time lines can be constructed where some of the payments constitute an annuity bu
others are unequal and thus are not part of the annuity.
Question 7
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
lower the calculated
value of the
investment?
Answer
Correct Answer:
The discount rate
Question 8
Which of the
following statements
regarding a 30-year
monthly payment
amortized mortgage
with a nominal
interest rate of 10% is
CORRECT?
Answer
Correct
Answer:
A smaller proportion of the last monthly payment will be interest, and a larger
proportion will be principal, than for the first monthly payment.
Question 9
Which of the
following statements
is CORRECT?
Answer
Correct Answer:
Time lines are useful for visualizing complex problems prior to doing actual cal
Question 10
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
The present value of a 3-year, $150 annuity due will exceed the present value of a
$150 ordinary annuity.
Question 11
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
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.
Question 12
Which of the
following
investments would
have the highest
future value at the
end of 10 years?
Assume that the
effective annual rate
for all investments is
the same and is
greater than zero.
Answer
Correct
Answer:
Investment A pays $250 at the
of 10 payments).
Question 13
Which of the
following statements
is CORRECT,
assuming positive
interest rates and
holding other things
constant?
Answer
Correct
Answer:
A bank loan's nominal interest rate will always be equal to or less than its effecti
annual rate.
Question 14
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
Correct
Answer:
The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-ye
$333.33 ordinary annuity.
Question 15
A U.S. bond
will Treasury 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
Correct
Answer:
The present value of the $1,000 would be smaller if interest were compounded
monthly rather than semiannually.
Question 16
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
Sinking fund provisions sometimes turn out to adversely affect bondholders, and th
likely to occur if interest rates decline after the bond has been issued.
Question 17
A 10-year bond pays
an annual coupon, its
YTM is 8%, and it
currently trades at a
premium. Which of
the following
statements is
CORRECT?
Answer
Correct
Answer:
If the yield to maturity remains at 8%, then the bonds price will decline over th
year.
Question 18
Under normal
conditions, which of
the following would
be most likely to
increase
the coupon rate
required to enable a
bond to be issued at
par?
Answer
Correct Answer:
Adding a call provision.
Question 19
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
You hold two bonds.
that pays a 6% annual coupon.
market rate rises from the current level, the zero coupon bond will experience the
percentage decline.
Question 20
A 15-year bond with
a face value of
$1,000 currently sells
for $850. Which of
the following
statements is
CORRECT?
Answer
Correct Answer:
The bonds yield to maturity is greater than its coupon rate.
Question 21
Which of the
following events
would make it more
likely that a company
would choose to call
its outstanding
callable bonds?
Answer
Correct Answer:
Market interest rates decline sharply.
Question 22
Which of the
following statements
is CORRECT?
Answer
Correct Answer:
If a coupon bond is selling at par, its current yield equals its yield to maturity.
Question 23
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
Reinvestment rate risk is lower, other things held constant, on long-term than on sho
term bonds.
Question 24
Which of the
following statements
is CORRECT?
Answer
Correct Answer:
All else equal, if a bonds yield to maturity increases, its price will fall.
Question 25
Which of the
following bonds has
the greatest interest
rate price risk?
Answer
Correct Answer:
A 10-year, $1,000 face value, zero coupon bond.
Question 26
Which of the
following statements
is CORRECT?
Answer
Correct Answer:
All else equal, senior debt generally has a lower yield to maturity than subordin
Question 27
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
Correct Answer:
The bonds expected capital gains yield is positive.
Question 28
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates
dropped to the point where r
= YTM = 5%, we could be sure that the bond would sell at a premium above its
$1,000 par value.
Question 29
A 12-year bond has
an annual coupon
rate of 9%. The
coupon rate will
remain fixed until the
bond matures. The
bond has a yield to
maturity of 7%.
Which of the
following statements
is CORRECT?
Answer
Correct
Answer:
If market interest rates remain unchanged, the bonds price one year from now wi
lower than it is today.
Which of the
following bonds
would have the
Question 30
greatest percentage
increase in value if
all interest rates fall
by 1%?
Answer
Correct Answer:
20-year, zero coupon bond.