FIN 534 Test 3
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FIN 534 Test 3

Course Number: FIN 534, Spring 2011

College/University: Strayer

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FIN 534 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...

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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 Register to View Answerrational 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 Register to View Answersmaller 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 Register to View Answerbank 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 Register to View Answer10-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.

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