Exam 2 Flashcards
(44 cards)
define a time value of money relationship
time and present value are inversely related, all else held constant
Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for years 1 to 4 respectively. Which one of the following statements is true concerning these two projects given a positive discount rate?
Both projects have the same value at Time 0.
Both projects are ordinary annuities.
Project Y has a higher present value than Project X.
Project X has both a higher present and a higher future value than Project Y
Project X has both a higher present and a higher future value than Project Y
You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each.
Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)
Option A has the higher future value at the end of Year 3.
Option B has a higher present value at Time 0.
Option B is a perpetuity.
Option A is an annuity.
Option B has a higher present value at Time 0
An ordinary annuity is best defined as
increasing payments paid for a definitive period of time.
increasing payments paid forever.
equal payments paid at the end of regular intervals over a stated time period.
equal payments paid at the end of regular intervals over a stated time period.
A perpetuity is defined as
a limited number of equal payments paid in even time increments.
payments of equal amounts that are paid irregularly but indefinitely.
varying amounts that are paid at even intervals forever.
unending equal payments paid at equal time intervals.
unending equal payments paid at equal time intervals.
A Canadian consol is best categorized as a(n):
amortized cash flow.
annuity due.
discounted loan.
perpetuity.
perpetuity
The interest rate that is most commonly quoted by a lender is referred to as the:
annual percentage rate.
compound rate.
annual percentage rate.
The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ____ rate.
stated
discounted annual
effective annual
effective annual
Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate
effective annual
annual percentage
periodic interest
annual percentage
Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?
Annual
Semi-annual
Annual
Ana just received the semiannual payment of $35 on a bond she owns. This is called the ____ payment.
coupon
face value
discount
call premium
yield
coupon
Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:
coupon.
face value.
discount.
yield.
dirty price.
face value.
A bond’s principal is repaid on the
____ date.
coupon
yield
maturity
dirty
clean
maturity
A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42?
The bond is currently selling at a premium.
The current yield exceeds the coupon rate.
The bond is selling at par value.
The current yield exceeds the yield to maturity.
The coupon rate has increased to 7 percent.
The current yield exceeds the coupon rate.
Which one of the following applies to a premium bond?
Yield to maturity > Current yield > Coupon rate
Coupon rate = Current yield = Yield to maturity
Coupon rate > Yield to maturity > Current yield
Coupon rate < Yield to maturity < Current yield
Coupon rate > Current yield > Yield to maturity
Coupon rate > Current yield > Yield to maturity
Which one of the following relationships applies to a par value bond?
Yield to maturity > Current yield > Coupon rate
Coupon rate > Yield to maturity > Current yield
Coupon rate = Current yield = Yield to maturity
Coupon rate < Yield to maturity < Current yield
Coupon rate > Current yield > Yield to maturity
Coupon rate = Current yield = Yield to maturity
In response to a change in the market rate of interest, the price sensitivity of a bond increases as the:
coupon rate increases.
time to maturity decreases.
coupon rate decreases and the time to maturity increases.
time to maturity and coupon rate both decrease.
coupon rate and time to maturity both increase.
coupon rate decreases and the time to maturity increases.
As a bond’s time to maturity increases, the bond’s sensitivity to interest rate risk:
increases at an increasing rate.
increases at a decreasing rate.
increases at a constant rate.
decreases at an increasing rate.
decreases at a decreasing rate.
increases at a decreasing rate.
Which one of these statements is correct?
Most long-term bond issues are referred to as unfunded debt.
Bonds often provide tax benefits to issuers.
The risk of a company financially failing decreases when the company issues bonds.
All bonds are treated equally in a bankruptcy proceeding.
A debenture is a senior secured debt.
Bonds often provide tax benefits to issuers.
Callable bonds generally:
grant the bondholder the option to call the bond any time after the deferment period.
are callable at par as soon as the call-protection period ends.
are called when market interest rates increase.
are called within the first three years after issuance.
have a sinking fund provision.
have a sinking fund provision.
Protective covenants:
apply to short-term debt issues but not to long-term debt issues.
only apply to privately issued bonds.
are a feature found only in government-issued bond indentures.
only apply to bonds that have a deferred call provision.
are primarily designed to protect bondholders.
are primarily designed to protect bondholders.
Darriji Systems has 10-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
at par.
in registered form.
in street form.
as debentures.
as callable bonds.
in registered form.
What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?
Maximal growth model
Constant growth model
Capital pricing model
Realized earnings model
Realized growth model
Constant growth model
The annual dividend yield is computed by dividing ____ annual dividend by the current stock price.
this year’s
last year’s
next year’s
the past 5-year average
the next 5-year average
next year’s
