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FIN 534 Quiz 7 (30 questions with answers) 99,99 % Scored PLEASE DOWNLOAD HEREQuestion 1Which of the following investments would have the lowest present value?Assume that the effective annual rate for all investments is the same and isgreater than zero.AnswerInvestment A pays $250 at the end of every year for the next 10 years (a total of10 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 10years (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 (atotal of 10 payments).2 pointsQuestion 2Which of the following statements is CORRECT, assuming positive interest ratesand holding other things constant?AnswerThe present value of a 5-year, $250 annuity due will be lower than the PV of asimilar ordinary annuity.A 30-year, $150,000 amortized mortgage will have larger monthly payments thanan otherwise similar 20-year mortgage.A bank loans nominal interest rate will always be equal to or less than itseffective annual rate.
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If an investment pays 10% interest, compounded annually, its effective annualrate will be less than 10%.Banks A and B offer the same nominal annual rate of interest, but A pays interestquarterly and B pays semiannually. Deposits in Bank B will provide the higherfuture value if you leave your funds on deposit.2 pointsQuestion 3You plan to analyze the value of a potential investment by calculating the sum ofthe present values of its expected cash flows. Which of the following wouldincrease the calculated value of the investment?AnswerThe 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 eachpayment 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 arereceived in the later years and less are received in the earlier years.The discount rate increases.2 pointsQuestion 4A 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 thefollowing statements is CORRECT?AnswerThe 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 formore periods.
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The present value of the $1,000 would be smaller if interest were compoundedmonthly 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 pointsQuestion 5Which of the following statements regarding a 30-year monthly paymentamortized mortgage with a nominal interest rate of 10% is CORRECT?AnswerThe monthly payments will decline over time.A smaller proportion of the last monthly payment will be interest, and a largerproportion will be principal, than for the first monthly payment.The total dollar amount of principal being paid off each month gets smaller as theloan approaches maturity.The amount representing interest in the first payment would be higher if thenominal interest rate were 7% rather than 10%.Exactly 10% of the first monthly payment represents interest.2 pointsQuestion 6Which of the following statements is CORRECT?AnswerA time line is not meaningful unless all cash flows occur annually.Time lines are not useful for visualizing complex problems prior to doing actualcalculations.Time lines cannot be constructed in situations where some of the cash flowsoccur annually but others occur quarterly.Time lines can be constructed for annuities where the payments occur at eitherthe beginning or the end of the periods.
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Some of the cash flows shown on a time line can be in the form of annuitypayments, but none can be uneven amounts.2 pointsQuestion 7You are considering two equally risky annuities, each of which pays $5,000 peryear for 10 years. Investment ORD is an ordinary (or deferred) annuity, whileInvestment DUE is an annuity due. Which of the following statements isCORRECT?AnswerThe present value of ORD must exceed the present value of DUE, but the futurevalue of ORD may be less than the future value of DUE.The present value of DUE exceeds the present value of ORD, while the futurevalue of DUE is less than the future value of ORD.The present value of ORD exceeds the present value of DUE, and the futurevalue of ORD also exceeds the future value of DUE.The present value of DUE exceeds the present value of ORD, and the futurevalue of DUE also exceeds the future value of ORD.If the going rate of interest decreases from 10% to 0%, the difference betweenthe present value of ORD and the present value of DUE would remain constant.2 pointsQuestion 8Which of the following statements is CORRECT?AnswerThe cash flows for an ordinary (or deferred) annuity all occur at the beginning ofthe 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 regularintervals, such as once a year or once a month.
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If some cash flows occur at the beginningof the periods while others occur at the ends, then we have what the textbookdefines as a variable annuity.2 pointsQuestion 9Which of the following statements is CORRECT?AnswerThe present value of a 3-year, $150 ordinary annuity will exceed the presentvalue of a 3-year, $150 annuity due.If a loan has a nominal annual rate of 8%, then the effective rate will never beless than 8%.If a loan or investment has annual payments, then the effective, periodic, andnominal rates of interest will all be different.The proportion of the payment that goes toward interest on a fully amortized loanincreases over time.An investment that has a nominal rate of 6% with semiannual payments will havean effective rate that is smaller than 6%.2 pointsQuestion 10A $150,000 loan is to be amortized over 7 years, with annual end-of-yearpayments. Which of these statements is CORRECT?AnswerThe 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 interestrate were the same in either case, the first payment would include more dollars ofinterest under the 7-year amortization plan.The proportion of each payment that represents interest as opposed torepayment of principal would be higher if the interest rate were lower.The proportion of each payment that represents interest versus repayment ofprincipal would be higher if the interest rate were higher.
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The proportion of interest versus principal repayment would be the same for eachof the 7 payments.2 pointsQuestion 11Which of the following statements is CORRECT?AnswerA time line is not meaningful unless all cash flows occur annually.Time lines are useful for visualizing complex problems prior to doing actualcalculations.Time lines cannot be constructed in situations where some of the cash flowsoccur annually but others occur quarterly.Time lines cannot be constructed for annuities where the payments occur at thebeginning of the periods.Some of the cash flows shown on a time line can be in the form of annuitypayments, but none can be uneven amounts.2 pointsQuestion 12Which of the following statements is CORRECT, assuming positive interest ratesand holding other things constant?AnswerThe present value of a 5-year, $250 annuity due will be lower than the PV of asimilar ordinary annuity.A 30-year, $150,000 amortized mortgage will have larger monthly payments thanan otherwise similar 20-year mortgage.A bank loans nominal interest rate will always be equal to or greater than itseffective annual rate.If an investment pays 10% interest, compounded quarterly, its effective annualrate will be greater than 10%.
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Banks A and B offer the same nominal annual rate of interest, but A pays interestquarterly and B pays semiannually. Deposits in Bank B will provide the higherfuture value if you leave your funds on deposit.2 pointsQuestion 13Your bank account pays a 6% nominal rate of interest. The interest iscompounded quarterly. Which of the following statements is CORRECT?AnswerThe periodic rate of interest is 1.5% andthe effective rate of interest is 3%.The periodic rate of interest is 6% and the effective rate of interest is greater than6%.The periodic rate of interest is 1.5% and the effective rate of interest is greaterthan 6%.The periodic rate of interest is 3% and theeffective rate of interest is 6%.The periodic rate of interest is 6% and theeffective rate of interest is also 6%.2 pointsQuestion 14Which of the following statements regarding a 15-year (180-month) $125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)AnswerThe remaining balance after three years will be $125,000 less one third of theinterest paid during the first three years.Because it is a fixed-rate mortgage, the monthly loan payments (which includeboth interest and principal payments) are constant.Interest payments on the mortgage will increase steadily over time, but the totalamount of each payment will remain constant.
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The proportion of the monthly payment that goes towards repayment of principalwill 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’slife.2 pointsQuestion 15You plan to invest some money in a bank account. Which of the following banksprovides you with the highest effective rate of interest?AnswerBank 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 pointsQuestion 16Which of the following statements is CORRECT?AnswerIf the maturity risk premium were zero and interest rates were expected todecreasein the future, then the yield curve for U.S. Treasury securities would, other thingsheld 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. Treasurysecurities are due primarily to the fact that the probability of default is higher onlong-term bonds than on short-term bonds.Default risk premiums are generally lower on corporate than on Treasury bonds.
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Reinvestment rate risk is lower, other things held constant, on long-term than onshort-term bonds.2 pointsQuestion 17Which of the following statements is CORRECT?AnswerIf the Federal Reserve unexpectedly announces that it expects inflation toincrease, 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 ofthe bond.Bonds are riskier than common stocks and therefore have higher requiredreturns.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 dateapproaches, provided the bond’s required return remains constant.2 pointsQuestion 18You are considering two bonds. Bond A has a 9% annual coupon while Bond Bhas a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTMis expected to remain constant. Which of the following statements is CORRECT?AnswerThe price of Bond B will decrease over time, but the price of Bond A will increaseover time.The prices of both bonds will remain unchanged.
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The price of Bond A will decrease over time, but the price of Bond B will increaseover 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 willincrease by more.2 pointsQuestion 19Which of the following statements is NOT CORRECT?AnswerIf a bond is selling at a discount to par, its current yield will be less than its yield tomaturity.All else equal, bonds with longer maturities have more interest rate (price) riskthan 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 tomaturity.All else equal, bonds with larger coupons have greater interest rate (price) riskthan bonds with smaller coupons.2 pointsQuestion 20Assume that interest rates on 20-year Treasury and corporate bonds withdifferent ratings, all of which are noncallable, are as follows: % A = 9.64% % %
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The differences in rates among these issues were most probably causedprimarily by:AnswerReal risk-free rate differences.Tax effects.Default risk differences.Maturity risk differences.Inflation differences.2 pointsQuestion 21Which of the following statements is CORRECT?AnswerIf a bond is selling at a discount, the yield to call is a better measure of return thanthe yield to maturity.On an expected yield basis, the expected capital gains yield will always bepositive because an investor would not purchase a bond with an expected capitalloss.On an expected yield basis, the expected current yield will always be positivebecause an investor would not purchase a bond that is not expected to pay anycash 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, BondA must have a higher yield to maturity than Bond B.2 pointsQuestion 22A 10-year corporate bond has an annual coupon of 9%. The bond is currentlyselling at par ($1,000). Which of the following statements is NOT
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CORRECT?AnswerThe 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 atpar.The bond’s current yield exceeds its capital gains yield.2 pointsQuestion 23Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan wasto make the bonds non-callable. If the bonds were made callable after 5 years ata 5% call premium, how would this affect their required rate of return?AnswerBecause 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 lessrisky to a bondholder.The required rate of return would increase because the bond would then be morerisky to a bondholder.It is impossible to say without more information.2 pointsQuestion 24Which of the following statements is CORRECT?
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AnswerAll else equal, senior debt generally has a lower yield to maturity thansubordinated 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 bonds yield tomaturity.If a bond’s coupon rate exceeds its yield to maturity, then its expected return toinvestors exceeds the yield to maturity.Under our bankruptcy laws, any firm that is in financial distress will be forced todeclare bankruptcy and then be liquidated.2 pointsQuestion 25Which of the following statements is CORRECT?AnswerIf a 10-year, $1,000 par, zero coupon bond were issued at a price that gaveinvestors a 10% yield to maturity, and if interest rates then dropped to the pointwhere = 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 interestrates then dropped to the point where rd= %, we could be sure that the bond would sell at a premium above its $1,000 parvalue.Other things held constant, a corporation would rather issue noncallable bondsthan callable bonds.Other things held constant, a callable bond would have a lower required rate ofreturn than a noncallable bond.Reinvestment rate risk is worse from an investor’s standpoint than interest rateprice risk if the investor has a short investment time horizon.2 points
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Question 26Which of the following bonds would have the greatest percentage increase invalue if all interest rates fall by 1%?Answer10-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 pointsQuestion 27Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is notconvertible, is not callable, and has no sinking fund. Alternatively, Amram couldissue a 20-year bond that is convertible into common equity, may be called, andhas a sinking fund. Which of the following most accurately describes the couponrate that Amram would have to pay on the convertible, callable bond?AnswerExactly 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 pointsQuestion 28A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Whichof the following statements is CORRECT?
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AnswerThe 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 overtime.2 pointsQuestion 29Which of the following statements is CORRECT?AnswerOne advantage of a zero coupon Treasury bond is that no one who owns thebond 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 riskthan short-term bonds.If interest rates increase, all bond prices will increase, but the increase will begreater for bonds that have less interest rate risk.Relative to a coupon-bearing bond with the same maturity, a zero coupon bondhas more interest rate price risk but less reinvestment rate risk.Long-term bonds have less interest rate price risk and also less reinvestment raterisk than short-term bonds.2 pointsQuestion 30Which of the following statements is CORRECT?Answer
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A zero coupon bonds 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 apremium over par.All else equal, if a bond’s yield to maturity increases, its current yield will fall.
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