# Finance Exam 2

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### Which one of the following best defines an annuity?

a level stream of payments occurring at equal intervals of time

annuity due

perpetuity

consol

### The quoted interest rate which is expressed in terms of the interest payment made each period is called the:

stated interest rate

### The effective annual rate is defined as the interest rate that is:

expressed as if it were compounded once per year.

### The annual percentage rate is the interest rate:

charged per period multiplied by the number of periods per year.

### A pure discount loan can be defined as the:

present value of a single lump sum to be repaid at some time in the future.

### A loan which requires the borrower to pay interest each period and to pay the entire principal at some point in the future is called a(n):

interest only loan

amortized loan

### The future value of a series of cash flows over time can be computed by:

summing the future values of each of the individual cash flows.

### All else constant, the present value of a stream of equal cash flows occurring at equal intervals of time will increase when the:

II.discount rate is decreased.
III.number of time periods is increased.

payment

### The present value of an annuity considers which of the following factors?

I. the timing of each cash flow
II. the amount of each cash flow
III. the discount rate
IV. the number of cash flows

### Which one of the following is the correct formula for the present value of an ordinary annuity? double parenthesis/r

C × {{1−[1/(1+r)t]}/r}

### Which of the following will increase the value of an annuity present value interest factor?

II. a decrease in the interest rate
III. an increase in the number of time periods

### Which one of the following is an annuity but NOT a perpetuity?

\$600 on the last day of each month for two years

### An increase in the amount of an annuity payment will:

increase the future value of the annuity

### To qualify as an annuity, the cash flows must:

I. be equal in amount.
II. occur at equal intervals of time.

### Which one of the following statements is correct concerning an annuity interest rate?

The annuity interest rate is the discount rate used to find the present value of the annuity payments.

### Which one of the following statements is correct concerning the annuity interest rate?

An increase in the annuity interest rate will increase the annuity future value factor.

### Which one of the following is the correct formula for computing the future value of an annuity? X-/r

C × (Future value factor − 1) / r

### The future value of an annuity will decrease when either the:

number of periods decreases or the interest rate declines.

### You are comparing two separate investments. Each one is for a period of 10 years and pays \$2,500 a year. You require a 10 percent return on these investments. Investment A pays at the beginning of each year and investment B pays at the end of each year. Given this situation, which one of the following statements is accurate?

Investment A has both a higher present value and a higher future value than investment B.

### The difference between an ordinary annuity and an annuity due is the:

timing of the annuity payments.

### Which one of the following is an annuity due?

\$600 paid at the beginning of every quarter for five years, starting today

### Which of the following can you calculate?

I. present value of an ordinary annuity
II. present value of a perpetuity
III. future value of an annuity due

preferred stock

stated rate

### Which one of the following has the highest effective annual rate?

6 percent compounded daily

### When comparing loans of equal amounts and equal time periods, you should select the loan that has the lowest:

effective annual rate.

### A credit card has an APR of 18 percent and charges interest monthly. The effective annual rate on this account will:

be greater than 18 percent.

### Which one of the following statements is correct concerning annual percentage rates (APRs)?

The APR is equal to the monthly interest rate multiplied by 12 for a credit card that computes interest on a monthly basis.

### If two loans have same annual percentage rates, then:

the borrower might still save money by selecting one loan over the other.

### Theresa borrows \$800 today in exchange for one payment of \$1,000 five years from now. This is an example of a(n):

pure discount loan

### Phil would like to borrow some money today but not make any payments at all for three years. At the end of the three years, he would like to pay the loan in full in one lump sum payment. What type of loan should Phil request from his bank?

pure discount loan

### Licheng borrowed \$1,000 from his bank three years ago. The interest rate on the loan was 10 percent. Licheng has been paying annual payments of \$100 on this loan. This year, he must pay \$1,100 to the bank. Licheng took out a(n):

interest only loan

### Today, you borrowed \$1,000 from your bank for five years at 8 percent interest. The loan requires that you make a payment of \$80 one year from today. Based on this information, it appears that you have a(n):

interest only loan

amortized loan

amortized loan

coupon

face value

### The coupon rate is best defined as the:

annual coupon divided by the face value of a bond.

maturity

### The rate required in the market on a bond is called the:

yield to maturity

### A premium bond is a bond that:

has a market price which exceeds the face value.

discount bond

### The current yield is defined as the:

annual coupon divided by the market price.

indenture

registered

bearer

### A debenture is a(n):

unsecured debt which generally matures in ten years or more.

note

### A sinking fund is an account managed by the bond trustee for the purpose of:

redeeming bonds early.

call provision

### The call premium is the amount by which the:

call price exceeds the par value

deferred call

### A bond which an issuer is currently restricted from redeeming is referred to as a:

call protected bond

### The stipulations in a bond indenture agreement which limit the actions a firm can take while the bond issue is outstanding are called:

protective covenants.

muni

zero coupon

bid

real

nominal

### The clean price of a bond is the price:

excluding any accrued interest.

### The pure time value of money, as illustrated by the nominal interest rates on default- free, pure discount bonds, is called the:

term structure of interest rates.

### The interest rate risk premium is the compensation investors require for their assumption of the risk related to:

changes in interest rates.

yield

### The liquidity premium is the portion of a nominal interest rate that represents compensation for the:

lack of the ability to sell the bond at its fair value in a timely manner.

### A bond that is selling at par value has a:

I. market price equal to the face value.
IV. yield to maturity that equals the coupon rate.

is priced at par

### A discount bond has a yield to maturity that:

exceeds the coupon rate

### A premium bond has a coupon rate that:

exceeds the yield to maturity

### The total value of a bond is equal to the:

present value of all the future cash flows related to that bond.

### The longer the time period until the maturity of a bond, the:

less value the bond's principal has TODAY.

semi-annual

### Which one of the following bonds tends to be the most interest rate sensitive?

a 20-year, zero coupon bond

### An unexpected decrease in market interest rates will cause:

bond prices to increase and the current yield to decrease.

### The degree of sensitivity a bond has to changes in interest rates decreases the:

I. shorter the time period to maturity.
IV. higher the coupon rate.

### The current yield will increase when a bond's:

II. price decreases.
III. coupon increases.

### The current yield on a bond is most similar to the:

dividend yield on a stock

### Which one of the following comparisons between debt and equity is correct?

The creditors have first claim to the firm's assets but the stockholders are the owners.

### The indenture is a legal document which:

outlines the terms and provisions of a bond issue.

### Which of the following can generally be found in the indenture agreement?

I. description of the loan collateral
II. call provisions
IV. protective covenants

indenture

### All of the following are generally included in the indenture EXCEPT the:

yield to maturity.

### A security arrangement where all the real property of a firm is used as collateral for a bond issue is called a(n):

blanket mortgage.

common stock

debenture

sinking fund

call

### Under which of the following conditions is a bond most likely to be called?

The bond is a 20-year bond and has 3 years to maturity.

### Which of the following are positive covenants that might be found in an indenture?

I.The firm must maintain a current ratio of 1.5 or better.
III. The firm shall provide audited financial statements annually.

### Which one of the following is a positive covenant?

The firm will maintain a minimal level of net working capital.

### The general purpose of protective covenants is to help protect the:

lenders from company actions contrary to the lenders' benefit.

Baa

### A crossover bond is one which:

is rated as investment grade by one rating agency and rated as junk by another rating agency.

fallen angel.

### Bond ratings primarily help potential investors measure the likelihood that the bond issuer will:

pay both the bond interest and principal in a timely fashion

### Which one of the following statements concerning municipal bonds is correct?

Municipal bonds are generally callable.

### Which one of the following individuals is most apt to purchase a newly issued municipal bond?

a high-income, high-tax bracket executive

### Which one of the following statements is true about zero coupon bonds?

The implicit interest is taxable income to the bondholder each year.

### Which of the following are common characteristics of a floating-rate bond?

I. The bonds generally contain a put feature.
II. The coupon rate fluctuates based on an interest rate index.
III. The coupon rate generally is capped at the upper collar.

income

### A convertible bond has features of both debt and equity because:

the bond can be exchanged for shares of stock.

### The general purpose of a put bond is to give the:

bondholder the right to force the issuer to purchase the bond at a stated price.

### Which of the following are considered exotic bonds?

Cats, Corts and Pets

cat

### Which one of the following statements is correct concerning the bond markets?

Bonds are generally bought from and sold to electronically-connected dealers.

### A \$1,000 face value bond quoted as 101.23 sells for _____ and a bond quoted as 98:06 sells for:

\$1,012.30; \$981.875.

I. quoted price

### The dirty price of a bond:

is also called the full price

nominal rate.

real rate

upward sloping

downward-sloping

inflation

### A bond investor believes, based on statements made by the Federal Reserve governors, that interest rates will increase in the future. Therefore, this investor will demand a(n) _____ premium if they purchase a bond today.

interest rate risk

### The Treasury yield curve:

is based on coupon bond yields.

default risk

corporate bond

### Which one of the following is most apt to have the largest liquidity premium?

municipal bond issued by a rural city

### The stock valuation process which determines the price of a stock by dividing the next period's dividend by the discount rate less the dividend growth rate is called the:

dividend growth model

zero-growth

constant growth

### The dividends paid by the Jon Stone Co. over the past 4 years were \$.40, \$1.00, \$1.10, and \$1.13, respectively. The name given to this type of stock is:

nonconstant growth.

dividend yield

### The rate at which the value of an investment grows is called the:

capital gains yield.

common

### Cumulative voting refers to the process in which a shareholder:

MAY cast all votes for one member of the board of directors.

one at a time

proxy

dividends

preferred

primary market

secondary

### A dealer is an agent who:

buys and sells securities from inventory.

broker

member

### The persons who execute customer buy and sell orders on the floor of the NYSE are called:

commission brokers

specialist

floor brokers

SuperDOT system.

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