# EXAM2

### 50 terms by hima_devarapalli

#### Study  only

Flashcards Flashcards

Scatter Scatter

Scatter Scatter

## Create a new folder

### Which of the following statements regarding a 15-year (180-month) \$125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

The outstanding balance declines at a faster rate in the later years of the loan's life

### Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT

A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment

\$3,726

### Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero

Investment D pays \$2,500 at the end of 10 years (just one payment

### Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price

10-year zero coupon bond.

\$23,261
BEGIN Mode
N 3
I/YR 5.2%
PV \$0.00
PMT \$7,000
FV \$23,261

### How much would \$5,000 due in 25 years be worth today if the discount rate were 5.5%? Answer

\$1,311.17
Response Feedback: N 25
I/YR 5.5%
PMT \$0
FV \$5,000
PV \$1,311.17

### How much would \$5,000 due in 25 years be worth today if the discount rate were 5.5%? Answer

\$1,311.17
Response Feedback: N 25
I/YR 5.5%
PMT \$0
FV \$5,000
PV \$1,311.17

### You want to go to Europe 5 years from now, and you can save \$3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

\$18,369
Response Feedback: N 5
I/YR 8.5%
PV \$0.00
PMT \$3,100
FV \$18,369

T

### 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 CORRECT

The bond's expected capital gains yield is zero.

### The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

### What is the present value of the following cash flow stream at a rate of 12.0%? 0 1 2 3 4 CFs: \$0 \$1,500 \$3,000 \$4,500 \$6,000 PV of CFs: \$0 \$1,339 \$2,392 \$3,203 \$3,813

\$10,747
PV = \$10,747 Found by summing individual PVs.

F

### Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

The required rate of return would increase because the bond would then be more risky to a bondholder.

T

### Which of the following statements is CORRECT?

If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.

\$26,357.92

### Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment.

### You have a chance to buy an annuity that pays \$5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

\$22,938
Response Feedback: BEGIN Mode
N 5
I/YR 4.5%
PMT \$5,000
FV \$0.00
PV \$22,938

### Sue now has \$125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

\$240.08
Response Feedback: N 8
I/YR 8.5%
PV \$125
PMT \$0
FV \$240.08

5.80%

### Which of the following statements is CORRECT?

All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.

### Which of the following statements is CORRECT?

Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.

### Which of the following statements is CORRECT?

The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.

### At a rate of 6.5%, what is the future value of the following cash flow stream? 0 1 2 3 4 CFs: \$0 \$75 \$225 \$0 \$300 FV of CFs: \$0 \$91 \$255 \$0 \$300

\$645.80
Found by summing individual FVs

### Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

20-year, zero coupon bond.

T

T

### Which of the following statements is CORRECT?

The present value of a 3-year, \$150 annuity due will exceed the present value of a 3-year, \$150 ordinary annuity.

### Five years ago, Weed Go Inc. earned \$1.50 per share. Its earnings this year were \$3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

16.36%
Response Feedback: N 5
PV \$1.50
PMT \$0
FV \$3.20
I/YR 16.36%

F

### Which of the following statements is CORRECT?

If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.

### Suppose you inherited \$275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

\$28,532
Response Feedback: N 20
I/YR 8.25%
PV \$275,000
FV \$0.00
PMT \$28,532

T

### 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?

The PV of the \$1,000 lump sum has a smaller present value than the PV of a 3-year, \$333.33 ordinary annuity.

### Which of the following statements is CORRECT?

Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

False

4,562

2.00%

### Your subscription to Investing Wisely Weekly is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying \$85 annually, beginning immediately, or you can get a lifetime subscription for \$850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

14.33

BEGIN Mode
Interest rate (I/YR) 6.0%
Annual cost (PMT) \$85
Number of payments made (N) 14.33
What is the present value of the following cash flow stream at a rate of 8.0%?

### What is the present value of the following cash flow stream at a rate of 8.0%? 0 1 2 3 CFs: \$750 \$2,450 \$3,175 \$4,400

9,233

PV of CFs: \$750 \$2,269 \$2,722 \$3,493

PV = \$9,233 Found by summing individual PVs.
PV = \$9,233

T

2.00

### What's the future value of \$1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

1,618.62
Response Feedback: Years 5
Periods/Yr 12
Nom. I/YR 6.0%

N = Periods 60
PMT \$0
I/Period 0.5%
PV \$1,200 Could be found using a calculator, the equation, or Excel.
FV \$1,618.62 Note that we must first convert to periods and rate per period

### Inflation is expected to increase steadily over the next 10 years, there is a positive maturity risk premium on both Treasury and corporate bonds, and the real risk-free rate of interest is expected to remain constant. Which of the following statements is CORRECT?

The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities.

### A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.

\$1,400.00

6.53%

Example: