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Finance 301 Final Exam Questions & Examples
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Terms in this set (17)
Which type of bond has a coupon rate that is equal to the market yield?
A) Par bond
B) Fixed-rate premium bond
C) Zero coupon bond
D) All bonds
E) Fixed-rate discount bond
A) Par bond
Which of the following bonds does not have reinvestment risk?
A) Fixed-rate discount bond
B) Zero coupon bond
C) Fixed-rate bond with call option
D) Fixed-rate premium bond
E) Fixed-rate par bond
B) Zero coupon bond
The risk that the issuer of a bond will not be able to repay its creditors is:
A) Default risk
B) Reinvestment risk
C) Market risk
D) Prepayment risk
E) Interest rate risk
A) Default risk
The risk that the issuer of a bond will call a bond prior to maturity is:
A) Default risk
B) Prepayment risk
C) Reinvestment risk
D) Market risk
E) Interest rate risk
B) Prepayment risk
Calculate the value of a non-callable 30-year bond with a face value of $1,000 and a coupon rate of 8% compounded semi-annually if you expect 5% yield on the bond.
A) $1,577
B) $1,464
C) $776
D) $592
E) $1,821
B) $1,464
Calculate the spread to treasuries on a 2 year corporate bond with a coupon rate of 3.25% using the following yields: 2 year treasury: 1.75% 10 year treasury: 3.0% 10 year municipal: 2.25% 30 year treasury: 4.75% Federal funds rate: 0.25%
A) 1.5%
B) 0.25%
C) 6.0%
D) 1.0%
E) 3.0%
A) 1.5%
Calculate the spread to treasuries on a 10 year corporate bond with a coupon rate of 6% using the following yields: 2 year treasury: 2.0% 10 year treasury: 3.75% 10 year municipal: 4.5% 30 year treasury: 5.25% Federal funds rate: 0.15%
A) 2.25%
B) 4.00%
C) 1.5%
D) 0.75%
E) 5.85%
A) 2.25%
Which of the following is true concerning the interest rate risk of bonds?
A) The length of maturity of a bond does not affect interest rate risk
B) The higher the coupon of a bond, the higher the interest rate risk of that bond
C) The coupon of a bond has no effect on the interest rate risk of a bond
D) The longer the maturity of a bond, the higher the interest rate risk of that bond
E) The shorter the maturity of a bond, the higher the interest rate risk of that bond
D) The longer the maturity of a bond, the higher the interest rate risk of that bond
Which of the following is true concerning the interest rate risk of bonds?
A) The shorter the maturity of a bond, the higher the interest rate risk of that bond
B) The length of maturity of a bond does not affect interest rate risk
C) The higher the coupon of a bond, the higher the interest rate risk of that bond
D) The lower the coupon of a bond, the higher the interest rate risk of that bond
E) The longer the maturity of a bond, the lower the interest rate risk of that bond
D) The lower the coupon of a bond, the higher the interest rate risk of that bond
Which of the following is true about bonds?
A) bonds are only issued by governments and municipalities
B) bonds repay the principal to the investor in semi-annual payments
C) bonds are an equity investment
D) bonds don't have default risk
E) bonds issue repayment of principal at maturity
E) bonds issue repayment of principal at maturity
A company's investment rule when using the calculated Net Present Value of a project is:
A) Invest in the project if the NPV is negative
B) Invest in the project if the NPV is positive
C) Invest in the project only if the NPV is zero
D) Invest in the project only if its NPV is higher than last year's project
E) NPV is not useful in making investment decisions
B) Invest in the project if the NPV is positive
Which of the following is TRUE regarding the calculation of NPV (Net Present Value)?
A) NPV uses both Net Income and Net Cash Flow in its calculation
B) NPV uses Net Cash Flow in its calculation rather than Net Income
C) NPV uses Net Income in its calculation rather than Net Cash Flow
D) An initial outlay of cash has no effect on NPV
E) NPV does not use Net Income or Net Cash Flow in its calculation
B) NPV uses Net Cash Flow in its calculation rather than Net Income
Which of the following is true about IRR as an investment role?
A) Invest if IRR is greater than zero
B) Invest if IRR is equal to zero
C) Invest if IRR is greater than a predetermined rate of return
D) Invest if IRR is less than a predetermined rate of return
E) Invest if IRR is equal to rate of return on treasury bills
C) Invest if IRR is greater than a predetermined rate of return
The IRR of a project is ________:
A) the maximum desired rate of return on a project
B) the discount rate that makes the NPV of an investment equal to zero
C) not used in making investment decisions
D) the discount rate that makes the NPV of an investment greater than zero
E) the discount rate that makes the NPV of an investment less than zero
B) the discount rate that makes the NPV of an investment equal to zero
What is the present value of the following stream of cash flows received at the end of each year, at a discount rate of 6.75% per year?
Year 1: 56,000
Year 2: 51,000
Year 3: 49,000
A) 137,494
B) 146,774
C) 151,188
D) 156,000
E) 128,121
A) 137,494
What is the present value of the following stream of cash flows received at the end of each year, at a discount rate of 7.85% per year?
Year 1: 36,000
Year 2: 39,000
Year 3: 43,000
A) 114,964
B) 109,130
C) 118,000
D) 101,186
E) 125,889
D) 101,186
Calculate the NPV of a project that costs 300,000 using the discount rate of 6.75%. The project is expected to generate the following cash flows:
Year 1: 110,000
Year 2: 135,000
Year 3: 195,000
Year 4: 240,000
A) 380,000
B) 266,627
C) 249,767
D) 866,283
E) 770,482
B) 266,627
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