Which of the following statements is CORRECT?\t\u00a0\t1) \ufffd A time line is not meaningful unless all cash flows occur annually\t2) \ufffd Time lines are useful for visualizing complex problems prior to doing actual calculations\t3) \ufffd Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly\t4) \ufffd Time lines can only be constructed for annuities where the payments occur at the ends of the periods, i.e., for ordinary annuities\t5) \ufffd Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity\t\u00a0\t\u00a0\t2. \ufffd Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?\t1) \ufffd The monthly payments will decline over time.\t2) \ufffd A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment\t3) \ufffd The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity\t4) \ufffd The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.\t5) \ufffd Exactly 10% of the first monthly payment represents interest\t\u00a0\t\u00a0\t3. \ufffd A Treasury bond promises to pay a lump sum of $1,000 exactly 3 years from today.\u00a0 The nominal interest rate is 6%, semiannual compounding.\u00a0 Which of the following statements is CORRECT?\t1) \ufffd The periodic interest rate is greater than 3%\t2) \ufffd The periodic rate is less than 3%\t3) \ufffd The present value would be greater if the lump sum were discounted back for more periods\t4) \ufffd The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually\t5) \ufffd The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity\t\u00a0\t\u00a0\t4. \ufffd You are analyzing the value of a potential investment by calculating the sum of the present values of its expected cash flows.\u00a0 Which of the following would lower the calculated value of the investment?\t1) \ufffd The cash flows are in the form of a deferred annuity, and they total to $100,000.\u00a0 You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000\t2) \ufffd The discount rate increases\t3) \ufffd The riskiness of the investment’s cash flows decreases\t4) \ufffd The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years\t5) \ufffd The discount rate decreases\t\u00a0\t\u00a0\t\u00a0\t5. \ufffd You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years.\u00a0 Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.\u00a0 Which of the following statements is CORRECT?\t1) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.\t2)\u00a0 The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.\t3) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.\t4) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.\t5) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.\t\u00a0\t\u00a0\t6. \ufffd \u00a0Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?\t1) \ufffd The monthly payments will decline over time\t2) \ufffd A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment\t3) \ufffd The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.\t4) \ufffd The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%\t5) \ufffd Exactly 10% of the first monthly payment represents interest\t\u00a0\t\u00a0\t7. \ufffd A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments.\u00a0 Which of these statements is CORRECT?\t1) \ufffd The annual payments would be larger if the interest rate were lower.\t2) \ufffd If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.\t3) \ufffd The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.\t4) \ufffd The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.\t5) \ufffd The proportion of interest versus principal repayment would be the same for each of the 7 payments.\t\u00a0\t\u00a0\t8. \ufffd Which of the following statements is CORRECT?\t1) \ufffd A time line is not meaningful unless all cash flows occur annually.\t2) \ufffd Time lines are not useful for visualizing complex problems prior to doing actual calculations.\t3) \ufffd Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.\t4) \ufffd Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.\t5) \ufffd 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.\t\u00a0\t9. \ufffd Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.\t1) \ufffd Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).\t2) \ufffd Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).\t3) \ufffd Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).\t4) \ufffd Investment D pays $2,500 at the end of 10 years (just one payment).\t5) \ufffd Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).\t\u00a0\t10.\u00a0 Which of the following statements is CORRECT?\tThe present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.\tIf a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.\tIf a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.\tThe proportion of the payment that goes toward interest on a fully amortized loan increases over time.\tAn investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%\t\u00a0\t\u00a0\t11.\u00a0 Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT?\u00a0 (Ignore taxes and transactions costs.)\t1) \ufffd The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.\t2) \ufffd Because the outstanding balance declines over time, the monthly payments will also decline over time.\t3) \ufffd Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.\t4) \ufffd The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.\t5) \ufffd The outstanding balance declines at a faster rate in the later years of the loan’s life\t\u00a0\t\u00a0\t12.\u00a0 Which of the following bank accounts has the highest effective annual return?\t1) \ufffd An account that pays 8% nominal interest with monthly compounding\t2) \ufffd An account that pays 8% nominal interest with annual compounding.\t3) \ufffd An account that pays 7% nominal interest with daily (365-day) compounding\t4) \ufffd An account that pays 7% nominal interest with monthly compounding\t5) \ufffd An account that pays 8% nominal interest with daily (365-day) compounding\t\u00a0\t\u00a0\t13.\u00a0 A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.\u00a0 The nominal interest rate is 6%, semiannual compounding.\u00a0 Which of the following statements is CORRECT?\t1) \ufffd The periodic interest rate is greater than 3%.\t2) \ufffd The periodic rate is less than 3%.\t3) \ufffd The present value would be greater if the lump sum were discounted back for more periods.\t4) \ufffd The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.\t5) \ufffd The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.\t\u00a0\t\u00a0\t14.\u00a0 Which of the following statements is CORRECT?\t1) \ufffd If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.\t2) \ufffd If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.\t3) \ufffd To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.\t4) \ufffd If you solve for I and get a negative number, then you must have made a mistake.\t5) \ufffd If CF0 is positive and all the other CFs are negative, then you cannot solve for I.\t\u00a0\t\u00a0\t15.\u00a0 You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years.\u00a0 Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.\u00a0 Which of the following statements is CORRECT?\t1)\u00a0 The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.\t2)\u00a0\u00a0 The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.\t3)\u00a0\u00a0 The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.\t4)\u00a0\u00a0 The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.\t5)\u00a0\u00a0 If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.\t\u00a0\t\u00a0\t16.\u00a0 Amram Inc. can issue a 20-year bond with a 6% annual coupon.\u00a0 This bond is not convertible, is not callable, and has no sinking fund.\u00a0 Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund.\u00a0 Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond?\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t1.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tExactly equal to 6%.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t2.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tIt could be less than, equal to, or greater than 6%.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t3.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tGreater than 6%.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t4.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tExactly equal to 8%.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t5.\t\t\t\t\t\t\t\t\t\t\t\t\t\t\tLess than 6%.\t\t\t\t\t\t\t\u00a0\t\u00a0\t17.\u00a0 A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.\u00a0 Which of the following statements is CORRECT?\t1 The bond has a current yield greater than 8 percent.\t2 The bond sells at a price above par.\t3. If the yield to maturity remains constant, the price of the bond is expected to fall over time.\t4. Statements b and c are correct.\t5 All of the statements above are correct.\t\u00a0\t\u00a0\t \ufffd\u00a0\u00a0 18.\u00a0 Which of the following bonds has the greatest interest rate price risk?\t1)\u00a0 A 10-year $100 annuity.\t2)\u00a0 All 10-year bonds have the same price risk since they have the same maturity.\t3)\u00a0 A 10-year, $1,000 face value, zero coupon bond.\t4)\u00a0 A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.\t5)\u00a0 A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments\t\u00a0\t\u00a0\t19.\u00a0 Which of the following statements is CORRECT?\tA time line is not meaningful unless all cash flows occur annually.\t\u00a0Time lines are not useful for visualizing complex problems prior to doing actual calculations.\tTime lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.\t\u00a0Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.\t\u00a0Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.\t\u00a0\t20.\u00a0 Which of the following statements is CORRECT?\tAll else equal, senior debt generally has a lower yield to maturity than subordinated debt.\tAn indenture is a bond that is less risky than a mortgage bond.\tThe expected return on a corporate bond will generally exceed the bond’s yield to maturity.\tIf a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.\tUnder our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.\t\u00a0\t21.\u00a0 A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?\t1. The bond’s yield to maturity is greater than its coupon rate.\t2. If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.\t3. The bond’s current yield is equal to its coupon rate.\t4. The bond’s current yield exceeds its yield to maturity.\t5. The bond’s coupon rate exceeds its current yield.\t\u00a0\t\u00a0\t22. Which of the following statements is CORRECT?\t1) \ufffd Sinking fund provisions never require companies to retire their debt; they only establish \u201ctargets\u201d for the company to reduce its debt over time.\t2) \ufffd A sinking fund provision makes a bond more risky to investors at the time of issuance.\t3) \ufffd Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.\t4) \ufffd Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature.\t5) \ufffd If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.\t\u00a0\t\u00a0\t23. Assume that all interest rates in the economy decline from 10% to 9%.\u00a0 Which of the following bonds would have the largest percentage increase in price?\t1. A 10-year bond with a 10 percent coupon.\t2. An 8-year bond with a 9 percent coupon.\t3. A 10-year zero coupon bond.\t4. A 1-year bond with a 15 percent coupon.\t\u00a0\t\u00a0\t24. A 12-year bond has an annual coupon rate of 9%.\u00a0 The coupon rate will remain fixed until the bond matures.\u00a0 The bond has a yield to maturity of 7%.\u00a0 Which of the following statements is CORRECT?\t1. The bond is currently selling at a price below its par value.\t2. If market interest rates decline today, the price of the bond will also decline today.\t3. If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.\t4. All of the statements above are correct.\t5. None of the statements above is correct.\t\u00a0\t\u00a0\t25. A 10-year bond pays an annual coupon.\u00a0 The bond has a yield to maturity of 8 percent.\u00a0 The bond currently trades at a premium–its price is above the par value of $1,000.\u00a0 Which of the following statements is CORRECT?\t1. If the yield to maturity remains at 8 percent, then the bond’s price will decline over the next year.\t2. The bond’s current yield is less than 8 percent.\t3. If the yield to maturity remains at 8 percent, then the bond’s price will remain the same over the next year.\t4. The bond’s coupon rate is less than 8 percent.\t5. If the yield to maturity increases, then the bond’s price will increase.\t\u00a0\t\u00a0\t\u00a0\t26. Which of the following statements is CORRECT?\tOne advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.\tLong-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.\tIf interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.\tRelative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.\tLong-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.\t\u00a0\t\u00a0\t27. Which of the following statements is CORRECT?\tA zero coupon bond’s current yield is equal to its yield to maturity.\tIf a bond’s yield to maturity exceeds its coupon rate, the bond will sell at par.\tAll else equal, if a bond’s yield to maturity increases, its price will fall.\tIf a bond’s yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.\tAll else equal, if a bond’s yield to maturity increases, its current yield will fall.\t\u00a0\t\u00a0\t28. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.\u00a0 Which of the following statements is CORRECT?\t1. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.\t\u00a02. The bond is selling below its par value.\t\u00a03. The bond is selling at a discount.\t\u00a04. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.\t\u00a05. The bond’s current yield is greater than 9%.\t\u00a0\t\u00a0\t29. 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?\t\u00a0a. The bond s expected capital gains yield is zero.\t\u00a0b. The bond s yield to maturity is above 9%.\t\u00a0c. The bond s current yield is above 9%.\t\u00a0d. If the bond s yield to maturity declines, the bond will sell at a discount.\t\u00a0e. The bond s current yield is less than its expected capital gains yield.\t\u00a0\t\u00a0\t \ufffd\u00a0\u00a0\u00a0\u00a0 30.\u00a0 If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.\t\u00a0The total yield on a bond is derived from dividends plus changes in the price of the bond.\tBonds are riskier than common stocks and therefore have higher required returns.\tBonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.\t\u00a0The market value of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.<\/p>\n","protected":false},"excerpt":{"rendered":"
Which of the following statements is CORRECT? \u00a0 1) \ufffd A time line is not meaningful unless all cash flows occur annually 2) \ufffd Time lines are useful for visualizing complex problems prior to doing actual calculations 3) \ufffd Time Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-216924","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/216924","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=216924"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/216924\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=216924"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=216924"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=216924"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}