FIN 534 Quiz3 Week 4

Which of the following statements is CORRECT?

1) A time line is not meaningful

unless all cash flows occur annually

2) Time lines are useful for

visualizing complex problems prior to doing actual calculations

3) Time lines cannot be

constructed to deal with situations where some of the cash flows

occur annually but others occur quarterly

4) Time lines can only be

constructed for annuities where the payments occur at the ends of

the periods, i.e., for ordinary annuities

5) 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

Which of the following statements regarding a 30-year monthly

payment amortized mortgage with a nominal interest rate of 10% is

CORRECT?

1) The monthly payments will

decline over time.

2) 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) The total dollar amount of

principal being paid off each month gets smaller as the loan

approaches maturity

4) The amount representing

interest in the first payment would be higher if the nominal

interest rate were 7% rather than 10%.

5) Exactly 10% of the first

monthly payment represents interest

A Treasury bond promises to 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?

1) The periodic interest rate is

greater than 3%

2) The periodic rate is less than

3%

3) The present value would be

greater if the lump sum were discounted back for more periods

4) The present value of the $1,000

would be smaller if interest were compounded monthly rather than

semiannually

5) The PV of the $1,000 lump sum

has a higher present value than the PV of a 3-year, $333.33

ordinary annuity

You are analyzing the value of a potential investment by

calculating the sum of the present values of its expected cash

flows. Which of the following would lower the calculated

value of the investment?

1) The cash flows are in the form

of a deferred annuity, and they total to $100,000. 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

2) The discount rate increases

3) The riskiness of the

investment’s cash flows decreases

4) 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

5) The discount rate decreases

You are considering two equally risky annuities, each of which

pays $5,000 per year for 10 years. Investment ORD is an

ordinary (or deferred) annuity, while Investment DUE is an annuity

due. Which of the following statements is CORRECT?

1) A rational investor would be willing to pay more for DUE than

for ORD, so their market prices should differ.

2) 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.

3) The present value of ORD exceeds the present value of DUE,

and the future value of ORD also exceeds the future value of

DUE.

4) The present value of ORD exceeds the present value of DUE,

while the future value of DUE exceeds the future value of ORD.

5) 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.

Which of the following statements regarding a 30-year

monthly payment amortized mortgage with a nominal interest rate of

10% is CORRECT?

1) The monthly payments will

decline over time

2) 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) The total dollar amount of

principal being paid off each month gets smaller as the loan

approaches maturity.

4) The amount representing

interest in the first payment would be higher if the nominal

interest rate were 7% rather than 10%

5) Exactly 10% of the first

monthly payment represents interest

A $150,000 loan is to be amortized over 7 years, with annual

end-of-year payments. Which of these statements is

CORRECT?

1) The annual payments would be

larger if the interest rate were lower.

2) 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.

3) The proportion of each payment

that represents interest as opposed to repayment of principal would

be higher if the interest rate were lower.

4) The proportion of each payment

that represents interest versus repayment of principal would be

higher if the interest rate were higher.

5) The proportion of interest

versus principal repayment would be the same for each of the 7

payments.

Which of the following statements is CORRECT?

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.

10. Which of the following statements is CORRECT?

11. Which of the following statements regarding a 15-year

(180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore

taxes and transactions costs.)

12. Which of the following bank accounts has the highest

effective annual return?

13. 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?

14. Which of the following statements is CORRECT?

15. You are considering two equally risky annuities, each

of which pays $5,000 per year for 10 years. Investment ORD is

an ordinary (or deferred) annuity, while Investment DUE is an

annuity due. Which of the following statements is

CORRECT?

16. Amram Inc. can issue a 20-year bond with a 6% annual

coupon. This bond is not convertible, is not callable, and

has no sinking fund. Alternatively, Amram could issue a

20-year bond that is convertible into common equity, may be called,

and has a sinking fund. Which of the following most

accurately describes the coupon rate that Amram would have to pay

on the convertible, callable bond?

17. A Treasury bond has an 8% annual coupon and a 7.5%

yield to maturity. Which of the following statements is

CORRECT?

18. Which of the following bonds has the greatest

interest rate price risk?

19. Which of the following statements is CORRECT?

20. Which of the following statements is CORRECT?

21. A 15-year bond with a face value of $1,000 currently

sells for $850. Which of the following statements is CORRECT?

22. Which of the following statements is CORRECT?

23. 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?

24. A 12-year bond has an annual coupon rate of 9%. The

coupon rate will remain fixed until the bond matures. The

bond has a yield to maturity of 7%. Which of the following

statements is CORRECT?

25. A 10-year bond pays an annual coupon. The bond has a

yield to maturity of 8 percent. The bond currently trades at

a premium–its price is above the par value of $1,000. Which

of the following statements is CORRECT?

26. Which of the following statements is CORRECT?

27. Which of the following statements is CORRECT?

28. A 10-year bond with a 9% annual coupon has a yield to

maturity of 8%. Which of the following statements is

CORRECT?

29. 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?

30. If the Federal Reserve unexpectedly announces that it

expects inflation to increase, then we would probably observe an

immediate increase in bond prices.