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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.

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