Question 1

Which one of the following statements concerning the annual percentage rate is correct?

The rate of interest you actually pay on a loan is called the annual percentage rate.

The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly.

The annual percentage rate considers interest on interest.

The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.

Question 2

Paying off long-term debt by making installment payments is called:

funding the debt.

foreclosing on the debt.

calling the debt.

amortizing the debt.

None of these.

Question 3

An annuity stream of cash flow payments is a set of:

increasing cash flows occurring each time period forever.

level cash flows occurring each time period for a fixed length of time.

arbitrary cash flows occurring each time period for no more than 10 years.

increasing cash flows occurring each time period for a fixed length of time.

level cash flows occurring each time period forever.

Question 4

Which of the following statements concerning the effective annual rate are correct?

When making financial decisions, you should compare effective annual rates rather than annual percentage rates.

The more frequently interest is compounded, the higher the effective annual rate.

III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily.

When borrowing and choosing which loan to accept, you should select the offer with the highest effective annual rate.

I, II, and III only

I, II, III, and IV

I and II only

I and IV only

II, III, and IV only

Question 5

A perpetuity differs from an annuity because:

annuity payments never cease.

perpetuity payments vary with the market rate of interest.

perpetuity payments vary with the rate of inflation.

perpetuity payments are variable while annuity payments are constant.

perpetuity payments never cease.

Question 6

An annuity stream where the payments occur forever is called a(n):

perpetuity.

annuity due.

amortization table.

indemnity.

amortized cash flow stream.

Question 7

You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

Both annuities are of equal value today.

Annuity B is an annuity due.

Annuity A has a higher future value than annuity B.

Annuity B has a higher present value than annuity A.

Both annuities have the same future value as of ten years from today.

Question 8

The time value of money concept can be defined as:

None of these.

the relationship between a dollar to be received in the future and a dollar today.

the relationship between money spent versus money received.

the relationship between interest rate stated and amount paid.

the relationship between the supply and demand of money.

Question 9

The present value of future cash flows minus initial cost is called:

the future value of the project.

the net present value of the project.

the initial investment risk equivalent value.

the equivalent sum of the investment.

None of these.

Question 10

An annuity:

is a stream of payments that varies with current market interest rates.

None of these.

has no value.

is a level stream of equal payments through time.

is a debt instrument that pays no interest.

Question 11

If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will _____.

None of these

premium; decrease this premium

discount; decrease this discount

discount; increase this discount

premium; increase this premium

Question 12

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price appreciation.

inflation

default risk

taxability

liquidity

interest rate risk

Question 13

One basis point is equal to:

.01%.

10%.

100%.

1.0%.

.10%.

Question 14

The yield to maturity is:

the rate that is used to determine the market price of the bond.

the expected rate to be earned if held to maturity.

All of these.

the rate that equates the price of the bond with the discounted cash flows.

equal to the current yield for bonds priced at par.

Question 15

The annual coupon of a bond divided by its face value is called the bond’s:

coupon.

coupon rate.

maturity.

face value.

yield to maturity.

Question 16

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

premium

par

discount

floating rate

zero coupon

Question 17

The Fisher Effect primarily emphasizes the effects of _____ risk on an investor’s rate of return.

market

inflation

interest rate

default

maturity

Question 18

The rate of return required by investors in the market for owning a bond is called the:

yield to maturity.

maturity.

coupon rate.

face value.

coupon.

Question 19

The relationship between nominal rates, real rates, and inflation is known as the:

Miller and Modigliani theorem.

Gordon growth model.

Fisher effect.

term structure of interest rates.

interest rate risk premium.

Question 20

Aspens is preparing a bond offering with an 8% coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?

The initial selling price of each bond will be $1,000.

After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond.

III. Each interest payment per bond will be $40.

The yield to maturity when the bonds are first issued is 8%.

I and II only

II and III only

II, III, and IV only

I, III, and IV only

I, II, and III only