Second Hour Exam FINN130

TRUE / FALSE QUESTIONS:
1. Discounting means that interest earned each year, plus the principal, will be
reinvested at the stated rate.
2. For a given discount rate, an ordinary annuity and an annuity due have the same
present value.
3. The par value on a bond is sometimes called its face value.
4. Credit risk is another term for default risk.
5. The higher the discount rate or yield to maturity, the lower the price of a bond.
6. Debenture bonds are secured obligations from firms with high credit ratings.
7. A bond will sell at a premium if its required return or discount rate is greater than its
coupon rate.
8. The bond issuer does not necessarily know who is receiving interest payments on
bearer bonds.
9. The common stockholders have the lowest standing when a business venture is
liquidated.
10. The call price of a callable bond is typically equal to par value plus two years
interest.
11. The effective annual rate (EAR) is the true opportunity cost measure of the interest
rate.
12. Corporate bonds are not as risky as common stocks; as a result, corporate bonds
always lower returns to investors than do common stock.
13. A convertible bond can be converted, at the issuing firm's option, into a specific
number of shares of the issuer's common stock.
14. Callable preferred stock gives the corporation the right to retire the preferred stock at
its option.
15. Preferred stock is an equity security that has a senior claim to the firm's earnings and
assets over bonds.
16. When the annual interest rate stays the same, more frequent interest compounding
helps savers earn more interest over the course of the year.
17. Level cash flow amounts that occur at the end of each period, beginning at the end of
the first period, form an annuity due.
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18. As the interest rate increases, present value decreases.
19. The return on debt securities of a firm would be lower than the return on equity
securities in that same firm.
20. The values of stocks and bonds are not affected by time value of money concepts.
MULTIPLE CHOICES QUESTIONS:
1. 2 Which of the following statements is false?

1.
A) The present value of a future sum decreases as either the discount rate or the number
of discounting periods per year increases.
B) If the present value of a sum is equal to its future value, the interest rate must be
zero.
C) If the discount (or interest) rate is positive, the future value of an expected series of
payments will always exceed the present value of the same series.
D) Each of the above statements is true.
2. Daniel deposits $2,000 per year at the end of the year for the next 15 years into an
IRA account that currently pays 7%. How much will Daniel have on deposit at the
end of the 15 years?
A) $39,981
B) $46,753
C) $49,002
D) $50,258
3. Which of the following statements is most correct?

A) There is an inverse relation between the present value interest factor of an annuity
and the future value interest factor of an annuity, i. e. , one is the reciprocal of the
other.
B) The future value of an ordinary annuity can be determined as the product of the
annual payment and the appropriate future value interest factor for an ordinary
annuity.
C) If a bank uses daily compounding for a savings account, the nominal rate will be
greater than the effective annual rate.
D) Each of the above statements is equally true.
4. You need $8,000 four years from now for a down payment on your future house.
How much money must you deposit today if your credit union pays 5% interest
compounded annually? Pick the closest answer.
A) $6,269. 59
B) $6,578. 95
C) $6,394. 12
D) $6,189. 83
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5. An investment will mature in 20 years. Its maturity value is $1,000. If the discount
rate is 7%, what is the present value of the investment?
A) $178
B) $258
C) $276
D) $362
6. When compounding more than once a year, the true opportunity costs measure of the
interest rate is indicated by the:
A) annual percentage rate
B) contract rate
C) stated rate
D) effective annual rate
7. If you have an account with a 21. 5% annual percentage rate where interest is
compounded quarterly, what is the effective annual rate of interest?
A) 23. 75%
B) 23. 3%
C) 21. 5%
D) none of the above
8. The future value of an annuity of $5,000 invested at 8% in 5 years would result in a

value of:
A) $25,000
B) $7,345
C) $29,335
9. Suppose you were going to save $1,000 per year for three years at a 10% interest
rate compounded annually, with the first investment occurring today. What would be
the future value of this investment?
A) $2,124
B) $2,310
C) $3,641
D) $3,812
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10. You want to buy a Volvo in seven years. The car is currently selling for $50,000, and
the price will increase by 10% per year. You can presently invest in high-yield bonds
earning 14%. How much must you invest at the end of each of the next seven years
to be able to purchase your dream car in seven years?
A) $8,831. 46
B) $9,080. 20
C) $9,125. 42
D) $9,282. 09
11. Preferred stock can have the following characteristic_______________?

A) cumulative
B) non-cumulative
C) convertible
D) all of the above
12. AT&T 10-year, $1,000 par value bond is selling at $1,158. 91. Interest on this bond
is paid semianually. If the annual yield to maturity is 14%, what is the annual
coupon rate of the AT&T bond?
A) 11%
B) 15%
C) 17%
13. Mary wants to purchase a 20-year bond that has a par value of $1,000 and makes
semiannual interest payments of $40. If her required yield to maturity is 10%, how
much should Mary be willing to pay for the bond?
A) $902
B) $925
C) $1000
14. Which of the following statements is false?

A) Preferred stock that is both cumulative and convertible is a popular financing choice
for investors purchasing shares of stock in small firms with high growth potential
B) Bond issues of a single firm can have different bond ratings if their security
provisions differ
C) Yankee bonds are dollar-denominated bonds that are sold outside the United States
D) All of the above statements are correct
15. A sinking fund:

A) is a special fund set up to pay of the creditors of bankrupt firms
B) requires specific approval by the firm's the board of directors
C) requires the issuer to retire a bond issue incrementally over time
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16. A firm's stock is expected to pay a $2 annual dividend next year, and the current $50
stock price is expected to rise to $53 over the next year. What is the expected
return?
A) 8%
B) 10%
C) 12%
D) 15%
17. A bond's value is the same as its principal amount when the coupon rate is:
A) the same as the required rate of return.
B) higher than the required rate of return.
C) lower than the required rate of return.
D) lower than the inflation rate.
18. Eurodollar bonds are:

A) denominated in Eurodollars
B) extremely long-term obligations
C) scrutinized by the SEC
19. A(n) _____________ gives the bondholder a claim to specific assets (identified
through serial numbers) such as railroad cars or airplanes.
A) first mortgage bond
B) equipment trust certificate
C) inventory bond
D) collateralized bond
20. Chrysler has a bond outstanding with eight years remaining to maturity, a coupon
rate of 5%, and semiannual payments. If the market price of the Chrysler bond is
$729. 05, what is the yield to maturity?
A) 7%
B) 9%
C) 10%
D) 11%
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Answer Key
1. False
2. False
3. True
4. True
5. True
6. False
7. False
8. True
9. True
10. False
11. True
12. False
13. False
14. True
15. False
16. True
17. False
18. True
19. True
20. False
21. D
22. D
23. B
24. A
25. B
26. D
27. B
28. C
29. C
30. B
31. D
32. C
33. D
34. C
35. C
36. B
37. A
38. D
39. B
40. C
Page 6

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TRUE / FALSE QUESTIONS:

3. The par value on a bond is sometimes called its face value.

4. Credit risk is another term for default risk.

MULTIPLE CHOICES QUESTIONS:

1. 2 Which of the following statements is false?

3. Which of the following statements is most correct?

8. The future value of an annuity of $5,000 invested at 8% in 5 years would result in a

11. Preferred stock can have the following characteristic_______________?

14. Which of the following statements is false?

15. A sinking fund:

18. Eurodollar bonds are:

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