Question

2.  As a loan customer, I would prefer a loan

a.with semiannual compounding

b.with annual compounding

c.with daily compounding

d.with monthly compounding

e.with quarterly compounding

3.  If the interest rate is zero and/or there is no time passing, then

a.  The present value will be equal to the future value.

b.  The present value will be doubled to get the future value.

c.  The future value will be half of the present value.

d.  There is no way to compute the present value or the future value.

e.  The future value will be ten times the present value.

4. When adjusting for quarterly payments, you would

a.Double the years and divide the rate by 12.

b.Double the rate and divide the years in half.

c.Double the years and divide the rate in half.

d.Multiply the rate times 1 and divide the years in half.

e.Multiply the years times four and divide the rate by four.

5. The total value of a bond

a.Will always have a coupon rate greater than the market rate.

b.Will be above $1,000 if the YTM is greater than the coupon rate.

c.Makes it a premium bond when the value is less than $1,000.

d.Equals the total of the present values of the coupon stream and the face value.

e.Will be above $1,000 whenever the bond is a good buy.

6.   If the general level of interest rates goes down and I am holding a bond with a fixed coupon rate, I would expect the value of my bond to

a.stay the same

b.double

c.increase

d.decrease

e.not enough information to tell

7.  The Rule of 72’s

a.Is about doubling the present value to get the future value.

b.Says that 72 divided by the payment gives you the number of years to double.

c.Says that the rate divided by 72 gives you the number of years to double.

d.Both a and b

e.Both a and c

8.  A perpetuity with a payment of $16,000 per year and a return of 8% would cost you

      a.            $1,120,000

b.$2,283,714

c.$1,600,000

d.$200,000

e.$228,571

9.  The rates that banks are required to use in quoting to customers is

a.The Annual Percentage Rate

b.The Fisher Effect

c.The Effective Annual Rate

d.The Effective Annual Yield

e.None of the above

10. A 12% loan with semiannual payments for 30 years

a.Would have payments twice a year.

b.Would have 330 payments.

c.Would have a rate of 1% per month.

d.Would have payments greater than $1,000 each.

e.Would be difficult to pay off in 30 years.

11. If a bond is callable January – June each year, then

a.The bond CANNOT be called on March 1.

b.The bond is call protected July – December each year.

c.The bond CAN be called on September 30.

d.The bond can be called anytime.

e.The call dates can change from year to year.

12. Which of the following is FALSE about a put provision on a bond?

a.It lowers the coupon rate because of lower risk.

b.It allows bondholders to turn in the bond for cash.

c.It is the reverse of a call provision.

d.It can be added to the bond indenture at any time.

e.It is popular with bondholders.

13. Jamie’s grandmother has a semiannual $1,000 bond with five years to maturity and she knows that the rate in the marketplace is 6%.  Jamie looked in the WSJ and saw that the bond was selling at 97.  She computed her grandmother’s coupon payment amount to be $26.48.  Which of the following is true?

a.  This is correct.

b.  This is not correct because Jamie forgot to multiply the WSJ price by 1000.

c.  This is not correct because Jamie forgot to put her present value in as a negative.

d.  This is not correct because Jamie switched the coupon rate and the YTM.

e.  This is not correct because Jamie forgot to double the answer she got in her calculator.

14. An example of an ordinary annuity would be

a.              Dinner at McDonald’s in which you pay for your food before you receive it.

b.            Your rent, which you pay on the first of the month.

c.            Admission to a movie, where you pay before seeing the movie.

d.            Your “A” grade which you receive after working hard all semester.

e.            None of the above.

15. Ben has computed the value of a stock to be $69.32 using the things he learned in BA3500.  His stock broker is on the phone asking if he would like to buy some shares at a price of $69.25.  What should Ben do?

a.  Tell the broker to buy him 100 shares.

b.  Tell the broker that he does not want to buy any.

c.  Tell the broker that if he calls him again with a bad recommendation, he will change brokers.

d.  Tell the broker that he is using false advertising and Ben will report him to the Better Business Bureau.

e.  None of the above.

16. Which of the following is an assumption of the dividend growth model?

a. G must be greater than R.

b.The stock must pay dividends.

c.Both price and dividend will grow at R indefinitely.

d.The price and dividend will increase gradually over the years.

e.The current dividend divided by 1+g equals the next dividend.

17.  A stock with a dividend yield of 4% and a total yield of 9%

a.Must have a share price greater than $100.

b.Must have a capital gains yield of 13%.

c.Must have a capital gains yield of 5%.

d.Must be growing at 4%.

e.None of the above.

18. You would use the dividend growth model (DGM) method to determine the value of a stock

a.for a stock that does not pay dividends.

b.with an unusual or non-constant growth pattern

c.when the growth rate of the stock is greater than the rate expected in the marketplace.

d.with the same dividend every time.

e.with a very stable, nominal growth pattern.

19.  A certain investment has an APR of 7% and an EAR of 7%.  From this information we know that:

a.One of the rates must be incorrect.

b.The investment actually earns 7.2%

c.This is not a good investment for several reasons.

d.The investment compounds quarterly.

e.The investment compounds annually.

20.  A grandmother would like to start a savings account for her grandchild when it is born and deposit $1,000, but then add no more to the account and let it earn interest at 5% until the child is 21. To find out how much will be in the account when the grandchild turns 21, you would do a

a.  multiple payment time value of money computation for future value.

b.  single payment time value of money computation for future value.

c.  multiple payment time value of money computation for present value.

d.  single payment time value of money computation for present value.

e.  None of the above will get to the value of the account after 21 years.

Answer 1

2. A loan is quoted with annual rate of interest but that rate of interest is compunded daily, quarterly, monthly, annually etc depending upon the policy of the bank. With daily compounding you pay interest on the loan daily instead of annually and thus when the effective interest payment is calculated you tend to pay more interest in daily compounding and least in annual compounding.

Thus correct answer is (b) Annual Compounding

3. When there is no time passing and interest rate is zero, there is no way to compute present and future values. Time value of money requires computation of cash flows in present or future based on time spans at certain rate of interest,

Thus correct answer is (d) There is no way to compute present value or future value.

4.Quarterly payments are done 4 times a year since there are four quarters in a year and thus the time factor would be multiplied by four and the rate being annual will be divided by four for quarterly payment computation.

Thus correct answer is (e) Multiply the time by four and divide rate by four.

5. (d) The total value of a bond is computed by summing the present value of future coupon payments (frequency pre defined) and face value. Thus correct answer is (d)