Ch.5 finance

Question 1

Interest rates is synonymous with: _______,________ & __________ when asking TVM questions

Answer 1

opportunity cost, discount rate & required return

Question 2

With present value and future value problems if the number of compounding periods is not specified you can assume it is:

Answer 2

1 year

Question 3

When finding present value and future value problems the main keys used on the calculator are:

Answer 3

N, I, P/yr and FV or PV

Question 4

When finding the future value, make sure you enter the present value #$ amount with a __________ sign

Answer 4

negative

Question 5

When a FV question asks “how long will it take for an account to grow x amount” they are asking for the ___________________

Answer 5

“N” number of compounding periods

Question 6

Ordinary annuity cashflows occur at the _____ of the period

Answer 6

end

Question 7

Annuity due cash flow occur at the __________ of the period.

Answer 7

beginning

Question 8

The way that you tell you calculator your doing an annuity is by using the “_______” key

Answer 8

PMT, this is how you tell the calculator your payment is occurring more than one time

Question 8

For an ordinary annuity you calculator should be in ____mode

Answer 8

“end mode” nothing on the screen.

Question 9

What is the formula for a perpetuity ?

Answer 9

PMT / I (make I into a decimal).

Question 10

When calculating annuities, In begin mode the present value we get will be at the same point in the timeline when the first cash flow occurs

Answer 10

Whereas when we find the future value of annuity due the answer you get will be for one period after the annuity ends

Question 11

How do you amortization key ?

Answer 11

1 input shift amort

Question 12

What order of keys do you press to see the “50th” or for example “30th” payment

Answer 12

1 input “50” shift ammort, then equal sign (1st time shows how much went to principal) 2nd time = shows how much went to interest.

Question 13

How do you find EAR ?

Answer 13

shift p/r
I/yr
Shift effective rate

Question 14

How do you calculate continuous compounding ?

Answer 14

1st. Interest rate as a decimal x the number of time periods (example 100 yrs means x 100)

2nd use that number to press Shift e^x

3rd multiple by the amount of money

Question 15

Market risk

Answer 15

(systematic risk) is
nondiversifiable. This type of risk can not
be diversified away.

Question 16

Company unique risk is the same as ____________risk

Answer 16

(unsystematic risk)
is diversifiable. This type of risk can be
reduced through diversification

Question 17

market risk cannot be eliminated with____________

Answer 17

Diversification

Question 18

The higher the beta, the higher the ___________

Answer 18

risk

Question 19

What is the CAPM equation?

Answer 19

required return= risk free rate+ beta (return on market index - risk free rate)

Question 20

Km(return on market index)- krf(risk free rate of interest=

Answer 20

market risk premium

Question 21

Standard deviation

Answer 21

1-find expected return by multiplying probabilities by outcome and adding them up.
2-Subtract expected returns from each outcome (aka each return)
3.square each of those bitches
4.Multiply by the probability
5. add the results
6. find the square root of the total

Question 22

Higher standard deviation means higher________

Answer 22

risk

Question 23

How to find the betas in a portfolio

Answer 23

-divide the amount $ in each stock by the total $ on the whole portfolio,
-multiply by the corresponding beta for the stock and
-add the totals should be a decimal.

Question 24

What is the CAPM formula

Answer 24

Required return= risk free rate(aka bond rate) + beta x (market return(s&P500) - risk free rate)

Question 25

According to the capital asset pricing model, the appropriate measure for risk is:

Answer 25

Beta

Question 26

10. You are considering buying stock in New England Bankshares Corporation. Which of the following are examples of risk that can be diversified away?

Answer 26

a) risk resulting from an impending lawsuit against New England Bankshares.
c) risk resulting from a strike by New England’s tellers.
-federal budget deficits and income tax increase risks cannot be diversified

Question 27

if the required return is greater than the expected return then it is an

Answer 27

overvalutation

Question 28

Standard Deviation formula

Answer 28

Square root of : probability x (return- expected return)^2

Question 29

According to CAPM the measure for risk is _________

Answer 29

Beta