Exam 1 (Ch 1,2,3,4,5,6,7,11,12,18)

Question 1

3 ways of calculating PV of a single cash flow

Answer 1

Excels PV function
Present Value Formula
Timeline

Question 2

What makes the future value of a single cash flow increase

Answer 2

if you increase:

pv
discount rate
number of periods

Question 3

Explain the formula for calculating the future value of each cash flow

Answer 3

each cash flow is compounded at the discount rate for the remaining periods

FV=C0 * (1+r)n

Question 4

Present Value Interest Factor for an Annuity

Answer 4

The formula to calculate PVIFA is (1 - (1 + r)^-n) / r, where r represents the period rate, and n represents the number of payments or withdrawals.

APV = PMT X PVIFA.

Question 5

Annuity Future Value

Answer 5

the value of a group of recurring payments at a certain date in the future, assuming a particular rate of return, or discount rate.

AFV=APV*(1+r)^t

Question 6

Affect on Aunnity Present Value

Answer 6

decrease payment amount = decrease in APV bc a smaller investment means smaller cash flow

decrease discount rate = increase in APV

Question 7

Can a constant discount rate formula be used when the discount rate changes over time>

Answer 7

No, the formula doesn’t account for changes in the rate

Question 8

How do you use the NPV function in excel

Answer 8

NPV is calculated by subtracting the initial investment from the PV

Question 9

Positive NPV Means…

Answer 9

A project should be accepted

Question 10

nominal discount rate

Answer 10

real interest rate plus the projected rate of inflation

= (1+i)*(1+r)-1

Question 11

why cant you just add real rate and interest to get nominal rate?

Answer 11

We will miss the cross-product term i (r), which is the increase in the real discount rate due to
inflation.

Question 12

can the general discount rate method be used when the rate is the same

Answer 12

yes, same rate is entered each year

Question 13

why is the demoninator not raised to t in the general discount rate formula

Answer 13

the cumulative rate already accounted for the # of periods since it is compounded

Question 14

Can excels NPV function be used when there’s multiple rates

Answer 14

No

Question 15

5 components of the return on equity in the Du Pont System of ratio analysis

Answer 15

tax burden
interest burden
operating profit margin
total asset turnover
equity multiplier

Question 16

What increases tax burden

Answer 16

paying less taxes because net profit will be higher

Question 17

What decreases interest burden

Answer 17

if a company pays more interest relative to EBIT

Question 18

Bond Price

Answer 18

PV of interest payments + PV of face value

Question 19

What makes a bond sell at discount

Answer 19

if the coupon rate is less than the yield to maturity

Question 20

Four ways of calulating Bond Price

Answer 20

PV of cashflows using timeline
formula for bond price
excels pv function
excels PRICE function

Question 21

Bond price results using APR vs EAR

Answer 21

Apr convention results in higher discount rate because of simple interest = Lower bond price

EAR convention results in a lower discount rate due to compound interest = high bond price

bond pricing works backwards from face value and coupon payments

Question 22

Relationship between bond price and yield to maturity

Answer 22

The bond price decreases at a decreasing rate as yield to maturity increases because the opportunity
cost (risk) increases.

Question 23

State and explain the effect of a higher coupon rate on a bond’s price.

Answer 23

The bond price increases because the coupon payments increase, raising the present value of cash
flows.

Question 24

Ordinary annuity

Answer 24

a series of regular payments made at the end of each period, such as monthly or quarterly.

Question 25

Annuity due

Answer 25

an annuity whose payment is due immediately at the beginning of each period.

Question 26

Treasury STRIPS

Answer 26

U.S. bonds that are sold at a discount to their face value and pay full face value at their maturity.

STRIPS are treasury bonds where the principal and coupon payments trade as separate securities. STRIPS holders do not receive coupon payments, only the final payoff on the date of maturity.

Question 27

YearFrac Function

Answer 27

the fractional years between two calendar dates

Question 28

yield

Answer 28

the measure of return, as a percentage - interest rates

Question 29

yield curve

Answer 29

line that depicts different bond yields with varying maturity dates

Question 30

Upward Sloping Yield Curve/positive

Answer 30

Most normal

as maturity increases so does the yield

Question 31

downward sloping yied curve/ inverted

Answer 31

as maturity increases the yield decreases

Question 32

Flat Yield

Answer 32

as maturity increases yield remains the same

Question 33

hump shaped yield

Answer 33

when medium-term rates are higher than short and long-term rates

Question 34

what do yield curves tell you?

Answer 34

normal curve - economic expansion

inverted - economic recession

Question 35

Static features for level of yield curve

Answer 35

high or low

Question 36

Static feature for curvature

Answer 36

lot or little