Exam 2

Question 1

Which of the following is true about loan amortization schedules?

Answer 1

The beginning balance minus the principal payment equals the ending balance

Question 2

Stanley has computed the value of a certain stock to be $83.95. Stanley’s broker is on the line asking if he wants to buy 100 shares of this stock at $85.00. What should Stanley do?

Answer 2

Don’t buy the stock; it is not a good deal.

Question 3

Which of the following would typically appear in a bond indenture?

Answer 3

The amount and timing of interest payments

Any collateral supporting the bond.

Question 4

Which of the following statements is FALSE concerning amortization schedules?

Answer 4

The beginning balance of one year is equal to the ending balance of the following year

Question 5

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

Answer 5

Fisher Effect

Question 6

Interest earned only on the original principal amount invested is called

Answer 6

simple interest

Question 7

The bonds issued by Try It Inc. bear a 6% coupon, payable semiannually. The bond matures in 8 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?

Answer 7

6 %

Question 8

ABC Corporation has decided to issue $1,000 bonds for 20 years with a coupon rate of 5% payable semiannually. At the last minute, ABC decides to add a call provision to the bond indenture. What other feature will probably also have to be adjusted?

Answer 8

The coupon rate will have to be increased to more than 5%

Question 9

A certain bond can be turned in to the company any time during 2008 and the bondholder can get his $1,000 back. This is an example of

Answer 9

a put provision

Question 10

As the discount rate increases, the present value of $50 to be received 10 years from now:

Answer 10

decreases

Question 11

Which of the following is true about the supernormal or non-constant growth model?

Answer 11

It uses the dividend growth model in part of the calculation

Question 12

All of the following are assumptions in using the dividend growth model EXCEPT one. Which one?

Answer 12

Next year’s dividend is always greater than last year’s dividend

Question 13

A Series EE bond is a good example of

Answer 13

baby bond, zero coupon bond, government bond, floating rate bond

Question 14

The process of accumulating interest on an investment over time to earn more interest is called

Answer 14

compounding

Question 15

One of the assumptions of the dividend growth model is

Answer 15

r must be greater than g

Question 16

Which of the following statements is true?

Answer 16

Compounding essentially means earning interest on interest.

Question 17

Which of the following is true?

Answer 17

There is an inverse relationship between discount rates and present values.

Question 18

As a depositor, I would prefer a deposit account

Answer 18

with daily compounding

Question 19

Investors who are in a high tax bracket might be interested in which of the following ?

Answer 19

Zero Coupon Bond

Stock with a High Capital Gains Yield

Question 20

Josie has a loan with an interest rate of 8% and annual payments. What is the Effective Annual Rate that Josie is paying?

Answer 20

8% because ear of an annual payment is the apr

Question 21

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

Answer 21

Decrease

Question 22

The purpose of creating several classes of stock is:

Answer 22

To maintain control of the stock in the hands of a few shareholders

Question 23

Banks are required to quote rates as ____ but the actual rate is the ____.

Answer 23

APR, EAR

Question 24

The purpose of creating several classes of stock is

Answer 24

To maintain control of the company in the hands of a few stockholders

Question 25

The Fisher Effect is the impact of ______ on the real rate of interest and APR to EAR is the impact of _______ on the real rate of interest.

Answer 25

Inflation

Compounding

Question 26

All of the following would be part of the bond indenture EXCEPT one. Which one?

Answer 26

Today’s Market Value

Question 27

The market in which previously held shares are traded among investors is called the

Answer 27

secondary market

Question 28

You are trying to compare the desirability of two alternative investments with rates of return quoted using different compounding periods. To make the proper decision, you should:

Answer 28

Convert each quoted return to an effective annual rate

Question 29

An example of an annuity due would be

Answer 29

Lunch at a fast food restaurant in which you pay for your food before you eat it.

Question 30

A stream of regular payments that goes on forever is

Answer 30

a perpetuity