Finance Test Bank

Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities 6. A perpetuity is a special form of an annuity. TRUE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Perpetuities 7. An annuity factor represents the future value of $1 that is deposited today. FALSE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities 8. With a fixed-rate mortgage, the proportion of each payment used to pay interest on the loan declines over time. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Amortization 9. Converting an annuity to an annuity due decreases the present value. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities 10. It is important to discount both real and nominal cash flows at the real interest rate. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-05 Understand the difference between real and nominal cash flows and between real and nominal interest rates. TopicC Nominal and real rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

21. Present values can always be calculated by dividing the cash flow by a discount factor. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-01 Calculate the future value of money that is invested at a particular interest rate. TopicC Present value-single cash flow 22. The five-year discount factor is less than the four-year discount factor. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-single cash flow 23. As long as the interest rate is positive, the future value will always be larger than the present value given any period of time. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-01 Calculate the future value of money that is invested at a particular interest rate. TopicC Future value-single cash flow 24. An annuity due must have a present value at least as large as an equivalent ordinary annuity. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities 25. Any sequence of equally spaced, level cash flows is called an annuity. An annuity is also known as a perpetuity. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Perpetuities Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

31. The concept of compound interest refers to: A. earning interest on the original investment. B. payment of interest on previously earned interest. C. investing for a multiyear period of time. D. determining the APR of the investment. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-01 Calculate the future value of money that is invested at a particular interest rate. TopicC Simple and compound interest 32. If interest is compounded semi-annually rather than annually, then: A. future values and present values will both be higher. B. futures values and present values will both be lower. C. future values will be lower and present values will be higher. D. Future values will be higher and present values will be lower. AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Simple and compound interest 33. Assume the total expense for your current year in college equals $20,000. How much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount? A. $952.4 6 B. $1,600.0 0 C. $1,728.0 8 D. $3,973.1 1 PV = $20,000 / (1.08) 21 PV = $3,973.11 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

38. Given the future value, which of the following will contribute to a lower present value? A. Higher discount rate B. Fewer time periods C. Less frequent discounting D. Lower discount factor AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-single cash flow 39. Cash flows occurring in different periods should not be compared unless: A. interest rates are expected to be stable. B. the flows occur no more than one year from each other. C. high rates of interest can be earned on the flows. D. the flows have been discounted to a common date. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-multiple cash flows Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

44. The salesperson offers, "Buy this new car for $25,000 cash or, with an appropriate down payment, pay $500 per month for 48 months at 8% interest." Assuming that the salesperson does not offer a free lunch, calculate the "appropriate" down payment. A. $1,000.0 0 B. $4,519.0 4 C. $5,127.2 4 D. $8,000.0 0 PV = $500 × {[1 / (0.08 / 12)] − [1/(0.08 / 12)(1 + (0.08 / 12) 48 )]} PV = $20,480.96 Down payment = $25,000 − 20,480.96 = $4,519.04 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities 45. What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3? A. $5,022.1 0 B. $5,144.0 3 C. $5,423.8 7 D. $5,520.0 0 PV = $1,000 / 1.08 + $2,000 / 1.08 2 + $3,000 / 1.08 3 PV = $5,022.10 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-multiple cash flows Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Perpetuities 50. A stream of equal cash payments lasting forever is termed: A. an annuity. B. an annuity due. C. an installment plan. D. a perpetuity. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Perpetuities 51. If the interest rate is 6%, which of these investments would you prefer? A. A single payment of $500 in year 3. B. A payment of $40 a year for 20 years starting in one year’s time. C. A perpetuity of $30 a year starting in one year’s time. D. A payment of $342.17 today PV($500 in year 3) = 500 / 1.06 3 = $419.81 PV ($40 a year for 20 years) = 40(1 / 0.06 − 1 / (0.06 × 1.06 20 )) = $458.80 PV ($30 in perpetuity) = 30 / 0.06 = $500 AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Present value-multiple cash flows Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

56. Which one of the following will increase the present value of an annuity, other things equal? A. Increasing the interest rate B. Decreasing the interest rate C. Decreasing the number of payments D. Decreasing the amount of the payment AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-annuity 57. What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is made today? A. $9,655.6 5 B. $10,814.3 3 C. $12,112.0 5 D. $13,200.0 0 PV AD = PV OA × (1 + r ) PV AD = {$3,000[1 / 0.12 − 1 / 0.12(1.12) 5 ]} × 1.12 PV AD = $12,112.05 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-annuity Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

58. The sum of $3,000 is deposited into an account paying 10% annually. If $1,206 is withdrawn at the end of years 1 and 2, how much then remains in the account?" A. $1,326.9 7 B. $1,206.3 4 C. $1,097.4 0 D. $587.3 2 FV Year 1 = PV(1 + r ) − Withdrawal FV Year 1 = $3,000(1.1) − $1,206 FV Year 1 = $2,094 FV Year 2 = FV Year 1 (1 + r ) − Withdrawal FV Year 2 = $2,094(1.1) − $1,206FV Year 2 = $1,097.40 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-01 Calculate the future value of money that is invested at a particular interest rate. TopicC Future value-single cash flow Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

59. Suppose you take out a 30-year mortgage for $100,000 with annual payments. The interest rate on the mortgage is 8%. When you have paid off half the mortgage, so that the value of the remaining payments is reduced to $50,000, how many more payments need to be made? A. Approximately 15 payments B. Approximately 12 payments C. Approximately 8 payments D. Approximately 20 payments Solve first for the annual payment: $100,000 = PMT(1 / 0.08 − 0.08 × 1.08 30 ). PMT = $8,882.74 PV = PMT [(1 / r ) − 1 / r (1 + r ) t ] $50,000 = 8,882.74{1 / 0.08−1 / (0.08 × 1.08 t } Either use logs or trial and error to find t ≈ 8 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Amortization 60. What is the present value of a four-year annuity of $100 per year that makes its first payment 2 years from today if the discount rate is 9%? A. $297.2 2 B. $323.9 7 C. $356.8 5 D. $272.6 8 PV = {$100[(1 / 0.09) − 1 / 0.09(1.09) 4 ]} / 1.09 PV = $297.22 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

TopicC Present value-annuity 61. If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with annual payments of $11,680.36, how much interest (as opposed to return of capital) is paid in the last year of the loan? A. $120,00 0 B. $162,00 0 C. $181,45 8 D. $227,59 8 Value of loan at start of last year = $11,680.36 / 1.09 = $10,715.93 Interest on loan in last year = 0.09 × $10,715.93 = $964.43 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Amortization 62. $50,000 is borrowed, to be repaid in three equal, annual payments with 10% interest. Approximately how much principal is amortized with the first payment? A. $2,010.6 0 B. $5,000.0 0 C. $15,105.7 4 D. $20,105.7 4 Payment = $50,000 / [1 / 0.1 − 1 / 0.1(1.1) 3 ] Payment = $20,105.74 Principal payment = $20,105.74 − ($50,000 × 0.1) Principal payment = $15,105.74 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

TopicC Amortization 63. An amortizing loan is one in which: A. the principal remains unchanged with each payment. B. accrued interest is paid regularly. C. the maturity of the loan is variable. D. the principal balance is reduced with each payment. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Amortization 64. You're ready to make the last of four equal, annual payments on a $1,000 loan with a 10% interest rate. If the amount of the payment is $315.47, how much of that payment is accrued interest? A. $28.6 8 B. $31.5 5 C. $100.0 0 D. $315.4 7 $315.47 − ($315.47 / 1.1) = $28.68 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Amortization Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

65. What will be the monthly payment on a $75,000 30-year home mortgage at 1% interest per month? A. $771.4 6 B. $775.9 0 C. $1,028.6 1 D. $1,034.5 3 Payment = $75,000 / [(1 / 0.01) − 1 / 0.01(1.01) 360 ] Payment = $771.46 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities 66. Your real estate agent mentions that homes in your price range require a payment of $1,200 per month for 30 years at 0.75% interest per month. What is the size of the mortgage with these terms? A. $128,035.0 5 B. $147,940.2 9 C. $149,138.2 4 D. $393,120.0 3 PV = $1,200[(1 / 0.0075) − 1 / 0.0075(1.0075) 360 ] PV = $149,138.24 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-annuity Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

67. Assume you are making $989 monthly payments on your amortized mortgage. The amount of each payment that is applied to the principal balance: A. decreases with each succeeding payment. B. increases with each succeeding payment. C. is constant throughout the loan term. D. fluctuates monthly with changes in market interest rates. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Amortization 68. How much must be saved at the end of each year for the next 10 years in order to accumulate $50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings every year. A. $3,291.0 0 B. $3,587.8 7 C. $4,500.3 3 D. $4,587.7 9 Payment = $50,000 / [(1.09 10 − 1) / 0.09] Payment = $3,291.00 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

69. Your retirement account has a current balance of $50,000. You plan to add $6,000 a year to the account for each of the next 30 years. Use a financial calculator or Excel to find what interest rate you need to earn in order to have $1,000,000 in the account at the end of the 30 years. ? A. 5.02 % B. 7.24 % C. 9.80 % D. 10.07 % Financial calculator: n = 30; PV = −50,000; PMT = −6,000; FV = 1,000,000; CPT i = 7.24%, or Excel function Rate(nper, PMT, PV, FV) AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-01 Calculate the future value of money that is invested at a particular interest rate. TopicC Interest rates 70. How much do you need when you retire to provide a $2,500 monthly check that will last for 25 years? Assume that your savings can earn 0.5% a month. A. $361,526.1 4 B. $388,017.1 6 C. $402,766.6 7 D. $414,008.2 4 Monthly interest rate = 0.06 / 12 = 0.005 PV = $2,500 {(1 / 0.005) − [1 / 0.005(1.005) 12 × 25 ]} PV = $388,017.16 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-annuity Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

71. The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due? A. $1 0 B. $61.4 0 C. $10 ×Number of years in annuity stream D. $6.14 × Number of years in annuity stream PV Annuity due = PV ordinary annuity × (1 + r) Difference = $614(1.1) − $614 = $61.40 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities 72. Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually, and the first payment occurs one year from now? A. $1,067,477. 62 B. $1,128,433. 33 C. $1,487,320. 09 D. $1,250,000. 00 PV = $100,000 {(1 / 0.08) − [1 / 0.08(1.08) 25 ]} PV = $1,067,477.62 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-annuity Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

73. You have just retired with savings of $1.5 million. If you expect to live for 30 years and to earn 8% a year on your savings, how much can you afford to spend each year? Assume that you spend the money at the start of each year. A. $112,148.5 0 B. $120,000.0 0 C. $123,371.4 4 D. $133,241.1 5 $1,500,000 = Pmt OA {(1 / 0.08) − [1 / 0.08(1.08) 30 ]} PMT OA = $133,241.15 PMT AD = PMT OA / (1 + r ) PMT AD = $133,241.15 / 1.08 PMT AD = $123,371.44 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Annuities 74. How much can be accumulated for retirement if $2,000 is put aside at the end of each of the next 40 years? Assume that you can earn 9% a year on your savings. A. $87,200.0 0 B. $675,764.8 9 C. $736,583.7 3 D. $802,876.2 7 FV = $2,000 {[(1 + 0.09) 40 − 1] / 0.09} FV = $675,764.89 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-01 Calculate the future value of money that is invested at a particular interest rate. TopicC Future value-annuity 75. If inflation in Wonderland was 3% per month in 2016, what was the annual rate of inflation? A. 36.00 % B. 42.58 % C. 40.09 % D. 41.27 % (1.03) 12 − 1 = 0.4258, or 42.58% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Simple and compound interest 76. Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold. If inflation averaged 4% annually during the period, then over his career his purchasing power: A. remained on par with inflation. B. increased by nearly 1% annually. C. increased by nearly 2% annually. D. decrease d. FV = PV(1 + r ) t 10 = 1(1 + i) 40 r = 5.93% Real rate = (1.0593 / 1.04) − 1 = 0.0186, or 1.86% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-05 Understand the difference between real and nominal cash flows and between real and nominal interest rates. TopicC Nominal and real rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

77. Real interest rates: A. always exceed inflation rates. B. can decline to zero but no lower. C. can be negative, zero, or positive. D. traditionally exceed nominal rates. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-05 Understand the difference between real and nominal cash flows and between real and nominal interest rates. TopicC Nominal and real rates 78. On the day you retire you have $1,000,000 saved. You expect to live another 25 years during which time you expect to earn 6.19% on your savings while inflation averages 2.5% annually. Assume you want to spend the same amount each year in real terms and die on the day you spend your last dime. What real amount will you be able to spend each year? A. $61,334.3 6 B. $79,644.5 8 C. $79,211.0 9 D. $61,931.7 8 Real rate = (1.0619 / 1.025) − 1 = 0.036 $1,000,000 = PMT {(1 / 0.036) − [1 / 0.036(1.036) 25 ]} PMT = $61,334.36 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-05 Understand the difference between real and nominal cash flows and between real and nominal interest rates. TopicC Nominal and real rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

79. What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually? A. 5.00 % B. 5.66 % C. 6.00 % D. 9.46 % 1 + real interest rate = (1 + nominal interest rate) / (1 + inflation) 1 + real interest rate = 1.12 / 1.06 Real interest rate = 5.66% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-05 Understand the difference between real and nominal cash flows and between real and nominal interest rates. TopicC Nominal and real rates 80. What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence? A. The real cost is constant. B. The real cost is increasing. C. The real cost is decreasing. D. The price index must be known to answer this question. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-05 Understand the difference between real and nominal cash flows and between real and nominal interest rates. TopicC Nominal and real rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

81. What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period? A. 7.36 % B. 7.50 % C. 7.64 % D. 8.01 % 1 + nominal rate = (1 + real rate)(1 + inflation rate) Nominal rate = (1.04 × 1.035) − 1 Nominal rate = 7.64% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-05 Understand the difference between real and nominal cash flows and between real and nominal interest rates. TopicC Nominal and real rates 82. What APR is being earned on a deposit of $5,000 made 10 years ago today if the deposit is worth $9,848.21 today? The deposit pays interest semiannually. A. 3.56 % B. 6.76 % C. 6.89 % D. 7.12 % FV = PV (1 + r ) t $9,848.21 = $5,000 [1 + ( r / 2)] 10 × 2 r = 6.89% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

83. An interest rate that has been annualized using compound interest is termed the: A. discount factor. B. annual percentage rate. C. discounted interest rate. D. effective annual interest rate. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 84. What is the effective annual rate of interest on a deposit that pays interest of 10% continuously compounded? A. 10.000 % B. 10.517 % C. 1.105 % D. 9.531 % Effective interest rate = e 0.1 − 1 = 0.10517, or 10.517% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 85. What is the relationship between an annually compounded rate and the annual percentage rate (APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments? A. The APR is lower than the annually compounded rate. B. The APR is higher than the annually compounded rate. C. The APR equals the annually compounded rate. D. The answer depends on the interest rate. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

86. What is the APR on a loan that charges interest at the rate of 1.4% per month? A. 10.20 % B. 14.00 % C. 16.80 % D. 18.16 % APR = 1.4% × 12 = 16.80% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 87. If interest is paid m times per year, then the per-period interest rate equals the: A. effective annual rate divided by m . B. compound interest rate times m . C. effective annual rate. D. annual percentage rate (APR) divided by m . AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

88. If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments, what is the annual percentage rate? A. 4.02 % B. 10.02 % C. 14.50 % D. 15.19 % APR = [(1.1608) 0.25 − 1] × 4 APR = 0.1519, or 15.19% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 89. Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with semiannual compounding? A. 8.0% with monthly compounding B. 8.5% with semiannual compounding C. The depositor would be indifferent. D. The time period must be known to select the preferred account. EAR = [1 + (0.08 / 12)] 12 − 1 = 8.30% EAR = [1 + (0.085 / 2)] 2 − 1 = 8.68% The depositor will prefer the option with the higher EAR (effective annual rate). AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

90. What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding? A. 10.00 % B. 10.47 % C. 10.52 % D. 11.05 % EAR = [1 + (0.10 / 12)] 12 − 1 = 0.1047, or 10.47% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 91. What is the APR on a loan with an effective annual rate of 15.26% and weekly compounding of interest? A. 14.35 % B. 14.49 % C. 13.97 % D. 14.22 % APR = [(1.1526) 1 / 52 − 1] × 52 = 0.1422, or 14.22% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

92. What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments? A. 9.00 % B. 9.38 % C. 9.81 % D. 10.94 % EAR = [1 + (0.09 / 12)] 12 − 1 = 0.0938, or 9.38% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 93. Other things being equal, the more frequent the compounding period, the: A. higher the annual percentage rate. B. lower the annual percentage rate. C. higher the effective annual interest rate. D. lower the effective annual interest rate. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 94. How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate? A. $130.0 0 B. $138.8 3 C. $169.0 0 D. $353.3 4 Interest = $1,000( e 0.13 ) − $1,000 = $138.83 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 95. What is the present value of $100 to be deposited today into an account paying 8%, compounded semiannually for 2 years? A. $85.4 8 B. $100.0 0 C. $116.0 0 D. $116.9 9 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-single cash flow 96. If a borrower promises to pay you $1,900 nine years from now in return for a loan of $1,000 today, what effective annual interest rate is being offered if interest is compounded annually? A. 5.26 % B. 7.39 % C. 9.00 % D. 10.00 % FV = PV × (1 + r ) t $1,900 = $1,000 × (1 + r ) 9 r = 1.9 1 / 9 − 1 r = 0.0739, or 7.39% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

97. What is the present value of your trust fund if you have projected that it will provide you with $50,000 7 years from today and it earns 10% compounded annually? A. $25,000.0 0 B. $25,657.9 1 C. $28,223.7 0 D. $29,411.7 6 PV = FV / (1 + r ) t PV = $50,000 / 1.10 7 PV = $25,657.91 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-single cash flow 98. What is the discount factor for $1 to be received in 5 years at a discount rate of 8%? A. 0.469 3 B. 0.550 0 C. 0.600 0 D. 0.680 6 PV = FV / (1 + r ) t PV = 1 / 1.08 5 PV = 0.6806 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-single cash flow Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

99. How much more would you be willing to pay today for an investment offering $10,000 in 4 years rather than in 5 years? Your discount rate is 8%. A. $544.4 7 B. $681.4 8 C. $740.7 4 D. $800.0 0 Difference = FV / (1 + r ) t − 1 − FV / (1 + r ) Difference = $10,000 / 1.08 4 − $10,000 / 1.08 5 Difference = $544.47 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-multiple cash flows 100. "Give me $5,000 today and I'll return $10,000 to you in 5 years," offers the investment broker. To the nearest percent, what annual interest rate is being offered? A. 12.29 % B. 13.67 % C. 14.87 % D. 12.84 % FV = PV(1 + r ) t $10,000 = $5,000(1 + r ) 5 r = 2 1 / 5 − 1 r = 0.1487, or 14.87% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 101. The APR on a loan must be equal to the effective annual rate when: A. compounding occurs monthly. B. compounding occurs annually. C. the loan is for less than one year. D. the loan is for more than one year. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 102. A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a $4,000 down payment. What is the loan's APR? A. 6 % B. 9 % C. 11 % D. 12 % $25,000 − 4,000 = $522.59 {(1 / r ) − [1 / r (1 + r ) 48 ]} Using a financial calculator or Excel, r = 0.0075 APR = 0.0075 × 12 APR = 0.09, or 9% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

103. A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _____ and an APR of ____. A. 16.08%; 15.00% B. 14.55%; 16.08% C. 12.68%; 15.00% D. 15.00%; 14.55% EAR = (1 + 0.0125) 12 − 1 = 0.1608, or 16.08% APR = 1.25% × 12 = 15.00% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 104. Eighteen years from now, 4 years of college are expected to cost $150,000. How much more must be deposited into an account today to fund this expense if you can earn only 8% on your savings rather than the 11% you hope to earn? A. $12,211.1 8 B. $13,609.2 1 C. $14,006.4 1 D. $14,614.0 3 Additional deposit = $150,000 / 1.08 18 − $150,000 / 1.11 18 Additional deposit = $14,614.03 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-multiple cash flows Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

105. Prizes are often not "worth" as much as claimed. What is the value of a prize of $5,000,000 that is to be received in 20 equal yearly payments, with the first payment beginning today? Assume an interest rate of 7%. A. $2,833,898. 81 B. $2,911,015. 68 C. $2,609,144. 14 D. $2,738,304. 13 Annual payment = $5,000,000 / 20 = $250,000 PV = ($250,000 {(1 / 0.07) − [1 / 0.07(1.07) 20 ]}) × (1.07) PV = $2,833,898.81 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-annuity Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

106. A loan officer states, "Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at an interest rate of .75% a month versus a 15-year mortgage with an interest rate of .7% a month. Both mortgages are for $100,000 and have monthly payments. What is the difference in total dollars that will be paid to the lender under each loan? (Round the monthly payment amounts to 2 decimal places.) A. $89,21 1 B. $98,40 6 C. $113,46 5 D. $124,30 0 $100,000 = PMT([1 / (0.0075)] − 1 / {(0.0075)[(1.0075)] 30 × 12 }) PMT = $804.62 $100,000 = PMT([1 / (0.007)] − 1 / {(0.007 )[ 1.007)] 15 × 12 }) PMT = $ 978.87 Total difference = ($804.62 × 12 × 30) − ($978.87 × 12 × 15) = $113,465 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Loan payments Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

107. Would you prefer a savings account that paid 7% interest compounded quarterly, 6.8% compounded monthly, 7.2% compounded weekly, or an account that paid 7.5% with annual compounding? A. 7% compounded quarterly B. 6.8% compounded monthly C. 7.2% compounded weekly D. 7.5% compounded annually EAR = [1 + (0.07 / 4)] 4 − 1 = 0.0719, or 7.19% EAR = [1 + (0.068 / 12)] 12 − 1 = 0.0702, or 7.02% EAR = [1 + (0.072 / 52)] 52 − 1 = 0.0746, or 7.46% EAR = APR = 7.5% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates 108. After reading the fine print in your credit card agreement, you find that the "low" interest rate is actually an 18% APR, or 1.5% per month. What is the effective annual rate? A. 18.47 % B. 19.56 % C. 18.82 % D. 19.41 % EAR = 1.015 12 − 1 = 0.1956, or 19.56% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. TopicC Interest rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

109. You are considering the purchase of a home that would require a mortgage of $150,000. How much more in total interest will you pay if you select a 30-year mortgage at 5.65% rather than a 15-year mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places.) A. $86,311.1 8 B. $78,487.9 2 C. $99,595.8 0 D. $102,486.6 8 $150,000 = PMT([1 / (0.0565 / 12)] − 1 / {(0.0565 / 12)[1 + (0.0565 / 12)] 30 × 12 }) PMT = $865.85 $150,000 = PMT([1 / (0.049 / 12)] − 1 / {(0.049 / 12)[1 + (0.049 / 12)] 15 × 12 }) PMT = $1,178.39 Total difference = ($865.85 ×12 × 30) − ($1,178.39 × 12 × 15) = $99,595.80 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 05-03 Calculate present and future values of a level stream of cash payments. TopicC Loan payments 110. Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000, $35,000, and $42,000 over the next three years with the first payment of $28,000 occurring one year from today. What is this contract worth today at a discount rate of 7.25%? A. $88,311.0 8 B. $89,423.9 1 C. $90,580.5 5 D. $91,341.4 1 PV = $28,000 / 1.0725 + $35,000 / 1.0725 2 + $42,000 / 1.0725 3 PV = $90,580.55 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-02 Calculate the present value of a future payment. TopicC Present value-multiple cash flows 111. Miller's Hardware plans on saving $42,000, $54,000, and $58,000 at the end of each year for the next three years, respectively. How much will the firm have saved at the end of the three years if it can earn 4.5% on its savings? A. $160,295.0 5 B. $158,098.1 5 C. $167,508.3 3 D. $165,212.5 7 FV = ($42,000 × 1.045 2 ) + ($54,000 × 1.045) + $58,000 FV = $160,295.05 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 05-01 Calculate the future value of money that is invested at a particular interest rate. TopicC Future value-multiple cash flows Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

Chapter 05 Test Bank - Static Summary Category # of Questions AACSB: Analytical Thinking 68 AACSB: Communication 7 AACSB: Reflective Thinking 36 Accessibility: Keyboard Navigation 111 Blooms: Analyze 68 Blooms: Remember 7 Blooms: Understand 36 Difficulty: 1 Easy 21 Difficulty: 2 Medium 74 Difficulty: 3 Hard 16 Gradable: automatic 111 Learning Objective: 05-01 Calculate the future value of money that is invested at a particular interest rate. 18 Learning Objective: 05-02 Calculate the present value of a future payment. 30 Learning Objective: 05-03 Calculate present and future values of a level stream of cash payments. 29 Learning Objective: 05-04 Compare interest rates quoted over different time intervals-for example; monthly versus annual rates. 24 Learning Objective: 05-05 Understand the difference between real and nominal cash flows and between real and nominal interest rates. 10 Topic: Amortization 8 Topic: Annuities 11 Topic: Future value-annuity 1 Topic: Future value-multiple cash flows 1 Topic: Future value-single cash flow 6 Topic: Interest rates 23 Topic: Loan payments 2 Topic: Nominal and real rates 9 Topic: Perpetuities 7 Topic: Present value-annuity 9 Topic: Present value-multiple cash flows 10 Topic: Present value-single cash flow 13 Topic: Simple and compound interest 11 Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

Chapter 06 Test Bank - Static Key 1. When a bond matures, the issuer repays the bond’s face value. TRUE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond features 2. When the market interest rate exceeds the coupon rate, bonds sell for less than face value. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 3. Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the life of the bond. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns 4. A bond's rate of return is equal to its coupon payment divided by the price paid for the bond. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns 5. A bond's bid price will be lower than the ask price. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond quotes and trading 6. A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns 7. Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk 8. Speculative-grade bonds have default risk; investment grade bonds do not. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk 9. TIPS are unlike most bonds in that their cash flows increase when the national rate of gross domestic product increases. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Bond types 10. The return to bondholders is guaranteed to equal the yield to maturity only if the bond is held until maturity. TRUE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

11. It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond quotes and trading 12. Indexed bonds in the United States are known as Treasury Interest-Paid Securities, or TIPS. FALSE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Bond types 13. The current yield measures the bond's total rate of return. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns 14. When a financial calculator or spreadsheet program finds a bond's yield to maturity, it uses a trial-and-error process. TRUE AACSBC Technology AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns 15. Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-04 Understand why investors draw a plot of bond yields against maturity. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

16. Bonds with a rating of Ba or below by Moody's are referred to as speculative grade, high-yield, or junk bonds. TRUE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk 17. Bonds rated BB or above by Standard & Poor's are called investment grade. FALSE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk 18. Bonds rated Ba by Moody's have the same safety rating as the bonds rated BB by Standard & Poor's. TRUE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk 19. Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the purchase price and the payment of face value at maturity. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 20. Issuers compensate investors for default risk by putting a high face value on their bonds. FALSE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

21. Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk 22. Bond ratings measure a bond's credit risk. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk 23. The coupon rate of a bond equals: A. its yield to maturity. B. a defined percentage of its face value. C. the yield to maturity when the bond sells at a discount. D. the annual interest divided by the current market price. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns 24. Periodic receipts of interest by the bondholder are known as: A. the coupon rate. B. principal payments. C. coupon payments. D. the default premium. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond coupons Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

25. As the coupon rate of a bond increases, the bond's: A. face value increases. B. current price decreases. C. interest payments increase. D. maturity date is extended. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond coupons 26. Assume a bond is currently selling at par value. What will happen in the future if the yield on the bond is lower than the coupon rate? A. The price of the bond will increase. B. The coupon rate of the bond will increase. C. The par value of the bond will decrease. D. The coupon payments will be adjusted to the new discount rate. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Interest rate risk 27. If a bond’s asked price is 97.162, the investor: A. receives 97.162% of the stated coupon payments. B. receives $971.62 upon the maturity date of the bond. C. pays 97.162% of face value for the bond. D. pays $10,971.62 for a $10,000 face value bond. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond quotes and trading Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

28. How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the appropriate discount rate is 6%? A. $209.9 1 B. $260.0 0 C. $760.0 0 D. $792.0 9 $1,000 / 1.06 4 = $792.09 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 29. What happens to a discount bond as the time to maturity decreases? A. The coupon rate increases. B. The bond price increases. C. The coupon rate decreases. D. The bond price decreases. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

30. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%? A. $927.9 0 B. $981.4 0 C. $1,000.0 0 D. $1,075.8 2 Price = (0.10 × $1,000) {(1 / 0.12) − [1 / 0.12(1.12) 5 ]} + $1,000/1.12 5 Price = $927.90 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 31. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%? A. $696.7 4 B. $1,075.8 2 C. $1,082.0 0 D. $1,123.0 1 Price = (0.09 × $1,000) {(1 / 0.07) − [1 / 0.07(1.07) 5 ]} + $1,000 / 1.07 5 Price = $1,082.00 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

32. Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%? A. The face value of the bond has decreased. B. The bond's maturity value exceeds the bond's price. C. The bond's internal rate of return is 7%. D. The bond's market value is higher than its face value. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 33. If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to: A. decline over time, reaching par value at maturity. B. increase over time, reaching par value at maturity. C. be less than the face value at maturity. D. exceed the face value at maturity. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Interest rate risk 34. The current yield of a bond can be calculated by: A. multiplying the price by the coupon rate. B. dividing the price by the annual coupon payments. C. dividing the price by the par value. D. dividing the annual coupon payments by the price. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

35. What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84? A. 6.00 % B. 7.14 % C. 5.04 % D. 6.38 % Current yield = $60 / (0.84 × $1,000) = 0.0714, or 7.14% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns 36. A bond's par value can also be called its: A. coupon payment. B. present value. C. market value. D. face value. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond features 37. A bond's yield to maturity takes into consideration: A. current yield but not any price changes. B. price changes but not the current yield. C. both the current yield and any price changes. D. neither the current yield nor any price changes. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

38. The discount rate that makes the present value of a bond's payments equal to its price is termed the: A. dividend yield. B. yield to maturity. C. current yield. D. coupon rate. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns 39. What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%? Interest is paid annually. A. 6 % B. 8 % C. 10 % D. 11 % $1,053.46 = PMT {(1 / 0.06) − [1 / 0.06(1.16) 3 ]} + $1,000 / 1.06 3 PMT = $80 Coupon rate = $80 / $1,000 = 0.08, or 8% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond coupons Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

40. What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000? A. 6.0 % B. 8.5 % C. 10.0 % D. 12.5 % Since the bond is selling at par, the yield to maturity must equal the coupon rate which is: Coupon rate = $100 / $1,000 = 0.10, or 10% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 41. Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will: A. increase by $51.54. B. decrease by $51.54. C. increase by $53.46. D. decrease by $53.46. Price = (0.08 × $1,000) {(1 / 0.06) − [1 / 0.06(1.06) 3 ]} + $1,000 / 1.06 3 Price = $1,053.46 This is a price increase of $53.46, since the bond had sold at par. AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Interest rate risk Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

42. Which one of the following bond values will change when interest rates change? A. The expected cash flows B. The present value C. The coupon payment D. The maturity value AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Interest rate risk 43. What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%? A. The coupon rate increases to 10%. B. The coupon rate remains at 9%. C. The coupon rate remains at 8%. D. The coupon rate decreases to 8%. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond coupons 44. Which one of the following is fixed for the life of a given bond? A. Current price B. Current yield C. Yield to maturity D. Coupon rate AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond coupons Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

45. What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with an annual coupon payment of 6.5% and sells the bond 1 year later for $1,037.19? A. 4.53 % B. 5.33 % C. 5.16 % D. 4.92 % Rate of return = [$1,037.19 + (0.065 × $1,000) − $1,054.47] / $1,054.47 = 0.0453, or 4.53% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 46. If a bond investor's yield for a particular period does not change, then during that period, the bond's return : A. is zero. B. increase s. C. equals the yield. D. is indeterminate. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 47. What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures? A. The rate of return will be lower than the yield to maturity. B. The rate of return will be higher than the yield to maturity. C. The rate of return will equal the yield to maturity. D. It could be higher or lower. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 48. If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then the yield to maturity will be: A. lower than current interest rates. B. equal to the coupon rate. C. higher than the coupon rate. D. lower than the coupon rate. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 49. If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant? A. $904.9 0 B. $925.3 9 C. $947.9 3 D. $1,000.0 0 Price = (0.07 × $1,000) {(1 / 0.10) − [1 / 0.10(1.10) 3 ]} + $1,000 / 1.10 3 Price = $925.39 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

50. What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000? A. $100,135.4 1 B. $135,000.4 1 C. $136,269.3 8 D. $135,406.2 0 Price = 1.354062 × $100,000 = $135,406.20 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond quotes and trading 51. You purchased a 6% annual coupon bond at face value and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000? A. 4.48 % B. 6.15 % C. 7.52 % D. 6.07 % Rate of return = [$1,015.16 + (0.06 × $1,000) − $1,000] / $1,000 = 0.0752, or 7.52% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 52. How does a bond dealer generate profits when trading bonds? A. By maintaining bid prices lower than ask prices B. By maintaining bid prices higher than ask prices C. By retaining the bond’s next coupon payment D. By lowering the bond’s coupon rate upon resale AACSBC Reflective Thinking AccessibilityC Keyboard Navigation Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond quotes and trading 53. A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount of the next interest payment? A. $5 0 B. $5 5 C. $10 0 D. $11 0 Coupon payment = (0.10 × $1,000) / 2 = $50 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond coupons 54. The yield curve depicts the current relationship between: A. bond yields and default risk. B. bond maturity and bond ratings. C. bond yields and maturity. D. promised yields and default premiums. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-04 Understand why investors draw a plot of bond yields against maturity. TopicC Treasury yield curve Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

55. When the yield curve is upward-sloping, then: A. short-maturity bonds offer the highest coupon rates. B. long-maturity bonds are priced above par value. C. short-maturity bonds yield less than long-maturity bonds. D. long-maturity bonds increase in price when interest rates increase. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-04 Understand why investors draw a plot of bond yields against maturity. TopicC Treasury yield curve 56. Nominal U.S. Treasury bond yields: A. are constant over time. B. are equal to the real yields. C. include a default premium. D. include an inflation premium. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond yields and returns 57. Which one of these is included in the yield of a bond with a low credit rating but not included in a U.S. Treasury bond yield? Assume both bonds are selling at a premium. A. Real rate of return B. Inflation premium C. Default premium D. Loss of premium AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

58. The purpose of a floating-rate bond is to: A. save interest expense for corporate issuers. B. avoid making interest payments until maturity. C. shift the yield curve. D. offer rates that adjust to current market conditions. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond types 59. Which of the following would not be associated with a zero-coupon bond? A. Yield to maturity B. Discount bond C. Current yield D. Interest-rate risk AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond types 60. Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk? A. A zero-coupon bond with 20 years until maturity B. A coupon-paying bond with 20 years until maturity C. A floating-rate bond with 20 years until maturity D. A zero-coupon bond with 30 years until maturity AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

61. A "convertible bond" provides the option to convert: A. a bond into shares of common stock. B. fixed-rate coupon payments into variable-rate payments. C. a zero-coupon bond to a coupon-paying bond. D. a junk bond to a zero-coupon investment-grade bond. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond features 62. Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments. She sold the bond after 6 months and earned a total return of 4.8% on this investment. At what price, did she sell the bond? A. $1,001.4 7 B. $974.2 8 C. $981.0 6 D. $1,003.1 8 0.048 = (Selling price + [(0.07 × $1,000) / 2] − $989) / $989 Selling price = $1,001.47 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 63. A U.S. Treasury security that pays a fixed coupon and has an initial maturity of 2 to 10 years is called a: A. TIPS . B. Treasury bill. C. Treasury bond. D. Treasury note. AACSBC Communication Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond features 64. Which one of the following must be correct for a bond currently selling at a premium? A. Its coupon rate is variable. B. Its current yield is lower than its coupon rate. C. Its yield to maturity is higher than its coupon rate. D. Its coupon rate is lower than the current market rate on similar bonds. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 65. A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3 years. What is its yield to maturity? A. 4.78 % B. 5.48 % C. 9.57 % D. 12.17 % Using a financial calculator: n = 6; PV = −$960; PMT = $40; FV = $1,000, CPT i = 4.7826% YTM = 2 × 4.7826% = 9.57% AACSBC Technology AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

66. Which type of bond is certain to provide a capital loss if held to maturity? A. Discount bond B. Premium bond C. Zero-coupon bond D. Junk bond AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 67. Investors who purchase bonds having lower credit ratings should expect: A. lower yields to maturity. B. higher default possibilities. C. lower coupon payments. D. higher purchase prices. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

68. A bond has a face value of $1,000, has 5 years until maturity, and an annual coupon rate of 7%? It yields 5% currently. By how much will the price change over the next year if the yield remains constant? A. zer o B. decline by $86.59 C. decline by $15.67 D. rise by $15.67 Price today = $70(1 / 0.05+1 / (0.05 × 1.05 4 )) + $1,070 / 1.05 5 = $1,086.59 Price next year = $70(1 / 0.05+1 / (0.05 × 1.05 3 )) + $1,070 / 1.05 4 = $1,070.92 Price declines by $15.67 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 69. If a bond is priced at par value, then: A. it has a very low level of default risk. B. its coupon rate equals its yield to maturity. C. it must be a zero-coupon bond. D. the bond is quite close to maturity. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

70. The existence of an upward-sloping yield curve suggests that: A. bonds should be selling at a discount to par value. B. bonds will not return as much as common stocks. C. interest rates may be increasing in the future. D. real interest rates will be increasing soon. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Treasury yield curve 71. What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to maturity of 9.37%? A. $98.6 4 B. $95.2 7 C. $101.3 8 D. $104.9 7 $1,050 = PMT {(1 / 0.0937) − [1 / 0.0937(1.0937) 6 ]} + $1,000 / 1.0937 6 PMT = $104.97 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond coupons Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

72. This morning, you purchased a TIPS. Which one of these should you expect to occur if you hold this bond during an inflationary period? A. The coupon payment will increase in real terms. B. The maturity value will increase in nominal terms. C. The market price will remain constant at par. D. The market price will decrease. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Bond valuation 73. Many investors may be drawn to municipal bonds because of the bonds': A. speculative grade ratings. B. high coupon payments. C. long periods until maturity. D. income exemption from federal taxes. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond features 74. Two years ago bonds were issued at par with 10 years until maturity and a 7% annual coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds? A. $917.0 6 B. $928.8 4 C. $987.5 0 D. $1,000.0 0 Price = (0.07 × $1,000) {(1 / 0.0825) − [1 / 0.0825(1.0825) 10 − 2 ]} + $1,000 / 1.0825 10 − 2 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 75. If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the: A. bond is selling at a discount. B. bond has a high default premium. C. promised yield is not likely to materialize. D. bond must be a Treasury Inflation-Protected Security. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 76. What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% annual coupon and 5 years until maturity, then sells the bond after 1 year for $1,085? A. 6.82 % B. 6.91 % C. 7.64 % D. 9.00 % Total return = [$1,085 + (0.09 × $1,000) − $1,100] / $1,100 = 0.0682, or 6.82% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

77. How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest rates increase to 12% one year later? A. $19.9 3 B. $20.0 0 C. $23.9 3 D. $25.6 6 Price = $1,000 / 1.10 30 = $57.31 New price = $1,000 / 1.12 29 = $37.38 Loss = $57.31 − 37.38 = $19.93 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 78. Assume a bond has been owned by four different investors during its 20-year history. Which one of the following is most likely to have been different for each of these owners? A. Coupon rate B. Coupon frequency C. Par value D. Yield to maturity AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

79. If an investor purchases a 3%, 5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years, what will be the real value of the principal at maturity? A. $1,000.0 0 B. $1,030.0 0 C. $1,060.9 0 D. $1,061.3 6 The real value of the principal will remain constant at the par value. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Bond features 80. Which one of the following is correct concerning real interest rates? A. Real interest rates are constant. B. Real interest rates must be positive. C. Real interest rates must be less than nominal interest rates. D. Real interest rates, if positive, increase purchasing power over time. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Nominal and real rates 81. An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%? A. The 5-year bond will decrease more in price. B. The 20-year bond will decrease more in price. C. Both bonds will decrease in price by the same proportion. D. Neither bond will decrease in price, but their yields will increase. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

TopicC Interest rate risk 82. How much should you be prepared to pay for a 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%? A. $411.8 4 B. $897.0 4 C. $985.0 0 D. $1,000.0 0 Price = (0.06 × $1,000) {(1 / 0.075) − [1 / 0.075(1.075) 10 ]} + $1,000 / 1.075 10 Price = $897.04 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 83. How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually compounded yield of 7.5%? A. $895.7 8 B. $897.0 4 C. $938.4 0 D. $1,312.6 6 Semiannual interest rate = 0.075 / 2 = 0.0375 Price = [(0.06 / 2) × $1,000)] {(1 / 0.0375) − [1 / 0.0375(1.0375) 10 × 2 ]} + $1,000 / 1.0375 10 × 2 Price = $895.78 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

84. The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of these may have caused this price increase? A. The bond's rating was downgraded. B. The issuing firm announced the next interest payment. C. The issuing firm announced that its annual earnings met investor expectations. D. Market interest rates decreased. AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Interest rate risk 85. An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985. What was the investor's rate of return? A. 9.00 % B. 9.23 % C. 9.65 % D. 10.26 % Rate of return = [$985 + (0.09 × $1,000) − $975] / $975 = 0.1026, or 10.26% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

86. An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040. What was the investor's rate of return? A. 5.71 % B. 6.00 % C. 6.67 % D. 7.00 % Rate of return = [$1,040 + (0.07 × $1,000) − $1,050] / $1,050 = 0.0571, or 5.71% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 87. An investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. The investor sold the bond prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the bond? A. The bond's current yield increased above the bond's coupon rate. B. The inflation rate increased. C. Market interest rates declined. D. Market interest rates increased. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Interest rate risk Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

88. A bond has an ask quote of 99.5625 and a bid quote of 99.5475. How much will the bond dealer make on the purchase and resale of a $100,000 bond? A. $15 0 B. $1,50 0 C. $1 5 D. $1.5 0 Dealer profit = (0.995625 − 0.995475) × $100,000 = $15 AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. TopicC Bond quotes and trading 89. What are the conditions imposed on a debt issuer that are designed to protect bondholders ? A. Collateral agreements B. Vanilla wrappers C. Protective covenants D. Default provisions AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond features 90. The holder of which one of these securities has first claim on the assets of a firm? A. Senior debt B. Common stock C. Subordinated debt D. Preferred stock AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond features Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

91. When market interest rates exceed a bond's coupon rate, the bond will: A. sell for less than par value. B. sell for more than par value. C. decrease its coupon rate. D. increase its coupon rate. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Interest rate risk 92. Which one of the following is most likely for a CCC-rated bond, compared to a BBB-rated bond? A. The CCC bond will have a variable-coupon rate. B. The CCC bond will have a shorter term. C. The CCC bond will offer a higher promised yield to maturity. D. The CCC bond will have a higher price for the same term. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk 93. Which of these bond ratings is the lowest of Moody's investment-grade ratings? A. A B. B a C. A a D. Ba a AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Bond ratings and credit risk Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

94. If a bond offers an investor 11% in nominal return during a year in which the rate of inflation is 4%, then the investor's real return is: A. 6.73% . B. 6.31% . C. 15.44 %. D. 10.56 %. 1 + real return = 1.11 / 1.04 − 1 = 0.0673, or 6.73% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Nominal and real rates 95. What nominal return would an investor need to receive if he desires a real return of 4% and the rate of inflation is 5%? A. 4.20 % B. 8.64 % C. 9.00 % D. 9.20 % Nominal return = (1.04 ×1.05) − 1 = 0.0920, or 9.20% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Nominal and real rates Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

96. If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable? A. $848.1 2 B. $923.5 0 C. $862.9 2 D. $911.1 5 $691.72 = $1,000 / (1 + i ) 5 i = 0.0765 Price = $1,000 / 1.0765 2 Price = $862.92 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation 97. An investor buys a 10-year annual coupon bond at a yield of 8.7% and sells it 2 years later when it still yields 8.7%. What is his rate of return over this period? A. zero . B. 8.7% . C. Can’t say without knowing the coupon. D. 17.4% . AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond valuation Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

98. What causes bonds to sell for a premium? A. Investment-quality ratings B. Long periods until maturity C. Coupon rates that exceed market rates D. Speculative-grade ratings AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-03 Show why bonds exhibit interest rate risk. TopicC Interest rate risk 99. The current yield tends to overstate a bond's total return when the bond sells for a premium because: A. the bond's price will decline each year. B. coupon payments can change at any time. C. bonds selling for a premium have low default risk. D. taxes must be paid on the current yield. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 100. The current yield tends to understate a bond's total return when the bond sells for a discount because: A. increases in interest rates will increase the current yield. B. the bond's price will increase each year. C. current yields show only nominal returns. D. the bond may have a higher face value. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

101. When comparing a highly liquid bond with a comparable but less liquid bond, the highly liquid bond is most apt to have: A. a lower yield. B. a shorter maturity. C. a higher yield. D. a longer maturity. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in opposite directions. TopicC Bond yields and returns 102. Which one of these statements is not correct? A. When a foreign government borrows dollars, investors worry that in some future crisis the government will not have sufficient dollars to repay the debt. B. When the Japanese government borrows yen, investors worry that in some future crisis the government will not have sufficient yen to repay the debt. C. When a Eurozone government borrows euros, investors worry that in some future crisis the government will not have sufficient euros to repay the debt. D. When the U.S. government issues Treasury bonds, investors never need to worry that they will not be paid back. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings. TopicC Sovereign debt Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

Chapter 06 Test Bank - Static Summary Category # of Questions AACSB: Analytical Thinking 26 AACSB: Communication 18 AACSB: Reflective Thinking 56 AACSB: Technology 2 Accessibility: Keyboard Navigation 102 Blooms: Analyze 27 Blooms: Apply 7 Blooms: Remember 18 Blooms: Understand 50 Difficulty: 1 Easy 25 Difficulty: 2 Medium 74 Difficulty: 3 Hard 3 Gradable: automatic 102 Learning Objective: 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturi ty. 28 Learning Objective: 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yi eld given its price, and demonstrate why prices and yields move in opposite directions. 39 Learning Objective: 06-03 Show why bonds exhibit interest rate risk. 16 Learning Objective: 06-04 Understand why investors draw a plot of bond yields against maturity. 3 Learning Objective: 06-05 Understand why investors pay attention to bond ratings and demand a hig her interest rate for bonds with low ratings. 16 Topic: Bond coupons 7 Topic: Bond features 8 Topic: Bond quotes and trading 6 Topic: Bond ratings and credit risk 11 Topic: Bond types 4 Topic: Bond valuation 16 Topic: Bond yields and returns 34 Topic: Interest rate risk 9 Topic: Nominal and real rates 3 Topic: Sovereign debt 1 Topic: Treasury yield curve 3 Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

Chapter 07 Test Bank - Static Key 1. The dividend discount model states that the value of a stock is the present value of the dividends it will pay over the investor's horizon, plus the present value of the expected stock price at the end of that horizon. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model 2. An excess of market value over the book value of equity can be attributed to going concern value. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Market and book values 3. Securities with the same expected risk should offer the same expected rate of return. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Risk and return relationship 4. If investors believe a company will have the opportunity to make very profitable investments in the future, they will pay more for the company's stock today. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

5. The dividend discount model should not be used to value stocks if the dividend does not grow. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model 6. If the stock prices follow a random walk, successive stock prices are not related. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Random walk 7. The liquidation value of a firm is equal to the book value of the firm. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Market and book values 8. Sustainable growth rates can be estimated by multiplying a firm's ROE by its dividend payout ratio. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Internal and sustainable growth rates 9. If the market is efficient, stock prices should be expected to react only to new information. TRUE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Market efficiency-foundations and types Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

10. If stock prices follow a random walk, their prices bear no relation to the company’s real activities. FALSE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Random walk 11. A negative free cash flow for a business is always sign that it is not performing well. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-03 Apply valuation models to an entire business. TopicC Valuing an entire business 12. Evidence that stock prices follow a random walk does not imply that there aren’t predictable cycles in prices. FALSE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Random walk 13. Market efficiency implies that security prices impound new information quickly. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Market efficiency-implications 14. If security prices follow a random walk, then on any particular day the odds are that an increase or decrease in price is about equally likely. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Random walk Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

15. Many professional investors attempt to beat the market by buying index funds. FALSE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Market efficiency-studies and challenges 16. Market efficiency implies that one could earn above-average returns by examining the history of a firm's stock price. FALSE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Market efficiency-foundations and types 17. Market value, unlike book value and liquidation value, treats the firm as a going concern. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Market and book values 18. The dividend yield of a stock is much like the current yield of a bond. Both ignore prospective capital gains or losses. TRUE AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Stock returns and yields 19. The dividend discount model states that today's stock price equals the present value of all expected future dividends. TRUE AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

stock prices and price-earnings ratios. 20. The growth of mature companies is primarily funded by: A. issuing new shares of stock. B. issuing new debt securities. C. reinvesting company earnings. D. increasing accounts payable. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model 21. The sustainable growth rate represents the ____ rate at which a firm can grow: A. maximum; while maintaining a constant debt-equity ratio. B. maximum; based solely on internal financing. C. minimum; while maintaining a constant debt-equity ratio. D. minimum; based solely on internal financing. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

22. Wilt's has earnings per share of $2.98 and dividends per share of $0.35. What is the firm's sustainable rate of growth if its return on assets is 14.6% and its return on equity is 18.2%? A. 2.14 % B. 1.71 % C. 12.89 % D. 16.06 % Sustainable growth rate = ROE × plowback ratio Sustainable growth rate = 0.182 × [($2.98 − 0.35)/$2.98] Sustainable growth rate = 0.1606, or 16.06% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model 23. The sustainable rate of growth: A. increases as the dividend payout ratio increases. B. must be moderate over the long-term even if it is high in the short-term. C. assumes the debt-equity ratio will increase at the same rate as the growth rate. D. must exceed the required rate of return to be used in the dividend discount model. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

24. For a firm that repurchases its stock, firm value is most easily estimated by discounting _______________ A. dividends plus repurchases per share. B. repurchases rather than dividends. C. free cash flows. D. pre-repurchase earnings per share. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-03 Apply valuation models to an entire business. TopicC Dividend discount model 25. A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8%, and $648,200 in next year’s free cash flow. What value would you place on a share of this firm's stock if you require a 14% rate of return? A. $48.0 9 B. $52.9 6 C. $54.0 2 D. $61.5 8 Price = [$648,200/(0.14 − 0.038)]/120,000 = $52.96 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model 26. The semi-strong form of the efficient market hypothesis states that: A. the efficient market hypothesis is only half true. B. professional investors make superior profits but amateurs can’t. C. stock prices do not follow a random walk. D. prices reflect all publicly available information. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

TopicC Market efficiency-foundations and types 27. If the general sentiment of investors is pessimistic, stock prices are more apt to: A. increase significantly. B. increase slightly. C. remain constant. D. declin e. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Behavioral finance 28. Which of these statements is correct? Free cash flow A. is available to be paid out to investors as interest or dividends, or to repay debt or buy back stock. B. is positive if the company is issuing debt or stock. C. is equal to net income. D. is another term for retained earnings. AACSBC Communication AccessibilityC Keyboard Navigation BloomsC Remember DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-03 Apply valuation models to an entire business. TopicC Valuing an entire business 29. If markets are efficient, when new information about a stock becomes available, the price will: A. remain unchanged because it already reflects this information. B. accurately and rapidly adjust to include this new information. C. adjust to accurately reflect this new information over the course of the next few days. D. most likely increase because all new information has a positive effect on stock prices. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Market efficiency-implications Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

30. Which statement is correct? A. Stock repurchases invalidate the dividend discount model B. Stock repurchases do not add value to a business and can be ignored. C. When there are repurchases, it is simpler to value a business by discounting the free cash flow. D. Stock repurchases increase the number of shares and make it difficult to forecast dividends per share AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-03 Apply valuation models to an entire business. TopicC Valuing an entire business 31. What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40? A. 2.5 % B. 4.0 % C. 10.0 % D. 5.0 % Dividend yield = ($1 × 4)/$40 = 0.100, or 10.0% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-01 Understand the stock trading reports on the Internet or in the financial pages of the newspaper. TopicC Stock returns and yields 32. Which of the following values treats the firm as a going concern? A. Market value B. Book value C. Liquidation value D. Both market and book values AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-01 Understand the stock trading reports on the Internet or in the financial pages of the newspaper. TopicC Market and book values Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

33. If a stock's P/E ratio is 13.5 at a time when earnings are $3 per year and the dividend payout ratio is 40%, what is the stock's current price? A. $24.3 0 B. $18.0 0 C. $22.2 2 D. $40.5 0 Price = 13.5 × $3 = $40.50 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Stock valuation using multiples 34. With respect to the notion that stock prices follow a random walk, many researchers have concluded that: A. stock prices reflect a majority of available information about the firm. B. successive price changes are predictable. C. past stock price changes provide little useful information about future stock price changes. D. stock prices always rise excessively in January. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-04 Understand what professionals mean when they say that there are no free lunches on Wall Street. TopicC Random walk Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

35. What is the current price of a share of stock for a firm with $5 million in balance-sheet equity, 500,000 shares of stock outstanding, and a price/book value ratio of 4? A. $2.5 0 B. $10.0 0 C. $20.0 0 D. $40.0 0 Price = 4 × ($5,000,000/500,000) = $40 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Stock valuation using multiples 36. A firm's liquidation value is the amount: A. necessary to repurchase all outstanding shares of common stock. B. realized from selling all assets and paying off all creditors. C. a purchaser would pay to acquire all of the firm's assets. D. shown on the balance sheet as total owners' equity. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Market and book values 37. Which one of the following is least likely to account for an excess of market value over book value of equity? A. Inaccurate depreciation methods B. High rate of return on assets C. The presence of growth opportunities D. Valuable off-balance sheet assets AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Market and book values 38. Firms with valuable intangible assets are more likely to show a(n): A. excess of book value over market value of equity. B. high going-concern value. C. low liquidation value. D. low P/E ratio. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Market and book values 39. Which of the following is inconsistent with a firm that sells for very near book value? A. Low current earnings B. Few, if any, intangible assets C. High future earning power D. Low, unstable dividend payment AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Market and book values Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

40. A stock paying $5 in annual dividends currently sells for $80 and has an expected return of 14%. What might investors expect to pay for the stock one year from now after the next dividend has been paid? A. $82.2 0 B. $86.2 0 C. $87.2 0 D. $91.2 0 0.14 = ( P 1 + $5 − 80)/$80 P 1 = $86.20 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Stock returns and yields 41. A stock currently sells for $50 per share, has an expected return of 15%, and an expected capital appreciation rate of 10%. What is the amount of the expected dividend? A. $2.5 0 B. $2.7 5 C. $3.0 0 D. $3.5 0 Dividend yield = 0.15 − 0.10 = 0.05 Expected dividend = 0.05 × $50 = $2.50 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Stock returns and yields Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

42. The expected return on a common stock is equal to: A. [(1 + dividend yield) × (1 + capital appreciation rate)] − 1. B. the capital appreciation rate + dividend yield. C. (1 + capital appreciation rate)/(1 + dividend yield). D. the capital appreciation rate − dividend yield. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Stock returns and yields 43. It is possible to ignore cash dividends that occur very far into the future when using a dividend discount model because those dividends: A. will most likely be paid to a different investor. B. will most likely not be paid. C. have an insignificant present value. D. have a minimal, if any, potential rate of growth. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model 44. If the dividend yield for year 1 is expected to be 5% based on a stock price of $25, what will the year 4 dividend be if dividends grow annually at a constant rate of 6%? A. $1.3 3 B. $1.4 9 C. $1.5 8 D. $1.6 7 DIV 4 = (0.05 × $25) × 1.06 3 = $1.49 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Constant-growth stock 45. Dani's just paid an annual dividend of $6 per share. What is the dividend expected to be in five years if the growth rate is 4.2%? A. $7.0 7 B. $7.3 7 C. $7.1 4 D. $7.4 4 DIV 3 = $6 × 1.042 5 = $7.37 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Constant-growth stock 46. The value of common stock will likely decrease if: A. the investment horizon decreases. B. the growth rate of dividends increases. C. the discount rate increases. D. dividends are discounted back to the present. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

47. When valuing stock with the dividend discount model, the present value of future dividends will: A. change depending on the time horizon selected. B. remain constant regardless of the time horizon selected. C. remain constant regardless of the rate of growth. D. always equal the present value of the terminal price. AACSBC Reflective Thinking AccessibilityC Keyboard Navigation BloomsC Understand DifficultyC 1 Easy GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Dividend discount model 48. What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? A. $22.8 6 B. $28.0 0 C. $42.0 0 D. $43.7 5 Price = $3.50/0.08 = $43.75 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Apply DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Perpetuities Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

49. What should you pay for a stock if next year's annual dividend is forecast to be $5.25, the constant-growth rate is 2.85%, and you require a 15.5% rate of return? A. $31.2 5 B. $38.8 7 C. $41.5 0 D. $42.6 8 Price = $5.25/(0.155 − 0.0285) = $41.50 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Constant-growth stock 50. What price would you pay today for a stock if you require a rate of return of 13%, the dividend growth rate is 3.6%, and the firm recently paid an annual dividend of $2.50? A. $27.5 5 B. $30.2 8 C. $26.6 0 D. $31.3 7 Price = ($2.50 × 1.036)/(0.13 − 0.036) = $27.55 AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 3 Hard GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Constant-growth stock Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110

51. What constant-growth rate in dividends is expected for a stock valued at $32.40 if next year's dividend is forecast at $2.20 and the appropriate discount rate is 13.6%? A. 7.02 % B. 6.59 % C. 6.81 % D. 7.38 % $32.40 = $2.20/(0.136 − g ); g = 0.0681, or 6.81% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Constant-growth stock 52. What rate of return is expected from a stock that sells for $30 per share, pays $1.54 annually in dividends, and is expected to sell for $32.80 per share in one year? A. 15.03 % B. 14.28 % C. 14.09 % D. 14.47 % Expected return = ($32.80 + 1.54 − 30)/$30 = 0.1447, or 14.47% AACSBC Analytical Thinking AccessibilityC Keyboard Navigation BloomsC Analyze DifficultyC 2 Medium GradableC automatic Learning ObjectiveC 07-02 Calculate the present value of a stock given forecasts of future dividends and show how growth opportunities are reflected in stock prices and price-earnings ratios. TopicC Stock returns and yields Downloaded by Vanna V (vanna96817@gmail.com) lOMoARcPSD|6706110