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Financial Management
Quiz 3
5/6/14 11:52 AM
5/6/14 1:36 PM
Completed
120 out of 120 points
1 hour, 44 minutes out of 2 hours.
This quiz consist of 30 multiple
questions cover the material in
questions cover the material in
correct Chapter when you take

choice questions. The first 15


Chapter 4. The second 15
Chapter 5. Be sure you are in the
the quiz.

Question 1
4 out of 4 points

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The
nominal interest rate is 6%, semiannual compounding. Which of the following
statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

The PV of the $1,000 lump sum has a smaller present value than the PV
of a 3-year, $333.33 ordinary annuity.
The PV of the $1,000 lump sum has a smaller present value than the PV
of a 3-year, $333.33 ordinary annuity.

Question 2
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:

If a loan has a nominal annual rate of 7%, then the effective rate will
never be less than 7%.

Correct
Answer:

If a loan has a nominal annual rate of 7%, then the effective rate will
never be less than 7%.

Question 3
4 out of 4 points

Your bank account pays a 5% nominal rate of interest. The interest is compounded
quarterly. Which of the following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

The periodic rate of interest is 1.25% and the effective rate of interest
is greater than 5%.
The periodic rate of interest is 1.25% and the effective rate of interest
is greater than 5%.

Question 4
4 out of 4 points

You are considering two equally risky annuities, each of which pays $15,000 per year for
20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is
an annuity due. Which of the following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

The present value of DUE exceeds the present value of ORD, and the
future value of DUE also exceeds the future value of ORD.
The present value of DUE exceeds the present value of ORD, and the
future value of DUE also exceeds the future value of ORD.

Question 5
4 out of 4 points

Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest,
compounded annually. If you invest $2,000 in the CD, how much will you have when it

matures?
Answer
Selected Answer:
$3,754.27
Correct Answer:
$3,754.27

Question 6
4 out of 4 points

Of the following investments, which would have the lowest present value? Assume that
the effective annual rate for all investments is the same and is greater than zero.
Answer
Selected Answer:
Investment D pays $2,500 at the end of 10 years (just one payment).
Correct Answer:
Investment D pays $2,500 at the end of 10 years (just one payment).

Question 7
4 out of 4 points

Which of the following statements regarding a 20-year monthly payment amortized


mortgage with a nominal interest rate of 10% is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

Question 8
4 out of 4 points

A larger proportion of the first monthly payment will be interest, and a


smaller proportion will be principal, than for the last monthly payment.
A larger proportion of the first monthly payment will be interest, and a
smaller proportion will be principal, than for the last monthly payment.

Which of the following statements is CORRECT?


Answer
Selected
Answer:
Correct
Answer:

The cash flows for an annuity must all be equal, and they must occur at
regular intervals, such as once a year or once a month.
The cash flows for an annuity must all be equal, and they must occur at
regular intervals, such as once a year or once a month.

Question 9
4 out of 4 points

Which of the following statements regarding a 15-year (180-month) $225,000, fixed-rate


mortgage is CORRECT? (Ignore taxes and transactions costs.)
Answer
Selected
Answer:
Correct
Answer:

The outstanding balance declines at a faster rate in the later years of


the loan's life.
The outstanding balance declines at a faster rate in the later years of
the loan's life.

Question 10
4 out of 4 points

Your bank account pays an 8% nominal rate of interest. The interest is compounded
quarterly. Which of the following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

Question 11
4 out of 4 points

The periodic rate of interest is 2% and the effective rate of interest is


greater than 8%.
The periodic rate of interest is 2% and the effective rate of interest is
greater than 8%.

Which of the following statements is CORRECT?


Answer
Selected
Answer:
Correct
Answer:

The present value of a 3-year, $150 annuity due will exceed the present
value of a 3-year, $150 ordinary annuity.
The present value of a 3-year, $150 annuity due will exceed the present
value of a 3-year, $150 ordinary annuity.

Question 12
4 out of 4 points

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of


deposit (CD) that pays 3.5% interest, compounded annually. How much will you have
when the CD matures?
Answer
Selected Answer:
$1,781.53
Correct Answer:
$1,781.53

Question 13
4 out of 4 points

At the end of 10 years, which of the following investments would have the highest future
value? Assume that the effective annual rate for all investments is the same and is greater
than zero.
Answer
Selected
Answer:
Correct
Answer:

Question 14

Investment A pays $250 at the beginning of every year for the next 10
years (a total of 10 payments).
Investment A pays $250 at the beginning of every year for the next 10
years (a total of 10 payments).

4 out of 4 points

Which of the following statements is CORRECT, assuming positive interest rates and
holding other things constant?
Answer
Selected
Answer:
Correct
Answer:

If an investment pays 10% interest, compounded quarterly, its effective


annual rate will be greater than 10%.
If an investment pays 10% interest, compounded quarterly, its effective
annual rate will be greater than 10%.

Question 15
4 out of 4 points

You plan to analyze the value of a potential investment by calculating the sum of the
present values of its expected cash flows. Which of the following would increase the
calculated value of the investment?
Answer
Selected Answer:
The discount rate decreases.
Correct Answer:
The discount rate decreases.

Question 16
4 out of 4 points

Which of the following statements is NOT CORRECT?


Answer
Selected
Answer:
Correct
Answer:

All else equal, bonds with larger coupons have greater interest rate
(price) risk than bonds with smaller coupons.
All else equal, bonds with larger coupons have greater interest rate
(price) risk than bonds with smaller coupons.

Question 17
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:

Correct
Answer:

The market value of a bond will always approach its par value as its
maturity date approaches, provided the bond's required return remains
constant.
The market value of a bond will always approach its par value as its
maturity date approaches, provided the bond's required return remains
constant.

Question 18
4 out of 4 points

A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until
the bond matures. The bond has a yield to maturity of 6%. Which of the following
statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

If market interest rates remain unchanged, the bond's price one year
from now will be lower than it is today.
If market interest rates remain unchanged, the bond's price one year
from now will be lower than it is today.

Question 19
4 out of 4 points

The YTMs of three $1,000 face value bonds that mature in 10 years and have the same
level of risk are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual
coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest
rates remain constant for the next 10 years, which of the following statements is
CORRECT?

Answer
Selected
Answer:
Correct
Answer:

Bond A sells at a discount (its price is less than par), and its price is
expected to increase over the next year.
Bond A sells at a discount (its price is less than par), and its price is
expected to increase over the next year.

Question 20
4 out of 4 points

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a
premium. Which of the following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

If the yield to maturity remains at 8%, then the bond's price will
decline over the next year.
If the yield to maturity remains at 8%, then the bond's price will
decline over the next year.

Question 21
4 out of 4 points

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the
following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

Question 22
4 out of 4 points

If the yield to maturity remains constant, the bond's price one year from
now will be lower than its current price.
If the yield to maturity remains constant, the bond's price one year from
now will be lower than its current price.

Bonds A and B are 15-year, $1,000 face value bonds. Bond A has a 7% annual coupon,
while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%,
which is expected to remain constant for the next 15 years. Which of the following
statements is CORRECT?
Answer
Selected Answer:
One year from now, Bond A's price will be higher than it is today.
Correct Answer:
One year from now, Bond A's price will be higher than it is today.

Question 23
4 out of 4 points

Nicholas Industries can issue a 20-year bond with a 6% annual coupon. This bond is not
convertible, is not callable, and has no sinking fund. Alternatively, Nicholas could issue a
20-year bond that is convertible into common equity, may be called, and has a sinking
fund. Which of the following most accurately describes the coupon rate that Nicholas
would have to pay on the convertible, callable bond?
Answer
Selected Answer:
It could be less than, equal to, or greater than 6%.
Correct Answer:
It could be less than, equal to, or greater than 6%.

Question 24
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:

Correct
Answer:

If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if
interest rates then dropped to the point where rd = YTM = 5%, we could be
sure that the bond would sell at a premium above its $1,000 par value.
If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if
interest rates then dropped to the point where rd = YTM = 5%, we could be
sure that the bond would sell at a premium above its $1,000 par value.

Question 25
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:

If a coupon bond is selling at par, its current yield equals its yield to
maturity.

Correct Answer:
If a coupon bond is selling at par, its current yield equals its yield to
maturity.

Question 26
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:

All else equal, if a bond's yield to maturity increases, its price will
fall.

Correct Answer:
All else equal, if a bond's yield to maturity increases, its price will
fall.

Question 27
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:
Correct
Answer:

All else equal, long-term bonds have less reinvestment rate risk than
short-term bonds.
All else equal, long-term bonds have less reinvestment rate risk than
short-term bonds.

Question 28
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:

If a coupon bond is selling at par, its current yield equals its yield to
maturity.

Correct Answer:
If a coupon bond is selling at par, its current yield equals its yield to
maturity.

Question 29
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:

Correct
Answer:

Sinking fund provisions sometimes turn out to adversely affect


bondholders, and this is most likely to occur if interest rates decline after
the bond has been issued.
Sinking fund provisions sometimes turn out to adversely affect
bondholders, and this is most likely to occur if interest rates decline after
the bond has been issued.

Question 30
4 out of 4 points

Which of the following statements is CORRECT?


Answer
Selected
Answer:
Correct

Reinvestment rate risk is lower, other things held constant, on longterm than on short-term bonds.

Answer:

Reinvestment rate risk is lower, other things held constant, on longterm than on short-term bonds.

Tuesday, May 6, 2014 1:36:42 PM EDT

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