FIN 534 Week 1 Discussion 1

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FIN 534 Week 1 Discussion 1

FIN 534 Week 1 Discussion 1

“An Overview of Financial Management”  Please respond to the following:

Determine two (2) reasons why the concept of corporate finance is important to all managers. Support your response with examples of events that demonstrate this importance.

* From the e-Activity, examine ethical behavior within firms in relation to financial management. Provide two (2) examples of companies that have been guilty of ethics-based malfeasance related to financial management and determine why their comeuppance was deserved

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FIN 534 Week 1 Discussion 2

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FIN 534 Week 1 Discussion 2

“An Overview of Financial Management”  Please respond to the following:

Evaluate the overall importance of financial securities to financial managers. Justify your response.

* From the scenario, recommend two (2) actions that Trevose Fitness Center (TFC) could take in order to raise capital that will, in turn, enable it to reach its expansion goals. Defend your response. Support your recommendation with two (2) real-world examples of successful implementations of these actions.

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FIN 534 Week 1 Homework Assignment Chapter 1

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FIN 534 Week 1 Homework Assignment Chapter 1

1. One drawback of switching from a partnership to the corporate form of organization is the following:

a. It subjects the firm to additional regulations.

b. It cannot affect the amount of the firm’s operating income that goes to taxes.

c. It makes it more difficult for the firm to raise additional capital.

d. It makes the firm’s investors subject to greater potential personal liabilities.

e. It makes it more difficult for the firm’s investors to transfer their ownership interests

2. Which of the following statements is CORRECT?

a. The main method of transferring ownership interest in a corporation is by means of a hostile takeover.

b. Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.

c. A corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.

d. Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.

e. Although its stockholders are insulated by limited legal liability, the corporation’s legal status does not protect the firm’s managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions

3. Which of the following statements is CORRECT?

a. In a regular partnership, liability for other partners’ misdeeds is limited to the amount of a particular partner’s investment in the business.

b. Attracting large amounts of capital is more difficult for partnerships than for corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.

c. A slow – growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.

d. The limited partners in a limited partnership have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm’s debts in the event of bankruptcy.

e. A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself

4. Which of the following statements is CORRECT?

a. Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.

b. In a regular partnership, liability for the firm’s debts is limited to the amount a particular partner has invested in the business.

c. A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.

d. Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of permanence of the organization, and difficulty in transferring ownership.

e. A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation

5. Which of the following statements is CORRECT?

a. Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.

b. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.

c. Most business (measured by dollar sales) is conducted by corporations in spite of large corporations’ often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.

d. Large corporations are taxed more favorably than sole proprietorships.

e. Corporate stockholders are exposed to unlimited liability

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FIN 534 Week 2 Discussion 1

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FIN 534 Week 2 Discussion 1

“Financial Statement, Cash Flow, and Taxes”  Please respond to the following:

• Analyze the importance and impact of financial managers being able to understand financial statements. Provide the rationale behind your analysis.

• Imagine that you are starting a business. Determine the tax considerations that might result in you setting the business up as a proprietorship or a partnership, rather than a corporation. Provide a rationale for your decision

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FIN 534 Week 2 Discussion 2

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FIN 534 Week 2 Discussion 2

“Analysis of Financial Statements ”  Please respond to the following:

* From the e-Activity, determine why it is sometimes misleading to compare a company’s financial ratios with those of other firms that operate within the same industry. Support your response with one (1) example from your research.

* From the scenario, determine two (2) strategies that TFC could utilize to reach its expansion goals. You may, for example, consider your analysis of TFC’s financial statements, as well as your knowledge of TFC’s excessive cash position. Provide a rationale for your response.

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FIN 534 Week 2 Homework Assignment Chapter 2

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1. Below are the year-end balance sheets for Wolken Enterprises:

Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10 – year non-callable, long-term debt in 2012. As of the end of 2013, none of the principal on this debt had been repaid. Assume that the company’s sales in 2012 and 2013 were the same. Which of the following statements must be CORRECT?

a. Wolken increased its short-term bank debt in 2013.

b. Wolken issued long-term debt in 2013.

c. Wolken issued new common stock in 2013.

d. Wolken repurchased some common stock in 2013.

e. Wolken had negative net income in 2013

2. On its 2012 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2013. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

a. Dividends could have been paid in 2013, but they would have had to equal the earnings for the year.

b. If the company lost money in 2013, they must have paid dividends.

c. The company must have had zero net income in 2013.

d. The company must have paid out half of its earnings as dividends.

e. The company must have paid no dividends in 2013

3. Below is the common equity section (in millions) of Fethe Industries’ last two year-end balance sheets:

The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

a. The company’s net income in 2011 was higher than in 2012.

b. The company issued common stock in 2012.

c. The market price of the company’s stock doubled in 2012.

d. The company had positive net income in both 2011 and 2012, but the company’s net income in 2009 was lower than it was in 2011.

e. The company has more equity than debt on its balance sheet

4. Which of the following statements is CORRECT?

a. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

b. Typically, a firm’s DPS should exceed its EPS.

c. Typically, a firm’s EBIT should exceed its EBITDA.

d. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.

e. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

5. Which of the following statements is CORRECT?

a. Depreciation and amortization are not cash charges, so neither of them has an effect on a firm’s reported profits.

b. The more depreciation a firm reports, the higher its tax bill, other things held constant.

c. People sometimes talk about the firm’s net cash flow, which is shown as the lowest entry on the income statement, hence it is often called “the bottom line.”

d. Depreciation reduces a firm’s cash balance, so an increase in depreciation would normally lead to a reduction in the firm’s net cash flow.

e. Net cash flow (NCF) is often defined as follows: Net Cash Flow = Net Income + Depreciation and Amortization Charges

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FIN 534 Week 2 Homework Assignment Chapter 3

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1. A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?

a. Issue new common stock and use the proceeds to acquire additional fixed assets.

b. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.

c. Issue new common stock and use the proceeds to increase inventories.

d. Speed up the collection of receivables and use the cash generated to increase inventories.

e. Use some of its cash to purchase additional inventories.

2. Amram Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce the company’s current ratio?

a. Use cash to reduce accounts payable.

b. Borrow using short-term notes payable and use the proceeds to reduce accruals.

c. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

d. Use cash to reduce accruals.

e. Use cash to reduce short-term notes payable.

3. Which of the following statements is CORRECT?

a. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.

b. If a security analyst saw that a firm’s days’ sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.

c. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding (DSO) will increase.

d. There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.

e. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

4. Which of the following statements is CORRECT?

a. If two firms differ only in their use of debti.e., they have identical assets, sales, operating costs, and tax ratesbut one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.

b. If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.

c. A firm’s use of debt will have no effect on its profit margin on sales.

d. If two firms differ only in their use of debti.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax ratesbut one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.

e. The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.

5. Which of the following statements is CORRECT?

a. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

b. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.

c. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.

d. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.

e. If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.

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FIN 534 Week 2 Quiz 1

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FIN 534 Week 2 Quiz 1

FIN 534 Week 2 Quiz 1

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FIN 534 Week 3 Discussion 1

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FIN 534 Week 3 Discussion 1

“Time Value of Money”  Please respond to the following:

• Examine the concept of time value of money in relation to corporate managers. Propose two (2) methods in which time value of money can help corporate managers in general.
• Examine the manner in which financial managers use an opportunity cost rate in discounted cash flow analysis, and determine its position on a timeline. Propose a strategic method in which financial managers can use this rate to evaluate all potential investments.

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FIN 534 Week 3 Discussion 2

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FIN 534 Week 3 Discussion 2

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“Bond, Bond Valuation, and the Interest Rates”  Please respond to the following:

• Examine the pros and cons of a sinking fund from the viewpoint of both a firm and its bondholders. Determine the fundamental manner in which this knowledge could be helpful to a financial manager. Provide a rationale for your response.
• * From the scenario and e-Activity, recommend two (2) bonds that you believe TFC should invest in, and provide a rationale for your recommendation.

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FIN 534 Week 3 Homework Assignment Chapter 4

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FIN 534 Week 3 Homework Assignment Chapter 4

1. Which of the following statements is CORRECT?

a. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

b. A time line is not meaningful unless all cash flows occur annually.

c. Time lines are useful for visualizing complex problems prior to doing actual calculations.

d. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

e. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.

2. Which of the following statements is CORRECT?

a. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

b. A time line is not meaningful unless all cash flows occur annually.

 c. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

d. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

e. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

3. Which of the following statements is CORRECT?

a. Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

b. A time line is not meaningful unless all cash flows occur annually.

c. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

d. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

e. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

4. Which of the following statements is CORRECT?

a. A time line is not meaningful unless all cash flows occur annually.

 b. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

c. Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

d. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

 e. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

5. 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 lower the calculated value of the investment?

a. The discount rate decreases.

b. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

c. The discount rate increases.

d. The riskiness of the investment’s cash flows decreases.

e. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.

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FIN 534 Week 3 Homework Assignment Chapter 5

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1. Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

a. There is no reason to expect a change in the required rate of return.

b. The required rate of return would decline because the bond would then be less risky to a bondholder.

c. The required rate of return would increase because the bond would then be more risky to a bondholder.

d. It is impossible to say without more information.

e. Because of the call premium, the required rate of return would decline.

2. Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

a. Adding a call provision.

b. The rating agencies change the bond’s rating from Baa to Aaa.

c. Making the bond a first mortgage bond rather than a debenture.

d. Adding a sinking fund.

e. Adding additional restrictive covenants that limit management’s actions.

3. Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

a. 20-year, 10% coupon bond.

b. 20-year, 5% coupon bond.

c. 1-year, 10% coupon bond.

d. 20-year, zero coupon bond.

e. 10-year, zero coupon bond.

4. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

a. A 1-year bond with a 15% coupon.

b. A 3-year bond with a 10% coupon.

c. A 10-year zero coupon bond.

d. A 10-year bond with a 10% coupon.

e. An 8-year bond with a 9% coupon.

5. Which of the following bonds has the greatest interest rate price risk?

a. A 10-year, $1,000 face value, zero coupon bond.

b. A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.

c. All 10-year bonds have the same price risk since they have the same maturity.

d. A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

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FIN 534 Week 3 Quiz 2

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FIN 534 Week 4 Discussion 1

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FIN 534 Week 4 Discussion 1.

“Risk and Return”  Please respond to the following:

Take a position on the following statement: “The stand-alone risk of an individual corporate project may be quite high. However, the project’s true risk may be much lower when viewed in the context of its effect on stockholders’ risk.” Provide two (2) examples that support your response.

Determine two (2) critical ways in which anchoring bias and herding behavior contribute to market bubbles. Provide examples to support your response

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FIN 534 Week 4 Discussion 2

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FIN 534 Week 4 Discussion 2

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“Valuation of Stocks and Corporations”  Please respond to the following:

• * From the e-Activity, determine whether stock prices are affected more by long-term or short-term performance. Provide one (1) example of the effect that supports your claim.
• * From the scenario, value a share of TFC’s stock using a growth model method, and compare that value to the current trading price of a share of TFC. Determine whether the stock is undervalued or overvalued. Provide a rationale for your response

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FIN 534 Week 4 Homework Assignment Chapter 6

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FIN 534 Week 4 Homework Assignment Chapter 6

1. You are considering investing in one of the these three stocks

If you are a strict risk minimizer,  you would choose Stock ____ if it is to be held in isolation and  Stock ____ if it is to be held as part of a well-diversified portfolio.

a. A; B.

b. B; A.

c. C; A.

d. C; B.

e. A; A

2. Your friend is considering adding one additional stock to a 3 – stock portfolio, to form a 4 – stock  portfolio. She is highly risk averse and has asked for your advice. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A’s standard deviation of returns is 12% versus 8% for

Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?

a. Stock A.

b. Stock B.

c. Neither A nor B, as neither has a return sufficient to compensate for risk.

d. Add A, since its beta must be lower.

e. Either A or B, i.e., the investor should be indifferent between the two

3. Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

a. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the “true” or “expected future” beta.

b. The beta of an “average stock,” or “the market,” can change over time, sometimes drastically.

c. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.

d. All of the statements above are true.

e. The fact that a security or project may not have a past history that can be used as the basis for calculating beta

4. Stock A’s beta is 1.7 and Stock B’s beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.)

a. Stock B must be a more desirable addition to a portfolio than A.

b. Stock A must be a more desirable addition to a portfolio than B.

c. The expected return on Stock A should be greater than that on B.

d. The expected return on Stock B should be greater than that on A.

e. When held in isolation, Stock A has more risk than Stock B

5. Which of the following statements is CORRECT?

a. If you found a stock with a zero historical beta and held it as the only stock in your  portfolio, you would by definition have a riskless portfolio.

b. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.

c. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.

d. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk – free (default – free) rate of return, r RF .

e. The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks

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FIN 534 Week 4 Homework Assignment Chapter 7

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1. The preemptive right is important to shareholders because it

a. will result in higher dividends per share.

b. is included in every corporate charter.

c. protects the current shareholders against a dilution of their ownership interests.

d. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.

e. allows managers to buy additional shares below the current market price

2. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

a. All common stocks, regardless of class, must have the same voting rights.

b. All firms have several classes of common stock.

c. All common stock, regardless of c lass, must pay the same dividend.

d. Some class or classes of common stock are entitled to more votes per share than other classes.

e. All common stocks fall into one of three classes: A, B, and C

3. Which of the following statements is CORRECT?

a. Two firms with the same expected dividend and growth rates must also have the same stock price.

b. It is appropriate to use the constant growth model to estimate a stock’s value even if its growth rate is never expected to become constant.

c. If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is also 5%.

d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

e. The constant growth model takes into consideration the capital gains investors expect to earn on a stock

4. A stock is expected to pay a year – end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = - 5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

a. The company’s dividend yield 5 years from now is expected to be 10%.

b. The constant growth model cannot be used because the growth rate is negative.

c. The company’s expected capital gains yield is 5%.

d. The company’s expected stock price at the beginning of next year is $9.50.

e. The company’s current stock price is $20

5. If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

a. The stock’s dividend yield is 5%.

b. The price of the stock is expected to decline in the future.

c. The stock’s required return must be equal to or less than 5%.

d. The stock’s price one year from now is expected to be 5% above the current price.

e. The expected return on the stock is 5% a year

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FIN 534 Week 4 Quiz 3

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Question 1

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Answer

The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.

The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.

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

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

If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

2 points

Question 2

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

The periodic interest rate is greater than 3%.

The periodic rate is less than 3%.

The present value would be greater if the lump sum were discounted back for more periods.

The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.

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

2 points

Question 3

Which of the following statements is CORRECT?

Answer

A time line is not meaningful unless all cash flows occur annually.

Time lines are useful for visualizing complex problems prior to doing actual calculations.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.

Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

2 points

Question 4

Which of the following statements is CORRECT?

Answer

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

If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.

If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.

The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

2 points

Question 5

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Answer

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

Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays $2,500 at the end of 10 years (just one payment).

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

2 points

Question 6

Which of the following statements is CORRECT?

Answer

If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.

If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.

To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.

If you solve for I and get a negative number, then you must have made a mistake.

If CF0
is positive and all the other CFs are negative, then you can still solve for I.

2 points

Question 7

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Answer

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

Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays $2,500 at the end of 10 years (just one payment).

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

2 points

Question 8

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

The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.

The discount rate decreases.

The riskiness of the investment’s cash flows increases.

The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

The discount rate increases.

2 points

Question 9

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Answer

The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.

Because the outstanding balance declines over time, the monthly payments will also decline over time.

Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

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

2 points

Question 10

Which of the following statements is CORRECT?

Answer

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

If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.

If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.

The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

2 points

Question 11

Which of the following statements is CORRECT?

Answer

The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.

The cash flows for an annuity due must all occur at the ends of the periods.

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.

If some cash flows occur at the beginning
of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

2 points

Question 12

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

Answer

The periodic rate of interest is 2% and the effective
rate of interest is 4%.

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

The periodic rate of interest is 4% and the effective
rate of interest is less than 8%.

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

The periodic rate of interest is 8% and the effective
rate of interest is also 8%.

2 points

Question 13

You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Answer

Bank 1; 6.1% with annual compounding.

Bank 2; 6.0% with monthly compounding.

Bank 3; 6.0% with annual compounding.

Bank 4; 6.0% with quarterly compounding.

Bank 5; 6.0% with daily (365-day) compounding.
2 points

Question 14

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Answer

The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.

Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

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

2 points

Question 15

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Answer

The monthly payments will decline over time.

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

The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.

The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.

Exactly 10% of the first monthly payment represents interest.

2 points

Question 16

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Answer

If market interest rates decline, the price of the bond will also decline.

The bond is currently selling at a price below its par value.

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

The bond should currently be selling at its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.
2 points

Question 17

Which of the following statements is NOT CORRECT?

Answer

If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.

All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.

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

If a bond is selling at a premium, its current yield will be greater than its yield to maturity.

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

2 points

Question 18

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Answer

The prices of both bonds will decrease by the same amount.

Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

The prices of both bonds would increase by the same amount.

One bond’s price would increase, while the other bond’s price would decrease.

The prices of the two bonds would remain constant.
2 points

Question 19

Which of the following statements is CORRECT?

Answer

All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

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

All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.

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

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

2 points

Question 20

An investor is considering buying one of two 10-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 10 years. Which of the following statements is CORRECT?

Answer

Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

One year from now, Bond A’s price will be higher than it is today.

Bond A’s current yield is greater than 8%.

Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.

Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
2 points

Question 21

Which of the following statements is CORRECT?

Answer

If the maturity risk premium were zero and interest rates were expected to decrease
in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

Liquidity premiums are generally higher on Treasury than corporate bonds.

The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.

Default risk premiums are generally lower on corporate than on Treasury bonds.

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

Question 22

Which of the following statements is CORRECT?

Answer

A zero coupon bond’s current yield is equal to its yield to maturity.

If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at par.

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

If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.

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

2 points

Question 23

Which of the following statements is 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.

Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature.

A sinking fund provision makes a bond more risky to investors at the time of issuance.

Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time.

If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.
2 points

Question 24

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

Answer

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

The bond is selling below its par value.

The bond is selling at a discount.

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

The bond’s current yield is greater than 9%.

2 points

Question 25

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Answer

The price of Bond B will decrease over time, but the price of Bond A will increase over time.

The prices of both bonds will remain unchanged.

The price of Bond A will decrease over time, but the price of Bond B will increase over time.

The prices of both bonds will increase by 7% per year.

The prices of both bonds will increase over time, but the price of Bond A will increase by more.
2 points

Question 26

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Answer

A 1-year zero coupon bond.

A 1-year bond with an 8% coupon.

A 10-year bond with an 8% coupon.

A 10-year bond with a 12% coupon.

A 10-year zero coupon bond.

2 points

Question 27

Under normal conditions, which of the following would be most likely to increase
the coupon rate required to enable a bond to be issued at par?

Answer

Adding additional restrictive covenants that limit management’s actions.

Adding a call provision.

The rating agencies change the bond’s rating from Baa to Aaa.

Making the bond a first mortgage bond rather than a debenture.

Adding a sinking fund.
2 points

Question 28

Which of the following statements is CORRECT?

Answer

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

The total yield on a bond is derived from dividends plus changes in the price of the bond.

Bonds are riskier than common stocks and therefore have higher required returns.

Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.

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.

2 points

Question 29

Which of the following statements is CORRECT?

Answer

All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

An indenture is a bond that is less risky than a mortgage bond.

The expected return on a corporate bond will generally exceed the bond’s yield to maturity.

If a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.

Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.

2 points

Question 30

Which of the following statements is CORRECT?

Answer

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

If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.

If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.

If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

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

This quiz consist of 30 multiple choice questions. The first 15 questions cover the material in Chapter 4. The second 15 questions cover the material in Chapter 5. Be sure you are in the correct Chapter when you take the quiz.

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