FIN 3716

1. An ordinary annuity is best defined by which one of the following?
A. increasing payments paid for a definitive period of time
B. increasing payments paid forever
C. equal payments paid at regular intervals over a stated time period
D. equal payments p

C

2. Which one of the following accurately defines a perpetuity?
A. a limited number of equal payments paid in even time increments
B. payments of equal amounts that are paid irregularly but indefinitely
C. varying amounts that are paid at even intervals fo

D

3. Which one of the following terms is used to identify a British perpetuity?
A. ordinary annuity
B. amortized cash flow
C. annuity due
D. discounted loan
E. consol

E

4. The interest rate that is quoted by a lender is referred to as which one of the following?
A. stated interest rate
B. compound rate
C. effective annual rate
D. simple rate
E. common rate

A

5. A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?
A. stated rate
B. discounted annual rate
C. effective annual rate
D. periodic monthly rate
E. consolidated monthly rate

C

6. What is the interest rate charged per period multiplied by the number of periods per year called?
A. effective annual rate
B. annual percentage rate
C. periodic interest rate
D. compound interest rate
E. daily interest rate

B

8. Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?
A. amortized loan
B. modified loan
C. balloon loan
D. pure discount loan
E. interest-only loan

E

10. Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?
A. amortized loan
B. conti

C

11. You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of

E

12. You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual paymen

C

15. Which one of the following statements related to annuities and perpetuities is correct?
A. An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually.
B. A perpetuity co

B

17. Which one of the following statements concerning interest rates is correct?
A. Savers would prefer annual compounding over monthly compounding.
B. The effective annual rate decreases as the number of compounding periods per year increases.
C. The effe

C

19. Which one of the following statements correctly states a relationship?
A. Time and future values are inversely related, all else held constant.
B. Interest rates and time are positively related, all else held constant.
C. An increase in the discount r

E

20. Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate?
A. annual
B. semi-annual
C. monthly
D. daily
E. continuous

E

21. The entire repayment of which one of the following loans is computed simply by computing a single future value?
A. interest-only loan
B. balloon loan
C. amortized loan
D. pure discount loan
E. bullet loan

D

22. How is the principal amount of an interest-only loan repaid?
A. The principal is forgiven over the loan period so does not have to be repaid.
B. The principal is repaid in equal increments and included in each loan payment.
C. The principal is repaid

C

24. You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.
A. int

B

25. Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. At a 5.5 percent discount rate, what are these payments worth to you on the day you enter college?
A. $4,201.16
B. $4,299.88
C. $4,509

B

26. You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you today?
A. $172,252.71
B. $178,411.06
C. $181,338.40
D. $

A

27. Phil can afford $180 a month for 5 years for a car loan. If the interest rate is 8.6 percent, how much can he afford to borrow to purchase a car?
A. $7,750.00
B. $8,348.03
C. $8,752.84
D. $9,266.67
E. $9,400.00

C

28. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You

E

29. Your employer contributes $75 a week to your retirement plan. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.5 percent. Given these assumptions, what is this employee benefit worth to you today?

A

30. The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 4.5 percent interest compounded monthly. The first deposit will be

B

31. You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $25 a month for the next six months. In keeping with his reputation, he requires that the fir

E

33. You are scheduled to receive annual payments of $4,800 for each of the next 7 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each

A

35. Trish receives $480 on the first of each month. Josh receives $480 on the last day of each month. Both Trish and Josh will receive payments for next three years. At a 9.5 percent discount rate, what is the difference in the present value of these two

A

36. What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume annual compounding.
A. $301,115
B. $306,492
C. $310,868
D. $342,908
E. $347,267

C

38. Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years?
A. $1,806,429
B. $1,838,369
C. $2,211,407
D. $2,333,572
E. $2,508,316

D

39. Theresa adds $1,000 to her savings account on the first day of each year. Marcus adds $1,000 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at t

A

40. You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at 8.6 percent interest. What is the amount of each payment?
A. $287.71
B. $291.40
C. $301.12
D. $342.76
E. $366.05

E

41. You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?
A. $206,408
B. $229,079
C.

C

42. Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service. HT wants to set aside an equal amo

B

43. Nadine is retiring at age 62 and expects to live to age 85. On the day she retires, she has $348,219 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. How much can

E

44. Kingston Development Corp. purchased a piece of property for $2.79 million. The firm paid a down payment of 15 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent,

A

45. You estimate that you will owe $42,800 in student loans by the time you graduate. The interest rate is 4.25 percent. If you want to have this debt paid in full within six years, how much must you pay each month?
A. $611.09
B. $674.50
C. $714.28
D. $73

B

47. Atlas Insurance wants to sell you an annuity which will pay you $3,400 per quarter for 25 years. You want to earn a minimum rate of return of 6.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?
A. $151,008.24

C

50. You just received an insurance settlement offer related to an accident you had six years ago. The offer gives you a choice of one of the following three offers:
-Option A
-Option B
-Option C
You can earn 7.5 percent on your investments. You do not car

C

52. Stephanie is going to contribute $300 on the first of each month, starting today, to her retirement account. Her employer will provide a 50 percent match. In other words, her employer will contribute 50 percent of the amount Stephanie saves. If both S

E

53. You are considering an annuity which costs $160,000 today. The annuity pays $18,126 a year at an annual interest rate of 7.50 percent. What is the length of the annuity time period?
A. 12 years
B. 13 years
C. 14 years
D. 15 years
E. 16 years

D

54. Today, you borrowed $6,200 on your credit card to purchase some furniture. The interest rate is 14.9 percent, compounded monthly. How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly pay

C

55. Meadow Brook Manor would like to buy some additional land and build a new assisted living center. The anticipated total cost is $23.6 million. The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay

B

56. Today, you are retiring. You have a total of $411,016 in your retirement savings and have the funds invested such that you expect to earn an average of 7.10 percent, compounded monthly, on this money throughout your retirement years. You want to withd

D

57. Gene's Art Gallery is notoriously known as a slow-payer. The firm currently needs to borrow $27,500 and only one company will even deal with them. The terms of the loan call for daily payments of $100. The first payment is due today. The interest rate

C

58. The Wine Press is considering a project which has an initial cash requirement of $187,400. The project will yield cash flows of $2,832 monthly for 84 months. What is the rate of return on this project?
A. 6.97 percent
B. 7.04 percent
C. 7.28 percent
D

B

59. Your insurance agent is trying to sell you an annuity that costs $200,000 today. By buying this annuity, your agent promises that you will receive payments of $1,225 a month for the next 30 years. What is the rate of return on this investment?
A. 5.75

C

62. Your father helped you start saving $20 a month beginning on your 5th birthday. He always made you deposit the money into your savings account on the first day of each month just to "start the month out right." Today completes your 17th year of saving

A

63. Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40th birthday. In an attempt to reach this goal, you decide to save $50 a day, every day until you turn 40. You open an investment account and deposit your first $50 toda

B

66. You just won a national sweepstakes! For your prize, you opted to receive never-ending payments. The first payment will be $12,500 and will be paid one year from today. Every year thereafter, the payments will increase by 3.5 percent annually. What is

C

67. A wealthy benefactor just donated some money to the local college. This gift was established to provide scholarships for worthy students. The first scholarships will be granted one year from now for a total of $35,000. Annually thereafter, the scholar

D

74. You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional $70,000 two years from today. If the applicable discount rate is 11.5 percen

D

77. Lucas will receive $6,800, $8,700, and $12,500 each year starting at the end of year one. What is the future value of these cash flows at the end of year five if the interest rate is 7 percent?
A. $32,418
B. $32,907
C. $33,883
D. $35,411
E. $36,255

C

79. Miley expects to receive the following payments: Year 1 = $60,000; Year 2 = $35,000; Year 3 = $12,000. All of this money will be saved for her retirement. If she can earn an average of 10.5 percent on her investments, how much will she have in her acc

E

82. Wicker Imports established a trust fund that provides $90,000 in scholarships each year for needy students. The trust fund earns a fixed 6 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest incom

D

83. A preferred stock pays an annual dividend of $2.60. What is one share of this stock worth today if the rate of return is 11.75 percent?
A. $18.48
B. $20.00
C. $22.13
D. $28.80
E. $30.55

C

85. You just paid $750,000 for an annuity that will pay you and your heirs $45,000 a year forever. What rate of return are you earning on this policy?
A. 5.25 percent
B. 5.50 percent
C. 5.75 percent
D. 6.00 percent
E. 6.25 percent

D

87. The preferred stock of Casco has a 5.48 percent dividend yield. The stock is currently priced at $59.30 per share. What is the amount of the annual dividend?
A. $2.80
B. $2.95
C. $3.10
D. $3.25
E. $3.40

D

89. What is the annual percentage rate on a loan with a stated rate of 2.25 percent per quarter?
A. 9.00 percent
B. 9.09 percent
C. 9.18 percent
D. 9.27 percent
E. 9.31 percent

A

1. Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
A. coupon
B. face value
C. discount
D. call premium
E. yield

A

2. Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?
A. coupon
B. face value
C. discount
D. yield
E. dirty price

B

3. A bond's coupon rate is equal to the annual interest divided by which one of the following?
A. call price
B. current price
C. face value
D. clean price
E. dirty price

C

4. The specified date on which the principal amount of a bond is payable is referred to as which one of the following?
A. coupon date
B. yield date
C. maturity
D. dirty date
E. clean date

C

5. Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?
A. coupon rate
B. face rate
C. call rate
D. yield to maturity
E. interest rat

D

6. The current yield is defined as the annual interest on a bond divided by which one of the following?
A. coupon
B. face value
C. market price
D. call price
E. dirty price

C

7. An indenture is:
A. another name for a bond's coupon.
B. the written record of all the holders of a bond issue.
C. a bond that is past its maturity date but has yet to be repaid.
D. a bond that is secured by the inventory held by the bond's issuer.
E.

E

8. Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
A. a

B

9. A bond that is payable to whomever has physical possession of the bond is said to be in:
A. new-issue condition.
B. registered form.
C. bearer form.
D. debenture status.
E. collateral status.

C

10. The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
A. note
B. discounted
C. zero-coupon
D. callable
E. debenture

E

11. Which of the following defines a note?
I. secured
II. unsecured
III. maturity less than 10 years
IV. maturity in excess of 10 years
A. III only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

D

16. A call-protected bond is a bond that:
A. is guaranteed to be called.
B. can never be called.
C. is currently being called.
D. is callable at any time.
E. cannot be called during a certain period of time.

E

17. The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:
A. trustee relationships.
B. bylaws.
C. legal bounds.
D. "plain vanilla" conditions.
E. protective covenants

E

36. All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
A. a premium; less than
B. a premium; equal to
C. a discount; less than
D. a discount; higher than
E. par; less than

C

41. Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct?
A. The bonds will

C

44. Which one of the following bonds is the least sensitive to interest rate risk?
A. 3-year; 4 percent coupon
B. 3-year; 6 percent coupon
C. 5-year; 6 percent coupon
D. 7-year; 6 percent coupon
E. 7-year; 4 percent coupon

B

45. As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
A. increases at an increasing rate.
B. increases at a decreasing rate.
C. increases at a constant rate.
D. decreases at an increasing rate.
E. decreases at a decreas

B

50. Texas Foods has a 6 percent bond issue outstanding that pays $30 in interest every March and September. The bonds are investment grade and sell at par. The bonds are callable at a price equal to the present value of all future interest and principal p

D

51. Last year, Lexington Homes issued $1 million in unsecured, non-callable debt. This debt pays an annual interest payment of $55 and matures 6 years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly de

C

55. Which one of the following statements concerning bond ratings is correct?
A. Investment grade bonds are rated BB or higher by Standard & Poor's.
B. Bond ratings assess both interest rate risk and default risk.
C. Split rated bonds are called crossover

C

57. Bonds issued by the U.S. government:
A. are considered to be free of interest rate risk.
B. generally have higher coupons than those issued by an individual state.
C. are considered to be free of default risk.
D. pay interest that is exempt from feder

C

58. Treasury bonds are:
A. issued by any governmental agency in the U.S.
B. issued only on the first day of each fiscal year by the U.S. Department of Treasury.
C. bonds that offer the best tax benefits of any bonds currently available.
D. generally issue

D

59. Municipal bonds:
A. are totally risk-free.
B. generally have higher coupon rates than corporate bonds.
C. pay interest that is federally tax-free.
D. are rarely callable.
E. are free of default-risk.

C

60. The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:
A. 0.05/(1 - t*) = 0.07.
B. 0.05 - (1 - t*) = 0.07.
C. 0.07 + (1 - t*) = 0.05.
D. 0.05 (1 -

A

66. "Cat" bonds are primarily designed to help:
A. municipalities survive economic recessions.
B. corporations respond to overseas competition.
C. the federal government cope with huge deficits.
D. corporations recover from involuntary reorganizations.
E.

E

67. Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?
A. 6-year, putable, high coupon bond
B. 5-year TIPS
C. 10-year AAA cou

E

68. Al is retired and enjoys his daily life. His one concern is that his bonds provide a steady stream of income that will continue to allow him to have the money he desires to continue his active lifestyle without lowering his present standard of living.

B

69. Phil has researched TLM Technologies and believes the firm is poised to vastly increase in value. He wants to invest in this company. Phil has decided to purchase TLM Technologies bonds so that he can have a steady stream of interest income. However,

C

79. Which two of the following factors cause the yields on a corporate bond to differ from those on a comparable Treasury security?
I. inflation risk
II. interest rate risk
III. taxability
IV. default risk
A. I and II only
B. III and IV only
C. I, II, and

B

80. The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $989. What is the yield to maturity?
A. 5.87 percent
B. 5.92 percent
C. 6.08 per

D