You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually.
What is the value of your $30,000 in five years?
•
$27,000
•
$33,000
•
$26,878
•
$33,122
2
Select the
...
You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually.
What is the value of your $30,000 in five years?
•
$27,000
•
$33,000
•
$26,878
•
$33,122
2
Select the best definition of an annuity-due.
•
An annuity whose payments are made at the beginning of the period
•
An annuity whose payments are made at the end of the period
•
An annuity whose payments can be made at any point during the period
•
An annuity that has matured
3
What effect would a CCC credit rating likely have on a bond?
•
The bond would have a higher interest rate to compensate for increased risk.
•
The bond would have a typical interest rate because the bond is considered investment grade.
•
The bond would have a lower interest rate because the credit rating is poor.
•
The bond's interest rate would be unaffected because credit rating agencies are not considered impartial.
4
An investment fund that uses more complex investment strategies to generate returns for their wealthy or institutional investors is a(n) __________.
•
hedge fund
•
mutual fund
•
exchange-traded fund
•
index fund
5
When an investor purchases stock, he or she becomes a(n) __________ of the issuing company.
•
employee
•
director
•
creditor
•
owner
6
You would like to have $10,000 in an account after eight years’ time.
If the account earns 2.5% compounded interest yearly, how much would you have to deposit today?
•
$8,207
•
$9,765
•
$8,333
•
$9,464
7
Which of the following is a disadvantage of bonds for a potential investor?
•
They are more likely than stocks to end up valueless if a company goes bankrupt.
•
Some bonds can be redeemed early by the issuer.
•
Bondholders risk a significant price drop if a large number of bonds are sold at once.
•
They have less legal protection than stocks.
8
Which of the following is true for calculating the future value of multiple cash flows?
•
If the cash flows aren't uniform, you must find the FV of each cash flow and then add them together.
•
It is more complex to find the FV of annuities than the FV of irregular cash flows.
•
To find the FV of multiple annuities, multiply the sum of all the present values by the interest rate plus time period.
•
You can only find the FV of multiple cash flows if they all have the same interest rate.
9
Select the statement that correctly explains the relationship between interest rates and present or future value.
•
Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases.
•
Assuming other variables stay the same, if the interest rate increases, the future value of an investment increases.
•
The interest rate and the future value of an investment are inversely related.
•
Assuming other variables stay the same, if the interest rate decreases, the future value of an investment increases.
10
Which of the following accurately describes a flat yield curve?
•
A curve with a minimal spread between short-term and long-term maturities and that indicates concern or doubt about the strength of the economy.
•
A curve that slopes downward as maturities lengthen and that indicates confidence that economic activity will grow in the future.
•
A curve that rises sharply and then levels off as maturities lengthen and that indicates a transition between a period of economic stagnation to one of growth.
•
A curve that slopes upward as maturities lengthen and that indicates fear that the economy is about to enter a recession.
11
In calculating the yield of an investment, what is the relationship between APR and APY?
•
APR is always slightly higher than APY if an investment is earning compounding interest.
•
APR is always slightly lower than APY if an investment is earning compounding interest.
•
APR can be higher or lower than the APY of a compounding investment, depending on how high the interest rate is.
•
APR and APY are two ways of expressing the same measurement of yield.
12
Select the statement that is true of preferred stock.
•
Preferred stock can be converted into common stock.
•
Preferred stock does not change in value.
•
Preferred stock has less protection than common stock if a company goes bankrupt.
•
Preferred stockholders have a degree of control over corporate policy.
13
Which descriptor relates to the asset-based approach for valuing corporations?
•
Analyzes what the company owns
•
Involves an analysis of risk
•
Considers the weighted average cost of capital
•
Multiplies the share price by number of shares outstanding
14
Rochelle wants to buy a bond, but she wants to avoid interest rate risk. She also prefers to receive a payment every three months instead of the traditional six months.
What type of bond should she buy?
•
Zero-coupon
•
Government
•
Floating-rate
•
Fixed-rate
15
Janice purchased a $1,000 10-year Treasury note that promised to pay her 1.125% interest every 6 months for the life of the loan.
Which of those numbers is the par value of the note?
•
1,000
•
6
•
1.125
•
10
16
Consider what you have learned about valuing bonds.
• A: Coupon rate = 3.5%, YTM = 4%
• B: Coupon rate = 3.2%, YTM = 3.2%
• C: Coupon rate = 2.8%, YTM = 3.5%
• D: Coupon rate = 4%, YTM = 3.7%
Which of the bonds is selling at a premium?
•
B
•
D
•
A
•
C
17
Hunter is going to receive $3,000 in one year and he wants to know its equivalent value today.
The process of determining the answer is called ______.
•
rating
•
discounting
•
compounding
•
pricing
18
Select the pairing that is correctly matched.
•
Preferred stock: stockholder receives interest from the issuer
•
Preferred stock: cannot be converted for common stock shares
•
Common stock: the value of the stock is dependant upon the overall value of the company
•
Common stock: the issuer must honor any missed dividend payments
19
Determine the value of a stock with the following variables using the constant growth model:
• Current annual dividend: $2.75 per share
• Required return rate: 8.5%
• Constant growth rate: 6%
•
$116.60
•
$114.70
•
$119.35
•
$110.00
20
Select the true statement about default risk.
•
Default risk relates to a bond's periodic coupon payments, but not to its maturity payment.
•
Bondholders are guaranteed to be repaid in full if a company enters bankruptcy.
•
It is the risk that the bond's price will fall below its par value.
•
Bondholders have a degree of legal protection against default risk, but it is not comprehensive.
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