True
False
Answer: True
Question: The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) weather conditions.
True
False
Answer: False
Question: All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.
True
False
Answer: True
Question: A time line is meaningful even if all cash flows do not occur annually.
True
False
Answer: True
Question: According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.
Answer Options:
a. True
b. False
Answer: a. True
Question: Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.
a. True
b. False
Answer: a
Question: As a general rule, a company’s debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.
Answer Options:
a. True
b. False
Answer: a
Question: Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
a. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
b. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
c. A bank loan’s nominal interest rate will always be equal to or greater than its effective annual rate.
d. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.
e. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
Answer: d
Question: 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.
Answer: 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.
Question: The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan’s life, the greater the percentage of the payment that will be a repayment of principal.
True
False
Answer: True
Question: Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the beginning of the periods.
d. The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
e. 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.
Answer Options:
a) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
b) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
c) The cash flows for an annuity due must all occur at the beginning of the periods.
d) The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
e) 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.
Answer: c
Question: The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT?
a. All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
b. An indenture is a bond that is less risky than a mortgage bond.
c. The expected return on a corporate bond will generally exceed the bond’s yield to maturity.
d. If a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors will also exceed its yield to maturity.
e. Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
Answer: a
Question: Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the ends of the periods.
d. The cash flows for an annuity may all be equal, and they must occur at regular intervals, such as once a year or once a month.
e. 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.
Answer Options:
a) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
b) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
c) The cash flows for an annuity due must all occur at the ends of the periods.
d) The cash flows for an annuity may all be equal, and they must occur at regular intervals, such as once a year or once a month.
e) 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.
Answer: d
Question: Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.
True
False
Answer: False