True
False
Answer: False
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the current state of the weather. If the weather is dark and stormy, the cost of money will be higher than if it is bright and sunny, other things held constant.
True
False
Answer: False
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the time preference for consumption. The higher the time preference, the lower the cost of money, other things held constant.
True
False
Answer: False
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) the skill level of the economy’s labor force.
True
False
Answer: False
Question: Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.
True
False
Answer: False
Question: A time line is not meaningful unless all cash flows occur annually.
True
False
Answer: False
Question: Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
True
False
Answer: True
Question: When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment’s percentage declines in the loan’s later years.
True
False
Answer: False
Question: Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?
a. Adding additional restrictive covenants that limit management’s actions.
b. Adding a call provision.
c. The rating agencies change the bond’s rating from Baa to Aaa.
d. Making the bond a first mortgage bond rather than a debenture.
e. Adding a sinking fund.
Answer: b
Question: A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary.
Answer Options:
a. True
b. False
Answer: True
Question: 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?
a. 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.
b. 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.
c. The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
d. The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.
e. 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.
Answer: a
Question: Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
b. The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
c. The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
d. The periodic rate of interest is 3% and the effective rate of interest is 6%.
e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.
Answer Options:
a) The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
b) The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
c) The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
d) The periodic rate of interest is 3% and the effective rate of interest is 6%.
e) The periodic rate of interest is 6% and the effective rate of interest is also 6%.
Answer: b
Question: Which of the following statements is CORRECT?
a. The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
b. If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
c. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
d. The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
e. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
Answer: a