Question

# 6.   If the general level of interest rates goes down and I am holding a bond with...

6.   If the general level of interest rates goes down and I am holding a bond with a fixed coupon rate, I would expect the value of my bond to

a.stay the same

b.double

c.increase

d.decrease

e.not enough information to tell

7.  The Rule of 72’s

a.Is about doubling the present value to get the future value.

b.Says that 72 divided by the payment gives you the number of years to double.

c.Says that the rate divided by 72 gives you the number of years to double.

d.Both a and b

e.Both a and c

8.  A perpetuity with a payment of \$16,000 per year and a return of 8% would cost you

a.            \$1,120,000

b.\$2,283,714

c.\$1,600,000

d.\$200,000

e.\$228,571

9.  The rates that banks are required to use in quoting to customers is

a.The Annual Percentage Rate

b.The Fisher Effect

c.The Effective Annual Rate

d.The Effective Annual Yield

e.None of the above

10. A 12% loan with semiannual payments for 30 years

a.Would have payments twice a year.

b.Would have 330 payments.

c.Would have a rate of 1% per month.

d.Would have payments greater than \$1,000 each.

e.Would be difficult to pay off in 30 years.

11. If a bond is callable January – June each year, then

a.The bond CANNOT be called on March 1.

b.The bond is call protected July – December each year.

c.The bond CAN be called on September 30.

d.The bond can be called anytime.

e.The call dates can change from year to year.

12. Which of the following is FALSE about a put provision on a bond?

a.It lowers the coupon rate because of lower risk.

b.It allows bondholders to turn in the bond for cash.

c.It is the reverse of a call provision.

d.It can be added to the bond indenture at any time.

e.It is popular with bondholders.

13. Jamie’s grandmother has a semiannual \$1,000 bond with five years to maturity and she knows that the rate in the marketplace is 6%.  Jamie looked in the WSJ and saw that the bond was selling at 97.  She computed her grandmother’s coupon payment amount to be \$26.48.  Which of the following is true?

a.  This is correct.

b.  This is not correct because Jamie forgot to multiply the WSJ price by 1000.

c.  This is not correct because Jamie forgot to put her present value in as a negative.

d.  This is not correct because Jamie switched the coupon rate and the YTM.

e.  This is not correct because Jamie forgot to double the answer she got in her calculator.

14. An example of an ordinary annuity would be

a.              Dinner at McDonald’s in which you pay for your food before you receive it.

b.            Your rent, which you pay on the first of the month.

c.            Admission to a movie, where you pay before seeing the movie.

e.            None of the above.

15. Ben has computed the value of a stock to be \$69.32 using the things he learned in BA3500.  His stock broker is on the phone asking if he would like to buy some shares at a price of \$69.25.  What should Ben do?

a.  Tell the broker to buy him 100 shares.

b.  Tell the broker that he does not want to buy any.

c.  Tell the broker that if he calls him again with a bad recommendation, he will change brokers.

d.  Tell the broker that he is using false advertising and Ben will report him to the Better Business Bureau.

e.  None of the above.

16. Which of the following is an assumption of the dividend growth model?

a. G must be greater than R.

b.The stock must pay dividends.

c.Both price and dividend will grow at R indefinitely.

d.The price and dividend will increase gradually over the years.

e.The current dividend divided by 1+g equals the next dividend.

17.  A stock with a dividend yield of 4% and a total yield of 9%

a.Must have a share price greater than \$100.

b.Must have a capital gains yield of 13%.

c.Must have a capital gains yield of 5%.

d.Must be growing at 4%.

e.None of the above.

18. You would use the dividend growth model (DGM) method to determine the value of a stock

a.for a stock that does not pay dividends.

b.with an unusual or non-constant growth pattern

c.when the growth rate of the stock is greater than the rate expected in the marketplace.

d.with the same dividend every time.

e.with a very stable, nominal growth pattern.

19.  A certain investment has an APR of 7% and an EAR of 7%.  From this information we know that:

a.One of the rates must be incorrect.

b.The investment actually earns 7.2%

c.This is not a good investment for several reasons.

d.The investment compounds quarterly.

e.The investment compounds annually.

20.  A grandmother would like to start a savings account for her grandchild when it is born and deposit \$1,000, but then add no more to the account and let it earn interest at 5% until the child is 21. To find out how much will be in the account when the grandchild turns 21, you would do a

a.  multiple payment time value of money computation for future value.

b.  single payment time value of money computation for future value.

c.  multiple payment time value of money computation for present value.

d.  single payment time value of money computation for present value.

e.  None of the above will get to the value of the account after 21 years.

6) The correct choice is e

Explanation : - When the interest rate goes down below below the coupon rate, a fixed rate bonds price will rise above its par value. Such a bond is known as premium bond. However we do not know if the interest rate has decreased below the fixed coupon rate, hence we do not have enough information to tell.

7) The correct choice is a

Explanation : - The rule of 72 will tell an investor how many years it will take for the principal of an account to double in value.

8) The correct choice is d

Explanation : - Cost of perpetuity = \$ 16,000 0.08

Cost of perpetuity = \$ 200,000

9) The correct choice is a

Explanation : - Banks quote the interest rate to customers on a yearly basis which is expressed as annual percentage rate.

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