Southern New Hampshire University
FIN-320 Principles of Finance
EXAM 10 questions and answers
1
Which descriptor relates to the income approach for valuing corporations?
Calculates the value of a company's assets
Is most concerned with stock price
Reflects the forces of supply and demand
Considers required return as a function of risk
CONCEPT
Valuing the Corporation
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2
Kean receives $200 today.
According to the time value of money, the $200 he has today is worth the $200 that he could
receive next year.
more than
twice as much as
less than
the same as
CONCEPT
Introduction to the Time Value of Money
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3
A fund manager who oversees a mutual fund with the goal of keeping it a desirable investment is an
example of an .
intermediary
index
issuer
investor
CONCEPT
Stock Markets
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4
How are interest rate risk and reinvestment risk related to one another?
Because they are inversely related, one can be eliminated or
diminished, but not both.
They can both be moderated by holding a bond until its maturity.
One relates to a bond's coupon payments and the other relates to
its maturity payment.
They are directly related, so as interest rate risk increases, so
does reinvestment risk.
CONCEPT
Bond Risk
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5
Select one advantage of an annuity for a borrower.
It is typically easier to repay a loan as a single lump sum.
It is repaid more quickly than other types of loans.
Annuities always have lower interest rates than regular loans.
It offers predictable and regular payments for the life of the annuity.
CONCEPT
Annuities
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6
Which of the following impacts a bond's interest rate (coupon rate)?
The financing needs of the issuer
The market demand for the bond
The face value of the bond
The bond's time to maturity
CONCEPT
Understanding Bonds
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7
Select the pairing that is correctly matched.
Common stock: has a stronger claim to income versus preferred
stock
Preferred stock: has the right to be paid any missed dividends
Common stock: receives a regular dividend that is a percentage
of face value
Preferred stock: may only vote in person at a company's annual
general meeting
CONCEPT
Rules and Rights of Common and Preferred Stock
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8
How do common stock and preferred stock differ?
Unlike common stock, preferred stock is considered to be risk-free.
Unlike preferred stock, common stock can command dividends.
Unlike common stock, preferred stock is rated by credit
rating agencies.
Unlike common stock, preferred stock comes with
preemptive rights.
CONCEPT
Types of Stock
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9
Wendy wants to buy a bond that will maximize her periodic interest payments, and she is willing to take on an
increased level of default risk in return.
What kind of bond should she buy?
Convertible
Subordinated
Floating-rate
Government
CONCEPT
Types of Bonds
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10
What is the present value of a $50,000 payment you will receive in one year, assuming a discount rate of 5%?
$48,765
$47,619
$39,176
$47,573
CONCEPT
Present Value, Single Cash Flows
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11
On the same day, you make two $5,000 investments. Investment A accrues 8% interest annually and investment
B accrues 4% interest annually.
Which of the following is true?
CONCEPT
Investment B has the larger future value.
Investment A has the larger present value.
The two investments have the same future value.
Investment A has the larger future value.
Additional Detail on Present and Future Values
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12
Yusef purchased a $10,000 30-year Treasury bond that promised to pay him 1.3% of the face value every 6
months for the life of the loan.
Which of those numbers is the coupon rate of the bond?
30
10,000
1.3
6
CONCEPT
Key Characteristics of Bonds
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13
Consider what you have learned about valuing bonds.
•A: Coupon rate = 1.75%, YTM = 2%
•B: Coupon rate = 2.375%, YTM = 2.375%
•C: Coupon rate = 3.25%, YTM = 3%
•D: Coupon rate = 3%, YTM = 3.5%
Which of the bonds is selling at a premium?
D
B
A
C
CONCEPT
Valuing Bonds
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14
Multiple cash flows are an annuity if they have which three traits?
Fixed payment size, payment at a regular interval and a
fluctuating interest rate
Decreasing payment size, payment at a regular interval and
a constant interest rate
Fixed payment size, payment at a regular interval and a
constant interest rate
Fluctuating payment size, payment at a regular interval and a
fluctuating interest rate
CONCEPT
Valuing Multiple Cash Flows
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15
Stockholders may exercise their preemption rights in order to their proportional stake in
the company.
protect
reduce
sell
expand
CONCEPT
Defining Stock
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16
Which of the following is an advantage of bonds for a potential investor?
They provide a more consistent and reliable income stream
than stocks.
Bond prices are set by the indenture and cannot fall.
They are not subject to any form of risk.
A bondholder can "call" the bond and demand final payment early.
CONCEPT
Advantages and Disadvantages of Bonds
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17
Which yield curve is often associated with the beginning of a recession?
Steep
Inverted
Flat
Normal
CONCEPT
The Basics of Interest Rates
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18
When comparing yields on an investment, which measurement of yield omits the accrual of
compounded interest?
APR
NPV
APY
EAR
CONCEPT
Yield
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19
You loan a friend $1,500 for one year and with an interest rate of 4%.
What is the value of your $1,500 when your friend pays you back?
$1,440
$1,520
$2,100
$1,560
