Southern New Hampshire University
FIN-320 Principles of Finance
EXAM 4 questions and answers
1
Which yield curve is often associated with the beginning of a recession?
Normal
Flat
Inverted
Steep
CONCEPT
The Basics of Interest Rates
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2
Multiple cash flows are an annuity if they have which three traits?
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
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
CONCEPT
Valuing Multiple Cash Flows
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3
Select the pairing that is correctly matched.
Preferred stock: may only vote in person at a company's annual
general meeting
Common stock: receives a regular dividend that is a percentage
of face value
Common stock: has a stronger claim to income versus preferred
stock
Preferred stock: has the right to be paid any missed dividends
CONCEPT
Rules and Rights of Common and Preferred Stock
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4
How are interest rate risk and reinvestment risk related to one another?
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.
Because they are inversely related, one can be eliminated or
diminished, but not both.
They are directly related, so as interest rate risk increases, so
does reinvestment risk.
CONCEPT
Bond Risk
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5
A fund manager who oversees a mutual fund with the goal of keeping it a desirable investment is an
example of an .
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7
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
less than
twice as much as
the same as
CONCEPT
Introduction to the Time Value of Money
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8
Which of the following impacts a bond's interest rate (coupon rate)?
The bond's time to maturity
The face value of the bond
The market demand for the bond
The financing needs of the issuer
CONCEPT
Understanding Bonds
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9
What is the present value of a $50,000 payment you will receive in one year, assuming a discount rate of 5%?
$48,765
$39,176
$47,573
$47,619
CONCEPT
Present Value, Single Cash Flows
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10
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?
$1,560
$2,100
$1,520
$1,440
CONCEPT
Future Value, Single Cash Flows
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11
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?
CONCEPT
30
1.3
10,000
6
Key Characteristics of Bonds
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12
Which descriptor relates to the income approach for valuing corporations?
Is most concerned with stock price
Considers required return as a function of risk
Reflects the forces of supply and demand
Calculates the value of a company's assets
CONCEPT
Valuing the Corporation
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13
Which of the following is an advantage of bonds for a potential investor?
They provide a more consistent and reliable income stream
than stocks.
They are not subject to any form of risk.
Bond prices are set by the indenture and cannot fall.
A bondholder can "call" the bond and demand final payment early.
CONCEPT
Advantages and Disadvantages of Bonds
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14
Stockholders may exercise their preemption rights in order to their proportional stake in
the company.
reduce
sell
protect
expand
CONCEPT
Defining Stock
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15
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?
Government
Floating-rate
Subordinated
Convertible
CONCEPT
Types of Bonds
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16
Determine the value of a stock with the following variables using the constant growth model:
•Current annual dividend: $3.25 per share
•Required return rate: 6%
•Constant growth rate: 5.5%
$673.00
$689.00
$685.75
$650.00
CONCEPT
Stock Valuation
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17
Select one advantage of an annuity for a borrower.
It is repaid more quickly than other types of loans.
It offers predictable and regular payments for the life of the annuity.
Annuities always have lower interest rates than regular loans.
It is typically easier to repay a loan as a single lump sum.
CONCEPT
Annuities
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18
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?
C
B
A
D
CONCEPT
Valuing Bonds
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19
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?
Investment A has the larger present value.
Investment B has the larger future value.
The two investments have the same future value.
Investment A has the larger future value.
CONCEPT
Additional Detail on Present and Future Values
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20
How do common stock and preferred stock differ?
Unlike common stock, preferred stock comes with
preemptive rights.
Unlike common stock, preferred stock is rated by credit
rating agencies.
Unlike common stock, preferred stock is considered to be risk-free.
