1. Which of the following statements is TRUE? A. The penalty for spending before
ID: 2780914 • Letter: 1
Question
1. Which of the following statements is TRUE?
A. The penalty for spending before earning represents the interest rate from the point of view of the creditors.
B. Ceteris Paribus, a higher interest rate would reduce the PV
C. With compound interest, interest is earned each period only on the original starting amount
D. As bond ratings go from AAA to AA to A, the return that investors require goes down
2. Which of the following statements is TRUE?
A. If interest is compounded more than once a year, the APR would be lower than the EAR
B. The inflation premium is estimated by the author to be the smallest component of nominal interest rates in the period of 1950-1999
C. Interest rate in the U.S were extremely high in the early 1980s because of low maturity premiums.
D. The nominal interest rate represents the purchasing power rate.
3. For a 20 year $1,000 par value 6% annual coupon bond that is selling at a discount, which of the following is TRUE?
A. The price of the bond is above its par value
B. The bond pays $60 in interest every 6 months
C. The YTM of this bond is above 6%
D. Because this bond is selling at a discount, it would be worth less than $1,000 at maturity
4. Which of the following statements is TRUE?
A. There is no such thing as the PV of a perpetuity
B. The formula for the PV of an annuity would give us the value at the end of year 4 for an annuity with a first payment that occurs at the end of year 5.
C. The timeline for a lender of $1,000 for 1 year at a rate of 8% compounded annually would include a negative $1,080 at the end of year 1. [false]
D. The compounding process subtracts the interest part from the PV.
5. Which of the following statements is TRUE?
A. The Fisher Effect illustrates the inverse relationship between inflation and nominal interest rates
B. The nominal interest rate represents the purchasing power rate
C. The inflation premium is estimated by the author to be the smallest component of nominal interest rates in the period 1950-1999
D. If interest is compounded more than once a year, the APR would be lower than the EAR
6. Which of the following statements about Excel is TRUE?
A. FVs and PVs are entered with opposite signs
B. The “Rate” function can be used to find the price of a bond.
C. The “PV” function can be used to find a bond’s YTM
D. When solving for the YTM, if semiannual values are used, the result must be divided by 2 to convert the result to an annual YTM.
Explanation / Answer
Other things remains constant, if interest rate is high then discounting rate of future cash flow would also be high, and so present value of future cash flow would be low.
Option (B) is correct answer.
2.
If interest is compounded more than once a year, the APR would be lower than the EAR. Because Effective annual rate (EAR) means the amount is compounded more than once in a year.
option (A) is correct answer.
3.
If Par value of bond is $1,000 and coupon rate is 6%, it means annual interest rate is $60 and $30 in every 6 months. if bond is selling at discount means current price is lower than Par value, so YTM of bond is higher than coupon rate that is 6%.
Option (C) is correct answer.
4.
The formula for the PV of an annuity would give us the value at the end of year 4 for an annuity with a first payment that occurs at the end of year 5.
Option (B) is correct answer.
5.
The Fisher Effect illustrates the inverse relationship between inflation and nominal interest rates
Option (A) is correct answer.
6.
FVs and PVs are entered with opposite signs when determining YTM of bond.
Option (A) is correct answer.
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