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Questions And Answers - Chris Whaley -
University of Alabama
T or F: time value of money rewards those who are willing to wait - correct answer ✅true sometimes payments are made in unequal amounts, so you have to treat each one as its own sum - correct answer ✅multiple mixed cash flows An auto dealer gives you the option to pay for your car in one installment of $8,000 and two additional installments of $4,000. You could describe this as ____________ __________ __________ ____________ - correct answer ✅multiple mixed cash flows a level stream of cash flows at regular intervals with a finite maturity - correct answer ✅annuities annuities that are paid at the beginning of each period - correct answer ✅annuity due
Questions And Answers - Chris Whaley -
University of Alabama
annuities that are paid at the end of each period - correct answer ✅ordinary annuity rent and insurance are examples of annuities that are paid at the beginning of each period. is this an annuity due or an ordinary annuity? - correct answer ✅annuity due mortgage and loan payments are examples of annuities that are paid at the end of each period. is this an annuity due or an ordinary annuity? - correct answer ✅ordinary annuity What is the formula for future value annuity due? - correct answer ✅FV (annuity due) = FV (ordinary annuity) x (1 + r) What is the formula for present value annuity due? - correct answer ✅PV (annuity due) = PV (ordinary annuity) x (1 + r)
Questions And Answers - Chris Whaley -
University of Alabama
b. last payment covers what is left over from interest and principal amount c. the amount gets smaller and smaller after each payment is made auto loans with monthly payments, student loans, credit cards, etc. are examples of ________________________________ - correct answer ✅amortization amortization involves _________________ payments that reduce the _____________________ and ______________ until it's all gone - correct answer ✅fixed, principal, interest annual interest if interest was charged once per year - correct answer ✅annual percentage rate T or F: most common rate quoted by financial institutions is effective annual rate - correct answer ✅false, APR
Questions And Answers - Chris Whaley -
University of Alabama
What is the formula for APR? - correct answer ✅APR = r x M r = rate M = # of times interest is charged the true rate of return to the lender and true cost to borrower - correct answer ✅effective annual rate EAR takes into account _______________ payments - correct answer ✅non-annual the more compounding periods, the ___________ the interest rate
correct answer ✅higher Having more compounding periods is better for ____________ and worse for ________________ - correct answer ✅lenders, borrowers
Questions And Answers - Chris Whaley -
University of Alabama
the process of determining fair value of a bond interest - correct answer ✅bond pricing As the YTM goes down, the bond prices go ______ - correct answer ✅up most companies and government bonds pay coupons on a _______________ basis - correct answer ✅semi-annual T or F: Some companies issue zero-coupon bonds by selling them at a deep discount - correct answer ✅true T or F: for computing the price of these bonds, the values of the inputs have to be adjusted according to frequency of yield to maturity - correct answer ✅false, coupons
Questions And Answers - Chris Whaley -
University of Alabama
expected rate of return on the bond if held to maturity - correct answer ✅yield to maturity T or F: Yield to maturity changes in economic conditions and risk factors which also changes bond prices - correct answer ✅true the periodical payments in the form of a percentage that the issuer is offering - correct answer ✅coupon rate T or F, the coupon rate is the face value you will receive if bond is kept to maturity - correct answer ✅false, yield to maturity T or F: the longer bonds are kept, the more sensitive they are to rate changes - correct answer ✅true
Questions And Answers - Chris Whaley -
University of Alabama
period in which bond cannot be called - correct answer ✅call protection T or F: US federal bonds are considered some of the riskiest bonds you can go after - correct answer ✅false involves the bond issuer not paying on its bond obligations (either coupon or face value) - correct answer ✅default (credit) risk the diff between the return on federal bonds (safe) and corporate bonds (risky) is that - correct answer ✅default premium organizations that provide insight into a bond's risk with their rating scale - correct answer ✅credit rating agencies
Questions And Answers - Chris Whaley -
University of Alabama
common ratings from two major credit rating firms - correct answer ✅bond ratings a ranking of debt priority to be serviced - correct answer ✅seniority T or F, seniority states that a senior claim is paid first before any subordinate (junior claims) - correct answer ✅true debt that is backed by collateral that can be claimed by the firm if borrower defaults on the loan (can't pay back) - correct answer ✅secured debt restrictions imposed by the bondholders on the use of borrowed funds - correct answer ✅protective convenants
