### Suppose someone offered you the choice of two equally risky annuities, each paying $10,000 per year for five years. One is an ordinary (or deferred) annuity, the other is an annuity due. Which of the following statements is most correct?

Select one:

a. The present value of the ordinary annuity must exceed the present value of the annuity due, but the future

value of an ordinary annuity may be less than the future value of the annuity due.

b. The present value of the annuity due exceeds the present value of the ordinary annuity, while the future

value of the annuity due is less than the future value of the ordinary annuity.

c. The present value of the annuity due exceeds the present value of the ordinary annuity, and the future

value of the annuity due also exceeds the future value of the ordinary annuity.

d. If interest rates increase, the difference between the present value of the ordinary annuity and the present

value of the annuity due remains the same.

e. Answers a and d are correct.

### Which of the following statements is most correct?

Select one:

a. The present value of an annuity due will exceed the present value of an ordinary annuity (assuming all else

equal).

b. The future value of an annuity due will exceed the future value of an ordinary annuity (assuming all else

equal).

c. The nominal interest rate will always be greater than or equal to the effective annual interest rate.

d. Statements a and b are correct.

e. All of the statements above are correct.

### You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

Select one:

a. The discount rate decreases.

b. The cash fows are extended over a longer period of time, but the total amount of the cash fows remains the same.

c. The discount rate increases.

d. Answers b and c above.

e. Answers a and b above.

### You deposit $2,000 in a savings account that pays 10 percent interest, compounded annually. How much will your account be worth in 15 years?

Select one:

a. $2,030.21

b. $5,000.00

c. $8,091.12

d. $8,354.50

e. $9,020.10

### You can earn 8 percent interest, compounded annually. How much must you deposit today to withdraw $10,000 in 6 years?

Select one:

a. $5,402.69

b. $6,301.70

c. $6,756.76

d. $8,432.10

e. $9,259.26

### You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?

Select one:

a. $1,171

b. $1,126

c. $1,082

d. $1,163

e. $1,008

### What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

Select one:

a. $ 670.44

b. $ 842.91

c. $1,169.56

d. $1,522.64

e. $1,348.48

### What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

Select one:

a. $ 670.43

b. $ 842.91

c. $1,169.56

d. $1,348.48

e. $1,522.64

### Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows?

Select one:

a. $ 9,851

b. $13,250

c. $11,714

d. $15,129

e. $17,353

### If $100 is placed in an account that earns a nominal 4 percent, compounded quarterly, what will it be worth in 5 years?

Select one:

a. $122.02

b. $105.10

c. $135.41

d. $120.90

e. $117.48

### Which of the following statements is most correct?

Select one:

a. All else equal, long-term bonds have more interest rate risk than short-term bonds.

b. All else equal, higher coupon bonds have more reinvestment risk than low coupon bonds.

c. All else equal, short-term bonds have more reinvestment risk than do long-term bonds.

d. Statements a and c are correct.

e. All of the statements above are correct.

### Which of the following statements is most correct?

Select one:

a. All else equal, if a bond’s yield to maturity increases, its price will fall.

b. All else equal, if a bond’s yield to maturity increases, its current yield will fall.

c. If a bond’s yield to maturity exceeds the coupon rate, the bond will sell at a premium over par.

d. All of the answers above are correct.

e. None of the answers above is correct.

### Which of the following statements is most correct?

Select one:

a. If a bond’s yield to maturity exceeds its annual coupon, then the bond will be trading at a premium.

b. If interest rates increase, the relative price change of a 10-year coupon bond will be greater than the

relative price change of a 10-year zero coupon bond.

c. If a coupon bond is selling at par, its current yield equals its yield to maturity.

d. Both a and c are correct.

e. None of the answers above is correct.

### A 10-year corporate bond has an annual coupon payment of 9 percent. The bond is currently selling at par ($1,000). Which of the following statements is most correct?

Select one:

a. The bond’s yield to maturity is 9 percent.

b. The bond’s current yield is 9 percent.

c. If the bond’s yield to maturity remains constant, the bond’s price will remain at par.

d. Both answers a and c are correct.

e. All of the answers above are correct.

### Which of the following statements is most correct?

Select one:

a. Junk bonds typically have a lower yield to maturity relative to investment-grade bonds.

b. A debenture is a secured bond which is backed by some or all of the firm’s fixed assets.

c. Subordinated debt has less default risk than senior debt.

d. All of the statements above are correct.

e. None of the statements above is correct.

### Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Select one:

a. $905.35

b. $1,102.74

c. $1,103.19

d. $1,106.76

e. $1,149.63

### Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Select one:

a. $619

b. $674

c. $761

d. $828

e. $902

### A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this

bond?

Select one:

a. $ 941.36

b. $1,051.25

c. $1,115.57

d. $1,391.00

e. $ 825.49

### Which of the following statements is most correct?

Select one:

a. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.

b. If a bond sells at par, then its current yield will be less than its yield to maturity.

c. Assuming that both bonds are held to maturity and are of equal risk, a bond selling for more than par with

ten years to maturity will have a lower current yield and higher capital gain relative to a bond that sells at par.

d. Answers a and c are correct.

e. None of the answers above is correct.

### Which of the following statements is most correct?

Select one:

a. The market value of a bond will always approach its par value as its maturity date approaches, provided

the issuer of the bond does not go bankrupt.

b. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would

probably observe an immediate increase in bond prices.

c. The total yield on a bond is derived from interest payments and changes in the price of the bond.

d. Statements a and c are correct.

e. All of the statements above are correct.

## Answers

- e
- d
- a
- d
- b
- b
- e
- a
- c
- a
- a
- c
- c
- e
- b
- c
- d
- c
- e
- d