Deck 3: Introduction to Financial Calculations

Question 1

The rate of interest can be regarded as the value of money.

A) past
B) time
C) present
D) commodity

Answer 1

B

Question 2

An instrument that provides the same payment every period but no face value at the end of its life is called a(n):

A) discount security.
B) zero- coupon bond.
C) annuity.
D) insurance bond.

Answer 2

C

Question 3

Suppose you purchase a two- bedroom apartment in Adelaide for $350,000 and you were able to provide $35,000 in deposit and successfully secured a 20- year home loan at 7% for the remaining balance. What are your monthly payments?

A) 2600
B) 2532.19
C) 2442.19
D) 1800.32

Answer 3

C

Question 4

If the nominal per annum interest rate is 6%, then the interest rate per quarter is:

A) 6%.
B) 3%.
C) 1.5%.
D) 24%.

Question 5

Consider a five- year zero- coupon bond which has face value of $500,000 and a yield of 5% compounded semi- annually. The purchase price is:

A) $375,604.
B) $390,599.
C) $398,221.
D) $354,459.

Question 6

Which of the following is NOT needed to calculate the yield on a discount security?

A) The dollar value of quarterly coupon payments.
B) The face value.
C) The purchase price.
D) The maturity.

Question 7

The annualised percentage that the price of a security is below its face value is called the rate.

A) coupon
B) market
C) discount
D) interest

Question 8

In mortgage payments:

A) the roles of both interest and principal are constant throughout because of the 'straight line' method used.
B) the interest and principal always move in opposite trends.
C) as the principal declines, the interest component plays a diminishing role.
D) as the principal declines, the interest component plays an increasing role.

Question 9

If F = face value and f = maturity in days, the formula for the purchase price (P) of a discount security in terms of the discount (d) is:

A) P = F [1 - (f/365) × d].
B) P = F / [1 + (f/365) × d].
C) P = F / [1 + (d/365) × f].
D) P = F × [1 - (d/365) × f].

Question 10

Suppose you borrow $1000 from a finance student and promise to pay them back within one year. If the interest rate on the loan is 1.25% per month, what is the effective annual interest rate (EAR)?

A) 14.25
B) 10.25
C) 16.075
D) It cannot be determined.

Question 11

A dollar today is worth _ than a dollar at some future date.

A) less
B) equal
C) more
D) It cannot be determined.

Question 12

If C = $1000 and r = 5% (semi- annual), then the price (P) of a two- year annuity is:

A) $3523.94.
B) $3941.00.
C) $3322.76.
D) $3761.97.

Question 13

is the current value of future cash flows of an investment.

A) The interest rate
B) PV
C) FV
D) The time value of money

Question 14

Which of the following countries would use 360 days (not 365) in interest rate calculations?

A) Britain.
B) Australia.
C) New Zealand.
D) France.

Question 15

If interest is paid quarterly, then at an annual nominal rate of 6% an investment of one dollar will by the end of the first year have become (figures have been rounded to four decimal places):

A) $1.0672.
B) $1.0600.
C) $1.0622.
D) $1.0614.

Question 16

An investor buys a 180- day bank bill with face value of $100,000 for $98,000. The yield to maturity is:

A) 4.14%.
B) 8.28%.
C) 8.11%.
D) 4.06%.

Question 17

You are looking at acquiring credit from four different institutions and the rates are as follows: ANZ 20% compounded on a daily basis CBA 20% compounded an a weekly basis NAB 20% compounded on a monthly basis ING 20% compounded on a quarterly basis Which bank will you choose?

A) ANZ.
B) NAB.
C) ING.
D) CBA.

Question 18

A security which is sold at a price below its face value is called a security.

A) coupon
B) bearer
C) foncier
D) discount

Question 19

Suppose you will receive $1000 in three years' time. What is its PV if your opportunity cost/discount rate/interest rate is 10%?

A) 832.19
B) 909.90
C) 1300
D) 751.32

Question 20

When calculating the present value of a stream of payments at a market yield of 5% compounded semi- annually, the numerator in the fourth period of the calculation is:

A) (1.05) to the power of 4.
B) (1.025) to the power of 4.
C) (1.10) to the power of 4.
D) (1.0125) to the power of 4.

Question 21

What is the 'coupon rate' of a bond with face value $100,000 and cash payments per half year of $2000?

A) 2%.
B) 20%.
B) We cannot answer without knowing the maturity of the bond.
C) 4%.

Question 22

A 10- year coupon bond with face value of $500,000 and a semi- annual coupon rate of 6% p.a. pays how much per half year in coupon payments?

A) $30,000.
B) $15,000.
C) $1500.
D) $60,000.

Question 23

The return actually earned on an investment over a year is known as the rate.

A) real
B) simple
C) effective
D) nominal

Question 24

Given the face value and maturity of a zero- coupon bond, a rise in the yield implies that the purchase price will:

A) remain unchanged, because there are no coupons.
B) fall.
C) remain unchanged, up until the day it matures.
D) rise.

Question 25

When stating interest rates, the market convention is to go to decimal place(s).

A) three
B) one
C) two
D) four

Question 26

If an investor buys a 90- day bill at 8.5% and sells it after 45 days, the investor will earn 8.5% per annum over the 45 days of the investment.

Question 27

In financial markets, interest rates are normally quoted in terms.

A) daily simple
B) annual nominal
C) half- yearly compound
D) quarterly effective

Question 28

A university student is investing $100 in a deposit and can choose the compounding period that applies. To maximise the effective interest rate, she will choose compounding.

A) quarterly
B) monthly
C) six- monthly
D) daily

Question 29

The PVBP for a coupon bond is calculated in a different way as the PVBP for a bill.

Question 30

The reflects the notion that people prefer to consume things today rather than at some time in the future.

A) PV
B) interest rate
C) FV
D) time value of money

Question 31

A coupon bond can be regarded as the combination of an annuity and a zero- coupon bond.

Question 32

If a security is sold at a lower yield than that at which it was purchased, the holder:

A) incurs no capital gain or loss.
B) makes a capital gain.
C) makes a capital loss.
D) It depends on the length of time remaining until maturity.

Question 33

An Australian 90- day bank bill with nominal interest rate of 6% per annum will have a 90- day rate of return equal to:
A) 1.47%.

A) 1.50%.
B) 1.52%.
D) none of the above.

Question 34

If we are to receive $1,000,000 in 20 years' time, and the 20- year interest rate is 6.5%, then the present value is $283,797.

Question 35

The price value of a basis point (PVBP) of a security is the change in its price when the yield on it changes by one basis point, which is a change of one unit in its second decimal place.

Question 36

For yield- to- maturity calculations, we:

A) assume the coupon payments are invested at the same yield for the remainder of the term of the bond.
B) ignore the face value and consider only the coupon payments.
C) ignore the coupon payments and consider only the face value.
D) assume the coupon payments are 'stripped' off the bond each period they occur.

Question 37

A coupon bond can be regarded as the combination of:

A) an annuity and a consol.
B) a discount security and an annuity.
C) an annuity and a ZCB.
D) a discount security and a ZCB.

Question 38

The discount rate equals the return earned on the amount invested.

Question 39

If the per annum nominal interest rate is 6%, the monthly periodic rate is 0.5%.

Question 40

If compounding is half- yearly, interest accrues in the second half of the year on the balance of the outstanding principal at the end of the first half.

Question 41

The coupon rate of a coupon bond is equal to its yield to maturity.

Question 42

Many lenders providing fixed- rate mortgages do not impose any penalty for the prepayment of the mortgage.

Question 43

The present value of a future cash flow equals the future cash flow divided by to the power of n, where r = interest rate per period and n = number of periods until the cash flow occurs.

Question 44

If market yields are 10% p.a. and an investor sells a bond with face value of $10,000 and a semi- annual coupon rate of $5000, the price received will equal the par value.

Question 45

An annuity provides different payments every period, but no face value payment at the end of its life.

Question 46

A mortgage is repaid in equal installments including both principal and interest.

Question 47

Because zero- coupon bonds do not pay any cash payments until maturity, there is no need to apply compounding in the yield calculation.

Question 48

A mortgage is a loan to fund the purchase of a house, in which the lender takes security over the house in the form of a legal document known as a mortgage.

Question 49

An annuity provides the same payment every period, and a face value payment at the end of its life.

Question 50

In Australia and other British empire countries, the convention says that yield calculations are done using a '360- day year'.

Question 51

The sensitivity of a security's price to a change in long- term interest rates declines with the term to maturity.

Question 52

HPY is equal to YTM.

Question 53

Zero- coupon bonds give the owner title to a single payment at the end of their life.

Question 54

The essential principle of pricing financial securities is to find the present value of all cash flows from the security.

Question 55

If a university student invests in a 90- day certificate of deposit (CD) at 6.5% per annum, then market yields on CDs rise to 7.0% and the student tries to sell the CD, she will suffer a capital loss.

Question 56

An annuity provides the same payment every period, but no face value payment at the end of its life.

Question 57

The 'price value of a basis point' equals the change in the price of a security resulting from a one basis point change in the market yield.

Question 58

The present value (PV) of a future cash flow is the amount that needs to be invested now to produce that cash flow at the time that it occurs.

Question 59

Financial markets are governed by many arbitrary conventions. These conventions are agreements about the ways in which prices are stated and transactions are carried out, which arise from historical use rather than logical necessity.

Question 60

Compounding means that interest is charged or paid on the balance currently outstanding, rather than on
the amount invested at the beginning of the year.

Question 61

A customer should delay making mortgage repayments as long as possible because this reduces the present value of the interest repayments.

Question 62

Buyers of bills often sell them before maturity.

Question 63

In Australia, most housing mortgages are principal- and- interest loans; that is, they are repaid in a large number of equal payments that include both repayment of principal and the interest charged on the
outstanding balance.

Question 64

Yield to maturity is the market interest rate.

Question 65

Explain the relationship between ZCBs, annuities and coupon bonds.

Question 66

Explain the difference between discount securities and coupon securities. Give two examples of each.

Question 67

Why is there a penalty for early repayment of fixed- rate mortgages?

Question 68

Securities with a term of less than one year are usually discount securities.

Question 69

If a customer repays a fixed- rate mortgage early they usually receive a bonus from their bank.

Question 70

If the per annum nominal interest rate is 6% compounded monthly, the value of a dollar invested at the end of 12 months is $1.06.