Question 1

If a security pays $55 in one year and $133 in three years,its present value is $150 if the interest rate is
A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.

Accepted Answer

B

Question 2

With an interest rate of 6 percent,the present value of $100 next year is approximately
A) $106.
B) $100.
C) $94.
D) $92.

Accepted Answer

The formula for present value is PV = FV/ (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years. Plugging in the values, we get PV = 100/ (1 + 0.06)^1 = $94.34. Rounded to the nearest dollar, the answer is $94. Therefore, the best choice is C.

Question 3

If a $5,000 coupon bond has a coupon rate of 13 percent,then the coupon payment every year is
A) $650.
B) $1,300.
C) $130.
D) $13.

Accepted Answer

The coupon payment is calculated as the coupon rate (13%) multiplied by the face value of the bond ($5,000), which equals $650.

Question 4

Which of the following are true of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.

Accepted Answer

Fixed payment loans require the borrower to make the same payment amount throughout the loan term. This payment includes both principal and interest. Installment loans and mortgages are frequently structured as fixed payment loans. The borrower does not have to pay off the entire principal balance at the maturity date as they will have been making payments towards it throughout the loan term.

Question 5

The ________ is calculated by multiplying the coupon rate times the par value of the bond.
A) present value
B) par value
C) coupon payment
D) maturity payment

Accepted Answer

The coupon payment is a fixed amount paid annually or semi-annually to the bondholder. It is calculated by multiplying the coupon rate (stated as a percentage) by the par value (face value) of the bond.

Question 6

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation

Accepted Answer

The concept of present value is based on the common-sense notion that a dollar paid to you in the future is worth less than a dollar today because of the time value of money. Present value is the current worth of a future sum of money or stream of cash flows discounted at a specified rate of return. Future value is the value of an asset or cash at a specified date in the future, based on the value of that asset today and the expected rate of growth or return over time. Interest is the cost of borrowing money or the return earned on an investment. Deflation is a decrease in the general price level of goods and services in an economy over time.

Question 7

A ________ pays the owner a fixed coupon payment every year until the maturity date,when the ________ value is repaid.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face

Accepted Answer

Coupon bonds pay a fixed coupon payment every year until the maturity date, when the face value (or par value) is repaid. The face value is the amount borrowed and is stated on the bond itself.

Question 8

An increase in the time to the promised future payment ________ the present value of the payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to

Accepted Answer

The time value of money principle states that the longer you have to wait to receive a payment, the less valuable that payment is today. This is because of the opportunity cost of waiting; you could invest that money today and earn a return. Therefore, an increase in the time to the promised future payment decreases the present value of the payment.

Question 9

The present value of an expected future payment ________ as the interest rate increases.
A) falls
B) rises
C) is constant
D) is unaffected

Accepted Answer

The present value of an expected future payment is based on the idea that money today is worth more than money in the future. As the interest rate increases, the value of money today increases, which means that the present value of the expected future payment would fall. Therefore, choice A is the correct answer.

Question 10

If a $1000 face value coupon bond has a coupon rate of 3.75 percent,then the coupon payment every year is
A) $37.50.
B) $3.75.
C) $375.00.
D) $13.75

Accepted Answer

The annual coupon payment is calculated by multiplying the face value of the bond ($1,000) by the coupon rate (3.75%). Therefore, $1,000 * 3.75% = $37.50.

Question 11

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.

Accepted Answer

A coupon bond pays a fixed coupon payment every year until the maturity date and then repays the face value. A simple loan is a loan with a single lump-sum repayment, while a fixed-payment loan includes equal payments over a set period of time. A discount bond does not pay a fixed coupon but is sold at a discounted price and repaid at face value at maturity.

Question 12

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of
A) face value.
B) par value.
C) deflation.
D) discounting the future.

Accepted Answer

The process of discounting the future refers to the fact that receiving $1 million per year for the next twenty years is not the same as receiving $20 million today. The future payments are worth less because they are received over time and are subject to inflation and other economic factors. To accurately value the lottery winnings, the future cash flows need to be discounted back to their present value.

Question 13

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.

Accepted Answer

Simple loans require the borrower to repay the amount borrowed (the principal) plus an interest payment at the maturity date. Other options involve different structures of repayment or interest calculation.

Question 14

An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of
A) 5 percent.
B) 8 percent.
C) 10 percent.
D) 40 percent.

Accepted Answer

The coupon rate is calculated by dividing the annual coupon payment by the face value of the bond. In this case, $400 / $8,000 = 0.05, or 5 percent.

Question 15

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?
A) $453.51
B) $550.00
C) $476.25

Accepted Answer

To find the present value, we need to use the formula PV = FV/(1 + i)^n, where PV is the present value, FV is the future value ($500.00 in this case), i is the interest rate (5% or 0.05), and n is the number of years (2 in this case). Plugging in the values, we get PV = 500.00/(1 + 0.05)^2 = $453.51. Therefore, choice A is the correct answer.

Question 16

When talking about a coupon bond,face value and ________ mean the same thing.
A) par value
B) coupon value
C) amortized value
D) discount value

Accepted Answer

Face value and par value are interchangeable terms in reference to a coupon bond. The par value is the amount that the bond will be worth at maturity and is typically the amount listed on the bond certificate.

Question 17

The ________ is the final amount that will be paid to the holder of a coupon bond.
A) discount value
B) coupon value
C) face value
D) present value

Accepted Answer

The face value is the final amount that will be paid to the holder of a coupon bond. The discount value refers to the difference between the face value and the price paid for the bond, the coupon value is the annual interest rate specified on the bond, and the present value is the current value of future cash flows.

Question 18

A fully amortized loan is another name for
A) a simple loan.
B) a fixed-payment loan.
C) a commercial loan.
D) an unsecured loan.

Accepted Answer

A fully amortized loan is a type of fixed-payment loan where the borrower pays the same amount every month until the loan is fully paid off, with each payment covering both the principal and interest.

Question 19

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.

Accepted Answer

A fixed-payment loan requires the borrower to make the same payment every period until the maturity date. Simple loans do not necessarily require the same payment each period, while coupon and discount bonds are types of securities that are traded in financial markets, not necessarily loans made to borrowers.

Question 20

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's
A) coupon rate.
B) maturity rate.
C) face value rate.
D) payment rate.

Accepted Answer

The yearly coupon payment expressed as a percentage of the face value of the bond is referred to as the bond's coupon rate.

Quiz 4: Understanding Interest Rates

If a security pays $55 in one year and $133 in three years,its present value is $150 if the interest rate is

With an interest rate of 6 percent,the present value of $100 next year is approximately

If a $5,000 coupon bond has a coupon rate of 13 percent,then the coupon payment every year is

Which of the following are true of fixed payment loans?

The ________ is calculated by multiplying the coupon rate times the par value of the bond.

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

A pays the owner a fixed coupon payment every year until the maturity date,when the value is repaid.

An increase in the time to the promised future payment ________ the present value of the payment.

The present value of an expected future payment ________ as the interest rate increases.

If a $1000 face value coupon bond has a coupon rate of 3.75 percent,then the coupon payment every year is

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a

To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a

An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of

What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent?

When talking about a coupon bond,face value and ________ mean the same thing.

The ________ is the final amount that will be paid to the holder of a coupon bond.

A fully amortized loan is another name for

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's