Question 1

Which of the following are TRUE of fixed payment loans?

Accepted Answer

Fixed payment loans require the borrower to make regular payments (usually monthly) that are a fixed amount, which includes both principal and interest. Installment loans (such as car loans) and mortgages are frequently structured as fixed payment loans. Therefore, option B is true. Option A is incorrect because the borrower repays both the principal and interest over the life of the loan rather than just at maturity. Option C describes a balloon payment loan which is a form of fixed payment loan, but it does not apply to all fixed payment loans. Option D is incorrect because commercial loans can come in many different forms and are not necessarily fixed payment loans.

Question 2

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

Accepted Answer

The coupon rate is the percentage of the bond's face value that is paid out annually in interest to the bondholder. It is not the maturity rate, face value rate, or payment rate.

Question 3

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

Accepted Answer

A coupon bond pays a fixed coupon payment every year until the maturity date, and the face value is repaid at maturity. Thus, the correct answer is C - coupon bond and face value. Option A and B are partially correct, but option A only includes the coupon bond part, while option B has both the bond types as discount bonds, which is incorrect. Option D has the correct bond type as discount bond, but the second blank should be filled with a face value instead of the discount value.

Question 4

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

Accepted Answer

Par value, also known as face value, is the amount that a bond will be worth when it reaches maturity and is the amount that the bondholder will receive. It is the same as the coupon value, which refers to the stated interest rate on the bond that will be paid out periodically until maturity. Amortized value and discount value are not relevant to the concept of face value.

Question 5

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

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 6

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

Accepted Answer

The present value can be calculated using the formula PV = FV / (1+r), where PV is the present value, FV is the future value, and r is the interest rate. Plugging in the numbers, we get PV = 100 / (1+0.06) = $94.34, or approximately $94. Therefore, the best choice is (C), which is closest to the calculated present value.

Question 7

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

Accepted Answer

The description matches that of a coupon bond, which pays a fixed coupon payment until the maturity date and then repays the face value. Simple loans and fixed-payment loans do not involve coupon payments, while discount bonds do not involve coupon payments and are sold at a discount to their face value.

Question 8

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

Accepted Answer

The present value is calculated by discounting the expected future payment using an interest rate. As the interest rate increases, the discounting factor becomes larger, leading to a decrease in the present value. Therefore, the present value of an expected future payment falls as the interest rate increases.

Question 9

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

Accepted Answer

The process of discounting the future means that the value of the $1 million payments received in years 2-20 will be worth less than $1 million today, due to factors such as inflation and the time value of money. Therefore, the true present value of the 20-year prize is less than $20 million.

Question 10

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

Accepted Answer

This is due to the time value of money principle, which suggests that money is worth more in the present than in the future. As the time to receive a future payment increases, the present value of the payment decreases.

Question 11

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

Accepted Answer

A fixed-payment loan requires the borrower to make the same payment every period until the maturity date, whereas a simple loan may have variable payments or a lump sum payment at the end. A coupon bond involves periodic interest payments and a lump sum payment at maturity, and a discount bond involves purchasing the bond at a discount and receiving the face value at maturity.

Question 12

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

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 13

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

Accepted Answer

The coupon payment is the amount of interest paid to the bondholder annually or semi-annually, based on the coupon rate and the par value of the bond. It is calculated by multiplying the coupon rate by the face value (par value) of the bond.

Question 14

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

Accepted Answer

The answer of If a security pays $55 in one...

Question 15

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

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 16

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

Accepted Answer

The face value is the final amount that will be paid to the holder of a coupon bond. The discount value is the difference between the face value and the price paid for the bond, while the coupon value is the periodic payment made to the bondholder. The present value is the current value of the expected future cash flows, which includes both the face value and the coupon payments.

Question 17

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

Accepted Answer

The present value (PV) can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($500), r is the annual interest rate (0.05), and n is the number of years (2). Plugging in the values, we get PV = $500 / (1 + 0.05)^2 = $453.51.

Question 18

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.

Accepted Answer

The concept described in the question is known as time value of money, and specifically the principle of present value. This principle states that a dollar received in the future is worth less than a dollar received today, because you could invest the dollar you have now and earn interest on it, increasing its value over time. Therefore, to compare the value of money received at different times, we need to discount future money flows to their present values.

Question 19

A fully amortized loan is another name for

Accepted Answer

A fully amortized loan is a type of loan where the borrower makes fixed payments over a specified period of time that will fully pay off the loan by the end of the term. This is also known as a fixed-payment loan as the payments are fixed throughout the life of the loan. Option A, C, and D are not the correct choices as they do not accurately describe a fully amortized loan.

Question 20

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

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.

Quiz 4: The Meaning of Interest Rates