Question 1

4 out of 4 points

At the end of 10 years, which of the following investments would have

the highest future value? Assume that the effective annual rate for all
investments is the same and is greater than zero.
Answer
Selected
Answer:

Correct
Answer:

Investment A pays $250 at the beginning of every year for

the next 10 years (a total of 10 payments).
Investment A pays $250 at the beginning of every year for
the next 10 years (a total of 10 payments).

Question 2
4 out of 4 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

The cash flows for an annuity due must all occur at the
beginning of the periods.
The cash flows for an annuity due must all occur at the
beginning of the periods.

Question 3
0 out of 4 points

A $150,000 loan is to be amortized over 6 years, with annual end-ofyear payments. Which of these statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

The proportion of each payment that represents interest as

opposed to repayment of principal would be higher if the
interest rate were lower.
The proportion of each payment that represents interest
versus repayment of principal would be higher if the
interest rate were higher.

Question 4

Which of the following statements is CORRECT, assuming positive

interest rates and holding other things constant?

4 out of 4 points

Answer
Selected
Answer:

Correct
Answer:

A bank loan's nominal interest rate will always be equal to

or less than its effective annual rate.
A bank loan's nominal interest rate will always be equal to
or less than its effective annual rate.

Question 5
4 out of 4 points

A $250,000 loan is to be amortized over 8 years, with annual end-ofyear payments. Which of these statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

The proportion of each payment that represents interest as

opposed to repayment of principal would be lower if the
interest rate were lower.
The proportion of each payment that represents interest as
opposed to repayment of principal would be lower if the
interest rate were lower.

Question 6
4 out of 4 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

If a loan has a nominal annual rate of 7%, then the

effective rate will never be less than 7%.
If a loan has a nominal annual rate of 7%, then the
effective rate will never be less than 7%.

Question 7
0 out of 4 points

Your bank offers a 10-year certificate of deposit (CD) that pays 6.5%
interest, compounded annually. If you invest $2,000 in the CD, how
much will you have when it matures?
Answer
Selected Answer:

$4,139.09
Correct Answer:

$3,754.27

Question 8
4 out of 4 points

Your bank account pays a 5% nominal rate of interest. The interest is

compounded quarterly. Which of the following statements is
CORRECT?
Answer
Selected
Answer:

Correct
Answer:

The periodic rate of interest is 1.25% and the effective

rate of interest is greater than 5%.
The periodic rate of interest is 1.25% and the effective
rate of interest is greater than 5%.

Question 9
0 out of 4 points

You plan to analyze the value of a potential investment by calculating

the sum of the present values of its expected cash flows. Which of the
following would increase the calculated value of the investment?
Answer
Selected Answer:

The discount rate increases.

Correct Answer:

The discount rate decreases.

Question 10
4 out of 4 points

Which of the following statements is CORRECT, assuming positive

interest rates and holding other things constant?
Answer
Selected
Answer:

Correct
Answer:

If an investment pays 10% interest, compounded quarterly,

its effective annual rate will be greater than 10%.
If an investment pays 10% interest, compounded quarterly,
its effective annual rate will be greater than 10%.

Question 11
4 out of 4 points

How much would Roderick have after 6 years if he has $500 now and
leaves it invested at 5.5% with annual compounding?
Answer

Selected Answer:

$689.42
Correct Answer:

$689.42

Question 12
4 out of 4 points

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years
from today. The nominal interest rate is 6%, semiannual
compounding. Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

The PV of the $1,000 lump sum has a smaller present value

than the PV of a 3-year, $333.33 ordinary annuity.
The PV of the $1,000 lump sum has a smaller present value
than the PV of a 3-year, $333.33 ordinary annuity.

Question 13
4 out of 4 points

JG Asset Services is recommending that you invest $1,500 in a 5-year

certificate of deposit (CD) that pays 3.5% interest, compounded
annually. How much will you have when the CD matures?
Answer
Selected Answer:

$1,781.53
Correct Answer:

$1,781.53

Question 14
4 out of 4 points

Which of the following statements regarding a 30-year monthly

payment amortized mortgage with a nominal interest rate of 8% is
CORRECT?
Answer
Selected
Answer:

Correct
Answer:

A smaller proportion of the last monthly payment will be

interest, and a larger proportion will be principal, than for
the first monthly payment.
A smaller proportion of the last monthly payment will be
interest, and a larger proportion will be principal, than for

the first monthly payment.

Question 15
4 out of 4 points

Which of the following statements regarding a 20-year (240-month)

$225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and
transactions costs.)
Answer
Selected
Answer:

Correct
Answer:

Because it is a fixed-rate mortgage, the monthly loan

payments (which include both interest and principal
payments) are constant.
Because it is a fixed-rate mortgage, the monthly loan
payments (which include both interest and principal
payments) are constant.

Question 16
4 out of 4 points

A Treasury bond has an 8% annual coupon and a 7.5% yield to

maturity. Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

If the yield to maturity remains constant, the price of the

bond will decline over time.
If the yield to maturity remains constant, the price of the
bond will decline over time.

Question 17
4 out of 4 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

All else equal, long-term bonds have less reinvestment

rate risk than short-term bonds.
All else equal, long-term bonds have less reinvestment
rate risk than short-term bonds.

Question 18
4 out of 4 points

A 15-year bond has an annual coupon rate of 8%. The coupon rate will
remain fixed until the bond matures. The bond has a yield to maturity
of 6%. Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

If market interest rates remain unchanged, the bond's price

one year from now will be lower than it is today.
If market interest rates remain unchanged, the bond's price
one year from now will be lower than it is today.

Question 19
4 out of 4 points

A 10-year corporate bond has an annual coupon of 9%. The bond is

currently selling at par ($1,000). Which of the following statements is
NOT CORRECT?
Answer
Selected Answer:

The bond's expected capital gains yield is positive.

Correct Answer:

The bond's expected capital gains yield is positive.

Question 20
4 out of 4 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

If a coupon bond is selling at par, its current yield equals

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

Question 21
4 out of 4 points

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury

bond has an 8% coupon. Both bonds have the same yield to maturity.
If the yield to maturity of both bonds increases by the same amount,
which of the following statements would be CORRECT?
Answer
Selected
Answer:

Both bonds would decline in price, but the 10-year bond

would have the greater percentage decline in price.

Correct
Answer:

Both bonds would decline in price, but the 10-year bond

would have the greater percentage decline in price.

Question 22
4 out of 4 points

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently
trades at a premium. Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

If the yield to maturity remains at 8%, then the bond's

price will decline over the next year.
If the yield to maturity remains at 8%, then the bond's
price will decline over the next year.

Question 23
4 out of 4 points

Nicholas Industries can issue a 20-year bond with a 6% annual

coupon. This bond is not convertible, is not callable, and has no
sinking fund. Alternatively, Nicholas could issue a 20-year bond that is
convertible into common equity, may be called, and has a sinking
fund. Which of the following most accurately describes the coupon
rate that Nicholas would have to pay on the convertible, callable
bond?
Answer
Selected Answer:

It could be less than, equal to, or greater than 6%.

Correct Answer:

It could be less than, equal to, or greater than 6%.

Question 24
4 out of 4 points

If its yield to maturity declined by 1%, which of the following bonds

would have the largest percentage increase in value?
Answer
Selected Answer:

A 10-year zero coupon bond.

Correct Answer:

A 10-year zero coupon bond.

Question 25
4 out of 4 points

The YTMs of three $1,000 face value bonds that mature in 10 years
and have the same level of risk are equal. Bond A has an 8% annual
coupon, Bond B has a 10% annual coupon, and Bond C has a 12%
annual coupon. Bond B sells at par. Assuming interest rates remain
constant for the next 10 years, which of the following statements is
CORRECT?
Answer
Selected
Answer:

Correct
Answer:

Bond A sells at a discount (its price is less than par), and

its price is expected to increase over the next year.
Bond A sells at a discount (its price is less than par), and
its price is expected to increase over the next year.

Question 26
4 out of 4 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

If a 10-year, $1,000 par, 10% coupon bond were issued at

par, and if interest rates then dropped to the point where rd
= YTM = 5%, we could be sure that the bond would sell at a
premium above its $1,000 par value.
If a 10-year, $1,000 par, 10% coupon bond were issued at
par, and if interest rates then dropped to the point where rd
= YTM = 5%, we could be sure that the bond would sell at a
premium above its $1,000 par value.

Question 27
4 out of 4 points

Assume that interest rates on 15-year noncallable Treasury and

corporate bonds with different ratings are as follows:
T-bond = 7.72%
A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably
caused primarily by:
Answer
Selected Answer:

Default risk differences.

Correct Answer:

Default risk differences.

Question 28
4 out of 4 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

All else equal, if a bond's yield to maturity increases, its

price will fall.

Correct
Answer:

All else equal, if a bond's yield to maturity increases, its

price will fall.

Question 29
4 out of 4 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

Reinvestment rate risk is lower, other things held constant,

on long-term than on short-term bonds.
Reinvestment rate risk is lower, other things held constant,
on long-term than on short-term bonds.

Question 30
4 out of 4 points

Stephenson Co.'s 15-year bond with a face value of $1,000 currently

sells for $850. Which of the following statements is CORRECT?
Answer
Selected
Answer:

The bond's yield to maturity is greater than its coupon

rate.

Correct Answer:

The bond's yield to maturity is greater than its coupon

rate.