# Fin 534 Quiz 3

Topics: Bond, Bonds, Compound interest Pages: 20 (2029 words) Published: February 20, 2012
Question 1

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2 out of 2 points

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.

The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.

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Question 2

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2 out of 2 points

Which of the following statements regarding a 15-year (180-month) \$125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

The outstanding balance declines at a faster rate in the later years of the loan’s life.

The outstanding balance declines at a faster rate in the later years of the loan’s life.

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Question 3

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2 out of 2 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 lower the calculated value of the investment?

The discount rate increases.

The discount rate increases.

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Question 4

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0 out of 2 points

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

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

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

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Question 5

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0 out of 2 points

Which of the following statements is CORRECT?

If you solve for I and get a negative number, then you must have made a mistake.

If CF0

is positive and all the other CFs are negative, then you can still solve for I.

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Question 6

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2 out of 2 points

Which of the following statements is CORRECT?

Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

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Question 7

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2 out of 2 points

A \$150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

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

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

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Question 8

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2 out of 2 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?

The present value of the \$1,000 would be smaller if interest were compounded monthly rather than semiannually.

The present value of the \$1,000 would be smaller if interest were compounded monthly rather than semiannually.

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Question 9

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2 out of 2 points

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

The periodic rate of interest is 2% and the effective

rate of interest is greater than 8%.

The periodic rate of interest is 2% and the effective

rate of interest is greater than 8%.

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Question 10

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2 out of 2 points

You are considering two equally risky annuities, each of which pays \$5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while...