1. The amount of money invested in a financial security or deposited into a financial intermediary is referred to as the
a. principal.
b. interest.
c. yield.
d. capital-gain.
2. The amount of money that you would need to invest today to yield a given future amount is called the
a. future value.
b. present value.
c. rate of discount.
d. discount factor.
3. If the principal invested in a bank at an annual interest rate of 6% is $3,000, the interest that will accumulate on the
principal after a year will equal
a. $180.
b. $300.
c. $500.
d. $700.
4. If the interest accumulated on a principal amount of $5,000 at the end of a year is $400, the annual rate of interest
must be
a. 4%.
b. 6%.
c. 8%.
d. 20%.
5. Earning interest on the interest that was earned in prior years is referred to as
a. discounting.
b. compounding.
c. present valuing.
d. bonding.
6. In the one-period present-value equation, P = F/(1 + i), the term 1 + i is referred to as
a. future value.
b. present value.
c. the rate of discount.
d. the discount factor.
7. In the one-period present-value equation, P = F/(1 + i), the term i is known as
a. future value.
b. present value.
c. the rate of discount.
d. the discount factor.
8. Discounting is the process of dividing a future value by the to obtain the value.
a. discount factor; past
b. discount factor; present
c. rate of discount; past
d. rate of discount; present
9. Which of the following statements is true?
a. Everything else remaining unchanged, higher the future value of an investment, higher will be the present
value.
b. Everything else remaining unchanged, higher the rate of discount on an investment, higher will be the present
value.
c. The future value of an investment is unrelated to the principal amount invested.
d. The future value of an investment is unrelated to the ongoing rate of interest.
10. The present value of a security is
a. directly related to the discount rate.
b. inversely related to the time until maturity.
c. directly related to the principal amount.
d. is not related to the discount rate.
11. The present value of a series of future payments is
a. inversely related to the future value.
b. unrelated to the discount factor.
c. inversely related to the rate of discount.
d. directly related to the discount factor.
12. Which of the following options would you choose to have if the rate of discount is 20 percent?
a. $300 in one year b.
$350 in two years c.
$420 in three years d.
$1500 in ten years
13. If the present value of $3,000 to be received after a year is $2,795, the annual rate of discount must be
a. 5.65%.
b. 7.33%.
c. 9%.
d. 11.11%.
14. A debt security with just one payment at a future date is referred to as a
a. coupon bond.
b. fixed-payment security.
c. discount bond.
d. perpetuity.
15. Treasury bills issued by the U.S. government that mature in a year or less are similar to
a. perpetuities.
b. discount bonds.
c. coupon bonds.
d. fixed-income securities.
16. Consider a one-year discount bond that pays $1,000 at maturity. If the annual rate of discount is 7 percent, the
present value of the bond is
a. $930.00.
b. $934.58.
c. $993.00.
d. $993.46.
17. Consider a one-year discount bond that pays $1,500 one year from now. If the annual rate of discount is 4 percent,
the present value of the bond is
a. $1,560.00.
b. $1,540.00.
c. $1,440.00.
d. $1,442.31.
18. Consider a bond that has a present value of $1,000. If the annual rate of interest is 7 percent, the future value of the
bond after a year is
a. $930.00.
b. $934.58.
c. $1,000.00.
d. $1,070.00.
19. Consider a bond that has a present value of $1,500. If the annual rate of interest is 4 percent, the future value of the
bond after a year is
a. $1,560.00.
b. $1,540.00.
c. $1,440.00.
d. $1,442.31.
20. The equation that allows us to compare dollar amounts to be received at different dates is the
a. present-value formula.
b. Taylor rule.
c. interest-rate parity equation.
d. Roy‘s identity
21. A debt security that pays interest forever and never repays the principal is a
a. fiduciary obligation.
b. federal funds loans.
c. perpetuity.
d. junk bond.
22. Which of the following statements is true?
a. A coupon bond is a debt security with only one payment.
b. The amount invested in a financial security is referred to as perpetuity.
c. A coupon bond is a debt security that pays interest forever and never repays principal.
d. The present value of a perpetuity varies directly with the annual repayments.
23. The present value of a perpetuity that pays $F every year when the annual rate of discount is i is
a. F/(1 + i).
b. F×i.
c. F/i.
d. F + i.
24. Which of the following statements is true of a perpetuity?
a. A perpetuity has a fixed maturity.
b. The present value of each payment made by a perpetuity is less than the previous payment.
c. The present value of a perpetuity that pays $100 every year when the annual rate of discount is 5% is $1,000.
d. The present value of a perpetuity that pays $200 every year when the annual rate of discount is 7% is $1,750.
25. The difference between the present value of a perpetuity that pays $250 every year and a perpetuity that pays $500
every year when the annual rate of discount is 5% is
a. $500.
b. $750.
c. $5,000.
d. $7,500.
26. Consider a perpetuity that pays $100 every year. If the annual rate of discount is 7 percent, the present value of the
perpetuity is
a. $107.00.
b. $1,300.00.
c. $1,428.57.
d. $1,700.00.
27. Consider a perpetuity that pays $150 every year. If the annual rate of discount is 4 percent, the present value of the
perpetuity is
a. $210.00.
b. $3,000.00.
c. $3,600.00.
d. $3,750.00.
28. Consider a perpetuity making one payment each year that has a present value of $1,000. If the annual rate of
discount is 7 percent, the annual payment is
a. $70.00.
b. $107.00.
c. $1,428.57.
d. $14,285.71.
29. Consider a perpetuity making one payment each year that has a present value of $1,500. If the annual rate of
discount is 3 percent, the annual payment is
a. $15.00.
b. $45.00.
c. $500.00.
d. $1,500.00.
30. The process in which the principal amount of a security is repaid gradually over time is referred to as
a. securitization.
b. depreciation.
c. amortization.
d. discounting.
31. After amortizing the principal, a debt security that makes the same dollar payment every year is referred to as a
a. coupon bond.
b. fixed-payment security.
c. discount bond.
d. perpetuity.
32. Consider a fixed-payment security that pays $100 at the end of every year for three years. If the annual rate of
discount is 10 percent, the present value of the security is
a. $24.87.
b. $248.69.
c. $294.10.
d. $1,000.00.
33. A bond that makes a regular interest payment until maturity, at which time the face value is repaid is referred to as a
a. coupon bond.
b. fixed-payment security.
c. discount bond.
d. perpetuity.
34. Consider a three-year fixed-payment security that has a present value of $1,000. If the annual rate of discount is 7
percent, the payment made at the end of each year is
a. $70.00.
b. $107.00.
c. $142.86.
d. $381.05.
35. Consider a fixed-payment security that pays $100 at the end of every year for five years. If the annual rate of
discount is 7 percent, the present value of the security is
a. $142.64.
b. $410.02.
c. $789.34.
d. $999.63.
36. Consider a five-year fixed-payment security that has a present value of $1,500. If the annual rate of discount is 2
percent, the payment made at the end of each year is
a. $231.77.
b. $288.24.
c. $300.00.
d. $310.00.
37. The amount repaid by a coupon bond at maturity is called its value.
a. present
b. future
c. face
d. coupon
38. Consider a coupon bond that pays $100 every year and repays its principal amount of $1,000 at the end of 10 years.
If the annual rate of discount is 10 percent, the present value of the bond is approximately
a. $909.09.
b. $990.00.
c. $1,000.00.
d. $1,100.00.
39. Consider a coupon bond that pays $105 every year and repays its principal amount of $1,500 at the end of 3 years. If
the annual rate of discount is 7 percent, the present value of the bond is approximately
a. $735.35.
b. $765.00.
c. $1,395.00.
d. $1,500.00.
40. Consider a three-year coupon bond that has a present value of $2,000. If the annual rate of discount is 7 percent, and
the payment made at the end of each year is $140, the principal amount to be repaid at the end of three years is
a. $1,860.00.
b. $2,000.00.
c. $2,140.00.
d. $2,156.40.
41. Consider a two-year coupon bond that has a present value of $10,000. If the rate of discount is 3 percent, and the
payment made at the end of each year is $300, the principal amount to be repaid at the end of two years is
a. $10,000.00.
b. $10,300.00.
c. $33,333.33.
d. $333,333.33.