Principle of Finance Unit 2 Challenges Sophia Course

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Unit no 2

                             Challenge no 1

 

The time value of money says that money today is worth ______ money in the future.

·a.)

the same as

·b.)

less than

·c.)

twice as much as

·d.)

more than

In relation to the time value of money, what is interest?

·a.)

The total value of an investment

·b.)

The value of money in the future

·c.)

The value of money today

·d.)

The cost of not having money today

 

In relation to the time value of money, what is discounting?

·a.)

The process of determining the present worth of money that will be paid or received in the future

·b.)

The process of determining how much future interest rates will fall

·c.)

The process of determining the future worth of money paid or received today

·d.)

The process of determining how much future interest rates will rise

You deposit $5,000 in a bank account that earns 2% simple interest annually.

 

What is the value of your $5,000 in five years?

·a.)

$4,500

·b.)

$5,500

·c.)

$5,280

·d.)

$5,520

You deposit $300 in a bank account that earns 4% compound interest annually.

 

What is the value of your $300 in 10 years?

·a.)

$400

·b.)

$420

·c.)

$156

·d.)

$444

You invest $800 in a scheme that guarantees a return of 9% simple interest annually.

 

What is the value of your $800 in three years?

·a.)

$584

·b.)

$854

·c.)

$1,016

·d.)

$1,036

What is the present value of a $5,000 payment you will receive in one year, assuming a discount rate of 2%?

·a.)

$4,980

·b.)

$4,902

·c.)

$4,876

·d.)

$4,921

What is the present value of a $10,000 payment you will receive in one year, assuming a discount rate of 3.75%?

·a.)

$9,625

·b.)

$9,294

·c.)

$9,636

·d.)

$9,832

You would like to have $6,000 dollars in an account after three years' time.

 

If the account earns 6% compounded interest yearly, how much would you have to deposit today?

·a.)

$5,506

·b.)

$5,766

·c.)

$5,025

·d.)

$5,038

Select the best definition of an annuity.

·a.)

An investment that makes variable payments over the course of the investment depending on interest rates

·b.)

An investment whose interest rate increases year after year

·c.)

An investment that makes payments in perpetuity

·d.)

An investment that makes fixed, regular payments over the course of the investment

Select the best definition of a perpetuity.

·a.)

An annuity that makes payments forever

·b.)

An annuity that makes a payment every day

·c.)

A single investment that grows forever

·d.)

An annuity whose payments can be made at any point during the period

Select one advantage of an annuity for a lender.

·a.)

The sum of all the payments will equal the original loan amount.

·b.)

Annuities are repaid more quickly than other types of loans.

·c.)

There is less risk that the borrower will be unable to repay the loan.

·d.)

The lender can recall the loan at any time

Select the correct phrases to complete the sentence.

 

If payments happen at regular intervals, are a fixed size, and have the same __________, total future value can be calculated by applying the formula for __________.

·a.)

maturity; present value

·b.)

maturity; annuities

·c.)

interest rate; annuities

·d.)

inception date; present value

Select the correct phrases to complete the sentence.

 

To find the present value of multiple cash flows, find the __________ of each cash flow and __________.

·a.)

future value; divide them

·b.)

future value; add them together

·c.)

present value; add them together

·d.)

present value; divide them

Select the correct phrases to complete the sentence.

 

To find the future value of multiple cash flows, find the __________ of each cash flow and __________.

·a.)

present value; add them together

·b.)

present value; multiply them

·c.)

future value; multiply them

·d.)

future value; add them together

You want to make a one-time deposit into a bank account today and have $2,000 in the account in five years.

 

Which interest rate requires you to deposit the least amount of money into the account today?

·a.)

1%

·b.)

8%

·c.)

5%

·d.)

4%

You want to make a one-time deposit into a bank account today and have $10,000 in the account in five years.

 

Which interest rate requires you to deposit the most amount of money into the account today?

·a.)

3%

·b.)

2%

·c.)

1%

·d.)

4%

You make a $1,000 investment that accrues interest annually.

 

Which of the following interest rates will give you the smallest future value?

·a.)

4%

·b.)

3%

·c.)

9%

·d.)

7%

Select the correct statement about the relationship between APY and EAR.

·a.)

They are essentially the same measures of interest.

·b.)

APY takes simple interest into account, whereas EAR does not.

·c.)

APY takes compound interest into account, whereas EAR does not.

·d.)

Neither of them take compound interest into account.

Which of the following is the least accurate measure of how much interest you accrue on an investment?

·a.)

APR

·b.)

EAR

·c.)

APY

·d.)

NPV

What is the difference between APR and APY?

·a.)

APY includes accrued compounding interest when calculating yield, whereas APR does not.

·b.)

APY is a simpler measure of yield than APR.

·c.)

APY gives you a less accurate understanding of the interest rate of an investment, as compared to APR.

·d.)

For the same loan, the APY is typically less than the APR.

                                                      Challenge no 2

If the interest rates for long-term investments are lower than those for short-term investments, how would the yield curve be described?

·a.)

Normal

·b.)

Steep

·c.)

Inverted

·d.)

Flat

If the interest rates rise as the length of the borrowing period increases, how would the yield curve be described?

·a.)

Normal

·b.)

Steep

·c.)

Inverted

·d.)

Flat

If interest rates for all borrowing periods are similar, how would the yield curve be described?

·a.)

Inverted

·b.)

Steep

·c.)

Flat

·d.)

Normal

Which of the following impacts a bond's interest rate, or coupon rate?

·a.)

The bond's market value

·b.)

The bond's par value

·c.)

The bond's face value

·d.)

The bond's credit rating

Which of the following best describes a bond?

·a.)

A type of investment in which the investor purchases equity in the entity issuing the bond

·b.)

A debt instrument that can only be sold on the primary market

·c.)

A debt security with a fixed term and a variable interest rate

·d.)

A form of loan that gives an investor a creditor stake in the entity issuing the bond

 

 Who is responsible for holding the legal contract for a bond, or bond indenture?

·a.)

The borrower

·b.)

A trustee, like a financial institution

·c.)

The bondholder

·d.)

Government officials

Marilyn purchased a $1,000 10-year Treasury note that promised to pay her 0.75% of the face value every six months for the life of the loan.

 

Which of those numbers is the coupon rate of the note?

·a.)

Six

·b.)

0.75

·c.)

1,000

·d.)

10

Alice purchased a $5,000 five-year municipal bond that promised to pay her 0.5% of the face value every six months for the life of the loan.

 

Which of those numbers is the bond's maturity?

·a.)

Five

·b.)

5,000

·c.)

Six

·d.)

0.5

Franklin purchased a $10,000 20-year Treasury bond that promised to pay him 1.25% interest every six months for the life of the loan.

 

Which of those numbers is the par value of the bond?

·a.)

20

·b.)

10,000

·c.)

1.25

·d.)

Six

Which of the following is an advantage of bonds for a potential investor?

·a.)

Prices can rise dramatically, generating significant profits.

·b.)

Credit rating agencies do not have an effect on bond pricing.

·c.)

Bond prices fall when market interest rates go up.

·d.)

A bondholder is less exposed to the risk of default than a stockholder.

Which of the following is a disadvantage of bonds for a potential investor?

·a.)

They are generally riskier and more volatile than stocks.

·b.)

Bondholders risk falling prices if market interest rates rise.

·c.)

They are less likely than stocks to be recovered if the issuer goes bankrupt.

·d.)

They lack diversity and do not respond to the needs of investors very well.

 

Which of the following is an advantage of bonds for a potential investor?

·a.)

They can never be recalled by a company.

·b.)

They do not carry interest rate risk.

·c.)

Their pricing is more stable and less wide-ranging than that of stocks.

·d.)

Although riskier than stocks, they have the potential for greater returns.

Ronaldo is highly risk-averse and wants to buy a bond that is guaranteed to be redeemed when it matures.

 

What kind of bond should he buy?

·a.)

Asset-backed

·b.)

Government

·c.)

Subordinated

·d.)

Inflation-linked

Charlie wants a bond that will pay him regular interest payments, but also provides him with the ability to exchange the bond for stock.

 

What kind of bond should he buy?

·a.)

Convertible

·b.)

Floating-rate

·c.)

Subordinated

·d.)

Asset-backed

Sylvia wants a bond that she can buy at a discount, so that she will make money when the bond matures.

 

If she is less concerned about receiving regular payments, what kind of bond should she buy?

·a.)

Floating-rate

·b.)

Zero-coupon

·c.)

Subordinated

·d.)

Government

Consider what you have learned about valuing bonds. 

·A: Coupon rate = 5%, YTM = 6.33%

·B: Coupon rate = 5%, YTM = 4.75%

·C: Coupon rate = 5%, YTM = 5%

·D: Coupon rate = 5%, YTM = 3.8%

 

Which of the bonds is selling at a discount?

·a.)

B

·b.)

A

·c.)

D

·d.)

C

Consider what you have learned about valuing bonds.  

·A: Coupon rate = 4%, YTM = 4.75%

·B: Coupon rate = 4%, YTM = 4.15%

·C: Coupon rate = 4%, YTM = 3.25%

·D: Coupon rate = 4%, YTM = 4%

 

Which of the bonds is selling at a premium?

·a.)

B

·b.)

C

·c.)

D

·d.)

A

Consider what you have learned about valuing bonds.

·A: Coupon rate = 3%, YTM = 2.5%

·B: Coupon rate = 3%, YTM = 3%

·C: Coupon rate = 3%, YTM = 2.75%

·D: Coupon rate = 3%, YTM = 3.25%

 

Which of the bonds is selling at par?

·a.)

C

·b.)

D

·c.)

A

·d.)

B

 

 Select the true statement about interest rate risk.

·a.)

Bonds held until maturity have greater exposure to interest rate risk.

·b.)

It is the risk that bond prices will fall if market interest rates rise.

·c.)

Longer-term bonds are less sensitive to interest rate risk than shorter-term bonds.

·d.)

It stems from the fact that coupon rates and market interest rates are directly correlated.

Select the true statement about default risk.

·a.)

A bondholder may lose some or all of their investment if an issuer enters bankruptcy.

·b.)

Default risk relates to a bond's maturity payment, but not to its periodic coupon payments.

·c.)

It is a greater risk for bondholders than it is for stockholders.

·d.)

It is the risk that the bondholder will not be able to sell the bond.

Select the true statement about reinvestment risk.

·a.)

Only holders of callable bonds are subject to reinvestment risk.

·b.)

Reinvestment risk is directly correlated to interest rate risk.

·c.)

A zero-coupon bond carries the greatest reinvestment risk.

·d.)

Reinvestment risk increases when market interest rates fall.

                                Challenge no 3

When an investor purchases stock, they are purchasing company __________.

·a.)

property

·b.)

debt

·c.)

equity

·d.)

assets

The purpose of preemption rights is to __________ the percentage of a stockholder's ownership in the company.

·a.)

increase

·b.)

modify

·c.)

maintain

·d.)

dilute

Preemption means that stockholders __________ purchase additional shares of stock before any new investors.

·a.)

can collectively vote to

·b.)

are required to

·c.)

are forbidden to

·d.)

have the option to

Select one way that preferred stock differs from common stock.

·a.)

Preferred stock represents ownership in a company, whereas common stock does not.

·b.)

Preferred stock usually carries voting rights on company matters like board membership.

·c.)

In the case of bankruptcy, preferred stockholders receive assets before bondholders, whereas common stockholders do not.

·d.)

If a company issues dividends, preferred stockholders are prioritzed over common stockholders.

Select one way that common stock differs from preferred stock.

·a.)

Common stock typically does not come with preemptive rights, whereas preferred stock does.

·b.)

In the case of bankruptcy, common stockholders receive assets before bondholders, whereas preferred stockholders do not.

·c.)

Common stockholders typically have the right to vote on matters related to corporate policy.

·d.)

Common stockholders are more likely to receive dividends than preferred stockholders.

Select one way that common stock differs from preferred stock.

·a.)

Common stock is generally thought to be less risky than preferred stock.

·b.)

Common stock may be converted to preferred stock if the holder so chooses.

·c.)

Common stock represents ownership in a company, whereas preferred stock does not.

·d.)

In the case of bankruptcy, common stockholders are only entitled to assets after preferred stockholders have been compensated

Select the pairing that is correctly matched.

·a.)

Common stock: has a callability feature

·b.)

Preferred stock: has a defined maturity

·c.)

Preferred stock: is a form of a loan

·d.)

Common stock: holder may participate in the annual general meeting

Select the pairing that is correctly matched.

·a.)

Preferred stock: usually sold with a fixed dividend attached to it

·b.)

Common stock: may have a par value assigned to it

·c.)

Preferred stock: has a residual claim in the case of company liquidation

·d.)

Common stock: must be redeemed upon completion of a defined term

Select the pairing that is correctly matched.

·a.)

Common stock: has a right to cumulative dividends

·b.)

Common stock: is best understood as a form of debt

·c.)

Preferred stock: may only be sold on the primary market

·d.)

Preferred stock: may have a claim equal to its par value in the case of company liquidation

A university that purchases a portfolio of stocks to generate returns for its long-term growth is an example of an __________.

·a.)

intermediary

·b.)

issuer

·c.)

investment trust

·d.)

investor

An investment fund whose goal is to provide income for workers who have ceased working is a(n) __________.

·a.)

hedge fund

·b.)

mutual fund

·c.)

exchange-traded fund

·d.)

pension fund

An investment fund that is created with the objective of mirroring the average performance of a segment of the market is a(n) __________.

·a.)

mutual fund

·b.)

index fund

·c.)

pension fund

·d.)

hedge fund

Determine the value of a stock with the following variables using the constant growth model:

·Current annual dividend: $1.50 per share

·Required return rate: 6.5%

·Constant growth rate: 4.5%

·a.)

$79.88

·b.)

$75

·c.)

$78.38

·d.)

$35.50

Determine the value of a stock with the following variables using the constant growth model:

·Current annual dividend: $2 per share

·Required return rate: 6%

·Constant growth rate: 4%

·a.)

$104

·b.)

$106

·c.)

$100

·d.)

$53

Determine the value of a stock with the following variables using the constant growth model:

·Current annual dividend: $1.20 per share

·Required return rate: 8%

·Constant growth rate: 5%

·a.)

$40

·b.)

$26

·c.)

$43.20

·d.)

$42

Which descriptor relates to the market-based approach for valuing corporations?

·a.)

Determines the average cost of a unit of company income

·b.)

Calculates a company's cost of capital

·c.)

Estimates the cost of replacing a company's resources

·d.)

Considers the price of common stock shares

Which descriptor relates to the income approach for valuing corporations?

·a.)

Relies on number of shares outstanding

·b.)

Reflects what shareholders are actually willing to pay

·c.)

Considers the total economic value of a company's resources

·d.)

Calculates the weighted average cost of capital

Which descriptor relates to the asset-based approach for valuing corporations?

·a.)

Considers the number of shares outstanding

·b.)

Determines the average cost of a unit of company income

·c.)

Relies primarily on share price

·d.)

Considers the value of a company's resources

 

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