WorksheetsFFM (Ch.5-6-7-8) Quiz_TVM_Interest Rates_Bonds_Risk&Return_
Total questions: 60
Worksheet time: 30mins
What is the future value of $1,000 invested for 3 years at 6% interest compounded annually?
$1,180.00
$1,191.02
$1,200.00
$1,196.00
$1,159.27
The present value of $1,500 received 4 years from now at 8% discount rate is:
$1,103.60
$1,111.12
$1,201.10
$1,289.00
$1,028.88
If interest is compounded quarterly, what is the effective annual rate (EAR) of a nominal 12% annual interest rate?
12.55%
12.00%
12.36%
12.68%
13.10%
The difference between simple and compound interest increases with:
Higher inflation
Lower interest rates
Shorter periods
Longer time and higher interest rates
Declining market rates
What is the present value of an ordinary annuity of $500 received annually for 5 years if the discount rate is 10%?
$2,372.43
$1,895.20
$2,000.00
$2,564.00
$2,190.30
What is the future value of a $200 annuity paid annually for 6 years at 7% interest?
$1,435.62
$1,523.10
$1,638.61
$1,721.30
$1,580.50
An annuity due differs from an ordinary annuity in that payments are:
More frequent
Made at the end of each period
Made at the beginning of each period
Made semi-annually
Deferred
The effective annual rate (EAR) is:
Always equal to nominal rate
Lower when compounding is monthly
Higher than nominal rate if interest is compounded more than once a year
Unrelated to compounding
Used only for loans
The present value of a perpetuity is calculated as:
PV = PMT × n
PV = PMT / (1 + r)^n
PV = PMT / r
PV = FV × r
PV = PMT / (1 + r × n)
Which factor does NOT affect the future value of a lump sum?
The interest rate
The number of periods
The frequency of compounding
Inflation expectations
The initial investment
Which statement is TRUE about time value of money?
A dollar today is worth less than a dollar in future
Present value decreases with lower interest
Future value is independent of compounding
Annuities have same PV regardless of timing
PV of money increases as discount rate decreases
The interest rate that equates the present and future value is called:
Real rate
Coupon rate
Internal rate
Discount rate
Spot rate
If the future value of an investment is known, the present value can be found by:
Multiplying by interest
Discounting
Compounding
Dividing by time
Adding inflation
Which is closest to the future value of $1,000 invested for 2 years at 9% semiannual compounding?
$1,180.56
$1,188.10
$1,196.41
$1,120.50
$1,150.00
The real risk-free rate (r*) represents:
Return including inflation and taxes
Nominal yield minus taxes
Return expected on a riskless security with zero inflation
Rate set by the Federal Reserve
Nominal rate with inflation premium
Which of the following premiums is NOT part of the nominal interest rate?
Default risk premium
Liquidity premium
Inflation premium
Political risk premium
Maturity risk premium
If the real risk-free rate is 2%, and inflation is expected to be 3%, what is the nominal risk-free rate?
5%
6%
1%
2%
3%
The term structure of interest rates is also known as:
Interest rate parity
Duration analysis
The yield curve
Time value analysis
Default structure
A steep upward-sloping yield curve usually indicates:
Interest rates are expected to fall
Investors prefer short-term bonds
Inflation is expected to decrease
Interest rates are expected to rise
Recession is imminent
The default risk premium compensates for:
Inflation
Time value of money
The possibility that a borrower may not repay
Federal Reserve interventions
Tax impacts
Which of the following bonds would likely have the HIGHEST interest rate?
Treasury bond
Municipal bond
Corporate junk bond
AAA-rated corporate bond
TIPS
If the real rate is 2%, the inflation premium is 4%, and default and liquidity premiums are each 1%, what is the approximate nominal rate?
8%
6%
7%
9%
5%
Which statement about liquidity premium is true?
It is higher for Treasury bonds
It is added when assets are easily tradable
It is zero for all securities
It compensates for lack of marketability
It applies only to equities
Which is NOT a factor that influences market interest rates?
Expected inflation
Central bank policy
Tax rates
Supply and demand for funds
Risk-free real rate
A flat yield curve suggests:
Long-term rates are higher
Short-term rates are higher
Interest rates are expected to stay constant
Default risk is very high
Strong economic growth
The yield on long-term securities is usually:
Lower due to lower risk
Higher due to greater inflation and maturity risks
The same as on short-term
Controlled by corporations
Negative in real terms
The Fisher effect explains the relationship between:
Nominal and real GDP
Nominal interest rate, real interest rate, and inflation
Bond ratings and yield
Money supply and velocity
Capital gains and tax rates
What happens to bond prices if interest rates rise?
Prices increase
Prices remain the same
Prices decrease
Prices rise initially, then fall
Prices double
Which interest rate is MOST relevant to investors in long-term corporate bonds?
Prime rate
Discount rate
Nominal rate on Treasury bills
Yield to maturity (YTM)
Repo rate
investors in long-term corporate bonds?
Prime rate
Discount rate
Nominal rate on Treasury bills
Yield to maturity (YTM)
Repo rate
A bond's par value is:
The market price of the bond
The coupon payment
The value paid at maturity
The yield to maturity
The book value
The coupon rate is defined as:
Annual interest divided by par value
Interest divided by market price
Interest compounded semiannually
Maturity value
Risk-adjusted rate of return
A bond with a call provision allows the issuer to:
Sell bonds to new investors
Exchange it for equity
Redeem the bond before maturity
Increase the interest rate
Defer interest payments
A sinking fund provision benefits:
The government
The bond issuer
The underwriters
The bondholders
Credit rating agencies
A bond selling at a premium has a:
Market price below par
Coupon rate less than the yield
Coupon rate greater than its yield
Zero interest rate
High default risk
A bond's yield to maturity (YTM) is:
The annual coupon payment
The return earned if held to maturity
The reinvestment rate
The rate used to discount dividends
The inflation rate
If market interest rates rise, the price of an existing bond will:
Increase
Remain unchanged
Decrease
Rise initially, then fall
Be unaffected
Which of the following would MOST LIKELY be true for a zero-coupon bond?
It pays annual interest
It is always sold at par
It sells at a discount
It has high liquidity risk
It is callable only at maturity
Which bond has the MOST price volatility?
Short-term, high-coupon bond
Long-term, high-coupon bond
Long-term, low-coupon bond
Short-term, zero-coupon bond
Treasury bill
A bond's price risk is highest when:
The bond is close to maturity
Coupon payments are large
Time to maturity is long and coupon is low
Market interest rates are falling
The bond is callable
Reinvestment risk refers to:
Not earning the YTM due to lower reinvestment rates
Bond not being repaid
Bankruptcy risk
Callable bonds only
Delayed interest payments
A bond rating reflects:
The price volatility
The interest rate sensitivity
The likelihood of default
The time to maturity
The coupon frequency
The clean price of a bond:
Includes accrued interest
Excludes accrued interest
Is equal to par always
Is the yield to maturity
Includes premium or discount only
A bond's current yield is defined as:
Coupon rate × market price
Coupon ÷ par
Coupon ÷ market price
YTM - capital gain yield
Nominal yield
Which bond feature typically leads to a LOWER required rate of return?
Subordination
Callable
Convertible
Long maturity
Zero-coupon
Stand-alone risk is best measured by:
Alpha
Beta
Standard deviation
Market risk premium
Duration
The coefficient of variation (CV) is used to measure:
Return per dollar invested
Systematic risk
Risk per unit of return
Interest rate sensitivity
Asset liquidity
The risk-return trade-off implies:
Higher risk always leads to higher returns
Higher returns can be achieved without risk
Investors require higher returns for higher risk
Diversification increases risk
Low-risk assets outperform in long term
Beta measures:
Firm-specific risk
Interest rate sensitivity
Total risk
Market or systematic risk
Credit risk
A stock with β = 1.5 is:
Less risky than the market
Risk-free
Equal in risk to market
More volatile than the market
Not affected by market changes
If a stock has a beta of 0.8, it is expected to:
Be more volatile than the market
Have the same return as the market
Be less risky than the market
Be risk-free
Have a higher return than the market
The Capital Asset Pricing Model (CAPM) estimates required return as:
Return = β × (rm - rf)
Return = rf + β(rm - rf)
Return = rm - β(rf)
Return = rf + σ
Return = α + β
If the market risk premium is 6% and the risk-free rate is 3%, what is the expected return of a stock with β = 1.2?
7.2%
9.0%
10.2%
11.5%
10.8%
Which of the following best reduces diversifiable risk?
Investing in long-term bonds
Buying risk-free securities
Holding a diversified portfolio
Selecting high-beta stocks
Investing in only one industry
Systematic risk can:
Be eliminated by diversification
Be reduced by investing in a single stock
Not be diversified away
Be avoided through derivatives
Be ignored by investors
Which of the following is NOT part of the CAPM equation?
Beta
Risk-free rate
Expected market return
Standard deviation
Market risk premium
If the risk-free rate increases and beta stays constant, the required return will:
Stay the same
Decrease
Increase
Double
Go to zero
A stock with negative beta:
Moves in the same direction as the market
Is impossible in practice
Moves opposite to the market
Is always risky
Cannot be priced by CAPM
Which risk is relevant in a well-diversified portfolio?
Unsystematic risk
Firm-specific risk
Idiosyncratic risk
Market risk
Currency risk
The Security Market Line (SML) shows:
The trade-off between beta and alpha
All possible portfolios
The relationship between risk (beta) and required return
The risk-return trade-off of one firm only
The efficient frontier
