Chapter 2: Financial Management Questions on Connect

1. A dollar received one year from today has ______ value than a dollar received today.
Less
2. If you invest $100 at 10 percent per year for 2 years, your future value with annual
compounding will be ______.
121
3. The idea behind ______ is that interest is earned on interest.
Compounding
4. A dollar tomorrow is worth ______ a dollar today.
Less - Reason: A dollar tomorrow is worth less than a dollar today, because if you
invest the dollar you have today, you'll have more than a dollar tomorrow.
5. Which of the following will result in a lower present value for a given future cash
flow?
A higher interest rate, More risk, More time
 If you take more risk, the interest rate will be higher, so you don't need to
deposit as much today.
 If you have a longer period of time before you need the money, it can
accumulate more interest, so you don't need to deposit as much today.
 If you have a higher interest rate, your money will accumulate more interest,
so you don't need to deposit as much today.
6. What are some of the implications of the time value of money concept?
 A dollar today is worth more than a dollar tomorrow.
 A dollar tomorrow is worth less than a dollar today.
 (A dollar today is worth more than a dollar tomorrow, because you can invest
it and have more than a dollar tomorrow.)
7. Why is a dollar received today worth more than a dollar received in the future?
 Today's dollar can be invested, yielding a greater amount in the future
8. If you invest $100 at 10 percent per year for 3 years, your future value with annual
compounding will be ___.
 $133.10
 Reason: 
 FV = $100(1.10)3 = $133.10
9. If $100 earns compound interest for 2 years at 10 percent per year, the future value
will be ____.
 Reason: FV = $100 × 1.10 2 = $121
10. You receive $100 today. With positive interest rates, the concept of future value
implies that the future value of your $100 will be ____ $100.
 Greater: Reason: If interest rates are positive, $100 given to you today will be
worth more than $100 in the future (for example, if the interest rate is 5%, your
$100 will be worth $100 x (1 + .05)1 = $105 in one year.
11. The difference between _______ interest and compound interest is that compound interest
(increases or decreases) ___________ with time.
 simple; increases
12. If you earn 8 percent a year compounded annually for 7 years on a $1,000 present value, your
future value will be ____.
 FV = $1,000(1.08)7 = $1,713.82
13. You receive $100 today. With positive interest rates, the concept of future value implies that
the future value of your $100 will be ____ $100.
 Greater than - If interest rates are positive, $100 given to you today will be worth
more than $100 in the future (for example, if the interest rate is 5%, your $100
will be worth $100 x (1 + .05)1 = $105 in one year.
14. What is the NPV of a project with an initial investment of $95, a cash flow in one year of
$107, and a discount rate of 6%? (Be sure to record the initial investment as a negative
number.)
 Reason: NPV = -$95 + ($107/1.06) = $5.94
15. How is net present value (NPV) computed?
 Reason: NPV = PV - investment
16. The future value formula is ______.
 FV = C0 × (1 + r)τ
17. The value of a future cash flow stated in today's dollars is referred to as the _____.
 Present value
18. According to the basic investment rule for NPV, a firm should ____.

 accept a project if the NPV is greater than zero.

 reject a project if NPV is less than zero.
19. Which of the following is the correct formula for the 1-period present value?
PV=FV/(1+r)
20. A perpetuity is a constant stream of cash flows for a(n) ______ period of time.
 Infinite
21. What is the NPV of a project with an initial investment of $90, a cash flow in one
year of $100, and a discount rate of 6%? (Be sure to record the initial investment as a
negative number.)
 NPV = -$90 + ($100/1.06) = $4.34
22. C/r is the formula for the present value of a(n) ____.
Perpetuity
23. A fixed stream of cash flows that ends after a specified number of years is called a(n):
Annuity
24. A series of level payments that begins immediately for a specified period of time is
called a(n):
Annuity due
25. Which of the following is a perpetuity?
 A constant stream of cash flows forever
26. Find the future value of an annuity of $200 per year for 10 years at 10 percent per year.
 Reason: First, find the PV by using the 10 year annuity factor: PV = $200 x 10
year annuity factor = $200 x [1/.1 - 1/.1x(1.1)10]= $1,228.92. To find the future
value, multiply $1,228.92 x (1.1)10= $3,187.49.
27. PV = C1/(r - g) is the formula for the present value of a:
28. A stream of cash flows that grows at a constant rate for a finite period is called a(n) _____.
 Growing annuity
29. A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a
fixed period of time.
 Fixed
30. An annuity due is a series of payments that are made ____.
 at the beginning of each period
31. Find the future value of an annuity of $100 per year for 10 years at 10 percent per year.
  First, find the PV by using the 10 year annuity factor: PV = $100 x 10 year
annuity factor = $100 x [1/.1 - 1/.1x(1.1)10]= $614.46. To find the future value,
multiply $614.46 x (1.1)10= $1,593.75.
32. Which of the following is the formula for the present value of a growing perpetuity?
 C1/(r - g)
33. Which of the following are true about the growing perpetuity model assumptions?
 The cash flow used is that for next year.
 The cash flows occur at regular intervals.
 The interest rate must exceed the growth rate.
34. A fixed stream of cash flows that ends after a specified number of years is called a(n):
Annuity
35. A series of level payments that begins immediately for a specified period of time is called
a(n):
 annuity due
36. The future value of $100 at 10 percent compounded semiannually is ______ the future value
of $100 at 10 percent compounded annually.
Greater than - The future value of $100 at 10 percent compounded semiannually is greater
than the future value of $100 at 10 percent compounded annually, because interest is earned
on the first six months' interest during the entire time period.
37. Assume interest is compounded monthly. The ______ annual rate will express this rate as
though it were compounded annually.
Effective - Assume interest is compounded monthly. The effective annual rate will express
this rate as though it were compounded annually.
38. Which of the following are true about the growing perpetuity model assumptions?
The interest rate must exceed the growth rate.
39. An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.
 Semiannually: Semiannually (correct): EAR = (1 + .07/2)2 – 1 = 7.12%
40. Another common name for the stated annual interest rate is _____.
annual percentage rate (APR)
41. What is the general compounding formula for calculating the annual return on an
investment when there is more than one compounding period in a year?
(1 + r/m)m
42. What is the difference in the future value of $100 at 7 percent interest for 5 years if
the interest is compounded semiannually rather than annually?
 ($100 × 1.03510) - ($100 × 1..075) = $.80
43. The __________ annual interest rate is usually calculated as the total annual payment divided
by the number of payments in the year.
 Quoted
44. Which compounding interval will result in the highest future value, assuming everything else
is held constant?
annual
45. A growing annuity has a(n) ____.
finite number of growing cash flows
46. The annual percentage rate is the annual interest rate without consideration of _____.
The annual percentage rate is the annual interest rate without consideration of compounding.
47. There is no limit to how frequently interest could be paid. Where payments are spread evenly
and continuously throughout the year we say the interest rate is ____________ compounded.
Continuously
48. What is the formula for computing future value with continuous compounding?
C0 × erT
One of the most basic principles of finance is that rational individuals prefer to receive a dollar ____
than a dollar ______
tomorrow; today

What are some of the implications of the time value of money concept?
A dollar today is worth more than a dollar tomorrow.

A dollar today is worth less than a dollar tomorrow.

True or false: Receiving $10 today has the same value as receiving $1 today and $9 one year from
now. False

Present value represents what an amount of money promised or expected in the future is worth
______. today

Which of the following represents an infinite and constant stream of cash flows?  Perpetuity
The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year
-compounding
___________ compounding means that interest is paid two times per year.- semaniual
Which of the following gives an effective annual yield of 12.36 percent? 12%, compounded
semiannually
Semiannual compounding means that interest is paid ______ per year.-two times
Which term refers to the stated annual interest rate? APR
Which compounding interval will result in the highest future value, assuming everything else is held
constant? Continuous

Which compounding interval will result in the lowest future value, assuming everything else
is held constant?annual

Chapter 3
Municipal governments can raise money from financial markets to finance its deficits by ___. issuing
bonds

Which of the following terms apply to a bond? Maturity,Principal, Face value

Which of the following is true about a typical multi-year bond's coupon? It is a fixed payment made
yearly and at bond maturity.
What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100 and a
coupon interest payment of $100 per year= 10%

What four variables are required to calculate the value of a bond? Face value, Time
remaining to maturity, Coupon rate, Yield

What information is needed to compute a bond's yield to maturity? Coupon rate,Time to

maturity,The bond's current price, The bond's yield to maturity
Which of the following terms apply to a bond? Coupon, Principal, Face value

A bond pays annual coupon payments of $50, has a face value of $1,000, and a market price
of $1,200. How is the coupon rate computed? $50/$1,000

What is a corporate bond's yield to maturity (YTM)? YTM is the expected return for an
investor who buys the bond today and holds it to maturity.
YTM is the prevailing market interest rate for bonds with similar features

In general, a corporate bond's coupon rate ____, is fixed until the bond matures

A bond's yield to maturity is: the total yield or expected return on a bond that is held until it
matures

Which of the following variables are required to calculate the value of a bond? Remaining
life of bond
Market yield
Coupon rate
Time remaining to maturity
Face value

Which of the following terms apply to a bond? Maturity, Principal, Face value, Coupon
A corporate bond's yield: changes over time
is usually not the same as a bond's coupon rate

A bond's yield to maturity is affected by all of the following EXCEPT the= number of bonds issued
The YTM will be greater than the current yield if: bonds were purchased at a discount
What is a premium bond? A bond that sells for more than face value

A corporate bond's yield: changes over time \is usually not the same as a bond's coupon rate
If a $1,000 face value bond is trading at a premium, the bond is: trading for more than $1,000 in the
market $45 every 6 months

Why does a bond's price fluctuate over time? The coupon rate is fixed, while market interest rate or
yield changes
When interest rates in the market fall, bond values will increase because the present value of the
bond's remaining cash flows ____. Increases

What is a corporate bond's yield to maturity (YTM)? YTM is the expected return for an
investor who buys the bond today and holds it to maturity.
YTM is the prevailing market interest rate for bonds with similar features.

If you invest in a U.S. Treasury bond or note, how many times can you expect, in general, to receive
interest? Twice a year
True or false: A bond's price is not affected by changes in the market rate of interest.FALSE
When interest rates in the market rise, we can expect the price of bonds to decrease
The relationship between bond prices and the market rate of interest is ____. an inverse relationship
If a $1,000 face value bond is trading at a premium, the bond is: trading for more than $1,000 in the
market
Assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's
current market price will _____.INCREASE
Duration measures: average time to maturity
True or false: In an upward-sloping term structure, the long-term rates will be lower than the short-
term rates. False
The _______________ states that the same commodity must sell at the same price in a well-
functioning market.= Law of one price
Assume you own a bond currently valued at $900. If the market rate of interest drops, the bond's
current market price will _____.= increase
A bond that makes just one cash payment, the price of which can be used to determine spot rates, is
called a: strip bond
Expected inflation, risk, and expectations of changes in future interest rates all impact the shape of
the: term structure
If the term structure of interest rates is upward-sloping, then ____. long-term rates are higher than
short-term rates
Which one of the following is true regarding long-duration and short-duration bonds? The prices of
long-duration bonds are more volatile than prices of short-duration bond
True or False: The expectations theory of the term structure states that a series of short-maturity bonds
must offer the same expected return as an investment in a single long-maturity bond. TRUE

The factors that impact the shape of the term structure include which of the following? Expected
inflation,Risk, Expectations of future interest rate change
When inflation is highly uncertain investors will require _______ expected rates of return to lend
long. HIGH