FINC 425 Exam 1 with 100% Correct
Answers
Fair price of a financial asset - ANSWER-The PV of all expected future CFs associated
with the asset
PV of Multiple CFs - ANSWER-Can calculate by discounting each CF separately and
then summing
Annuity - ANSWER-equally spaced, level stream of CFs for a specified finite time
Perpetuity - ANSWER-Constant stream of annuity, equally spaced, level CF streams
that continues forever
Growing perpetuity formula only works for... - ANSWER-g < r
2 Methods of annualizing rates - ANSWER-APR and EAR
Annual Percentage Rate (APR) - ANSWER-APR = r x n, ignores compound interest, not
useful for PV calculations
Effective Annual Rate (EAR) - ANSWER-(1+r)^n -1, accounts for compound interest
Difference between EAR and effective rate - ANSWER-EAR is just for one year,
effective rate is in terms of any # of years
Guaranteed - ANSWER-Use risk free rate
Pricing by replication - ANSWER-We can create the CF stream ourselves
Bonds - ANSWER-Considered debt, raise money for investment capital
Lenders (Investors) - ANSWER-Purchase the issuer's bonds for a price today and in
return receive a promise to be paid back on a contracted schedule
Price - ANSWER-Market driven value, amount paid by the bondholder for the bond
Maturity - ANSWER-"expiration date" of the bond
Face Value - ANSWER-amount to be paid to the bondholder at maturity
Answers
Fair price of a financial asset - ANSWER-The PV of all expected future CFs associated
with the asset
PV of Multiple CFs - ANSWER-Can calculate by discounting each CF separately and
then summing
Annuity - ANSWER-equally spaced, level stream of CFs for a specified finite time
Perpetuity - ANSWER-Constant stream of annuity, equally spaced, level CF streams
that continues forever
Growing perpetuity formula only works for... - ANSWER-g < r
2 Methods of annualizing rates - ANSWER-APR and EAR
Annual Percentage Rate (APR) - ANSWER-APR = r x n, ignores compound interest, not
useful for PV calculations
Effective Annual Rate (EAR) - ANSWER-(1+r)^n -1, accounts for compound interest
Difference between EAR and effective rate - ANSWER-EAR is just for one year,
effective rate is in terms of any # of years
Guaranteed - ANSWER-Use risk free rate
Pricing by replication - ANSWER-We can create the CF stream ourselves
Bonds - ANSWER-Considered debt, raise money for investment capital
Lenders (Investors) - ANSWER-Purchase the issuer's bonds for a price today and in
return receive a promise to be paid back on a contracted schedule
Price - ANSWER-Market driven value, amount paid by the bondholder for the bond
Maturity - ANSWER-"expiration date" of the bond
Face Value - ANSWER-amount to be paid to the bondholder at maturity
