FINA 3000 POPE UGA TEST 1 QUESTIONS AND
ANSWERS
T/F: A perpetuity is an annuity that never endsrh - answersTrue
T/F: When a borrower makes extra payments to principal, interest payments are accelerated
to make up for losses to the bankrh - answersFalse
T/F: One result of increasing leverage is that shareholders will expect a greater return on
their investment because their position is now riskierrh - answersTrue
T/F: For an investor, there is greater risk in forming a sole proprietorship versus a
corporationrh - answersTruerh
Corporations give investors limited liability whereas sole proprietorships, the sole investor
has all the risk and returnrh
T/F: If we increase the interest rate, the present value of an ordinary annuity increasesrh -
answersFalse
the present value will decrease!!
T/F: As the number of periods increases, present value decreases - answersTrue
FUTURE value would increase!!
, T/F: A zero coupon bond is considered a discount bondrh - answersTrue
T/F: A bond that matures in ten years would have a greater interest rate risk than a bond
that matures in five yearsrh - answersTrue
T/F: Suppose that Moody's changes the credit rating for Big Cat Fireworks from BBB to BBrh
We would expect the price of Big Cat bonds to increaserh - answersFalserh
Their credit worthiness rating has gone down, meaning that they are less likely to pay back
their creditorsrh therefore, their stock price would go DOWN
Suppose that Moody's upgrades the credit rating on Disney bonds from AA to AAArh We
would expect the coupon rate on future Disney bonds to be lowerrh - answersTrue
risk goes in hand with returns --> when credit ratings are higher, risk is lowered, so the
coupon rate/return is lower too
T/F: For an annuity due, each payment is received one period sooner than with an ordinary
annuityrh - answersTrue
T/F: Suppose you are looking at two different car loansrh One offers a term of 60 payments
while the other offers a term of 84 paymentsrh Both loans have the same annual percentage
rate (APR)rh It is true that you will pay more interest with the 84 payment loan (assuming
same priced car)rh - answersTrue
as the number of payments increase, you will pay more in interest!
T/F: Government bonds generally have higher yields to maturity than corporate bonds
because government bonds are very saferh - answersFalserh
Govt bonds have low rates of return because they are saferh Higher risk = higher returnrh
ANSWERS
T/F: A perpetuity is an annuity that never endsrh - answersTrue
T/F: When a borrower makes extra payments to principal, interest payments are accelerated
to make up for losses to the bankrh - answersFalse
T/F: One result of increasing leverage is that shareholders will expect a greater return on
their investment because their position is now riskierrh - answersTrue
T/F: For an investor, there is greater risk in forming a sole proprietorship versus a
corporationrh - answersTruerh
Corporations give investors limited liability whereas sole proprietorships, the sole investor
has all the risk and returnrh
T/F: If we increase the interest rate, the present value of an ordinary annuity increasesrh -
answersFalse
the present value will decrease!!
T/F: As the number of periods increases, present value decreases - answersTrue
FUTURE value would increase!!
, T/F: A zero coupon bond is considered a discount bondrh - answersTrue
T/F: A bond that matures in ten years would have a greater interest rate risk than a bond
that matures in five yearsrh - answersTrue
T/F: Suppose that Moody's changes the credit rating for Big Cat Fireworks from BBB to BBrh
We would expect the price of Big Cat bonds to increaserh - answersFalserh
Their credit worthiness rating has gone down, meaning that they are less likely to pay back
their creditorsrh therefore, their stock price would go DOWN
Suppose that Moody's upgrades the credit rating on Disney bonds from AA to AAArh We
would expect the coupon rate on future Disney bonds to be lowerrh - answersTrue
risk goes in hand with returns --> when credit ratings are higher, risk is lowered, so the
coupon rate/return is lower too
T/F: For an annuity due, each payment is received one period sooner than with an ordinary
annuityrh - answersTrue
T/F: Suppose you are looking at two different car loansrh One offers a term of 60 payments
while the other offers a term of 84 paymentsrh Both loans have the same annual percentage
rate (APR)rh It is true that you will pay more interest with the 84 payment loan (assuming
same priced car)rh - answersTrue
as the number of payments increase, you will pay more in interest!
T/F: Government bonds generally have higher yields to maturity than corporate bonds
because government bonds are very saferh - answersFalserh
Govt bonds have low rates of return because they are saferh Higher risk = higher returnrh
