FI 320 - Exam 2 (MSU) Questions And
Outlined Answers
\Q\.Compounding - ANSWERS✔-the ability of an asset to generate earnings,
which are then reinvested in order to generate their own earnings
\Q\.Compound Interest - ANSWERS✔-means that interest is earned on interest as
well as principal
\Q\.Simple Interest - ANSWERS✔-one year's worth of interest multiplied by n
\Q\.True - ANSWERS✔-for a given interest rate - the longer the time period, the
lower the present value
(farther out a cash flow goes, the less value it has)
\Q\.True - ANSWERS✔-the higher the interest rate, the smaller the present value
\Q\.Annuity - ANSWERS✔-finite series of equal payments that occur at regular
intervals
they come to an end
, \Q\.Perpetuity - ANSWERS✔-infinite series of equal payments
they do not come to an end
\Q\.True - ANSWERS✔-when calculating a problem, you should bring everything
down to lowest time level
\Q\.Bond - ANSWERS✔-debt security, usually an interest only loan
\Q\.$1000 - ANSWERS✔-future value for a bond
\Q\.Maturity - ANSWERS✔-specified date on which the principal amount of the
bond will be repaid
\Q\.Coupon Rate - ANSWERS✔-annual coupon payments/1000
\Q\.Coupon Payment - ANSWERS✔-(coupon rate)*(1000)/(# of payments per
year)
\Q\.Premium Bonds - ANSWERS✔-If a bond sells for MORE than its face value
(more than $1000). Its yield to maturity is LOWER than the coupon rate.
Outlined Answers
\Q\.Compounding - ANSWERS✔-the ability of an asset to generate earnings,
which are then reinvested in order to generate their own earnings
\Q\.Compound Interest - ANSWERS✔-means that interest is earned on interest as
well as principal
\Q\.Simple Interest - ANSWERS✔-one year's worth of interest multiplied by n
\Q\.True - ANSWERS✔-for a given interest rate - the longer the time period, the
lower the present value
(farther out a cash flow goes, the less value it has)
\Q\.True - ANSWERS✔-the higher the interest rate, the smaller the present value
\Q\.Annuity - ANSWERS✔-finite series of equal payments that occur at regular
intervals
they come to an end
, \Q\.Perpetuity - ANSWERS✔-infinite series of equal payments
they do not come to an end
\Q\.True - ANSWERS✔-when calculating a problem, you should bring everything
down to lowest time level
\Q\.Bond - ANSWERS✔-debt security, usually an interest only loan
\Q\.$1000 - ANSWERS✔-future value for a bond
\Q\.Maturity - ANSWERS✔-specified date on which the principal amount of the
bond will be repaid
\Q\.Coupon Rate - ANSWERS✔-annual coupon payments/1000
\Q\.Coupon Payment - ANSWERS✔-(coupon rate)*(1000)/(# of payments per
year)
\Q\.Premium Bonds - ANSWERS✔-If a bond sells for MORE than its face value
(more than $1000). Its yield to maturity is LOWER than the coupon rate.
