FIN SOPHIA Finance Milestone 2

FIN SOPHIA Finance Milestone 2 You passed this Milestone 15 questions were answered correctly. 5 questions were answered incorrectly. 1 You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually. What is the value of your $30,000 in five years? • $33,000 • $27,000 • $33,122 • $26,878 CONCEPT Future Value, Single Cash Flows 2 Max is willing to take on a little risk when she buys a bond, but she wants to be compensated for her risk with an elevated interest rate. What kind of bond should she buy? • Inflation-linked • Subordinated • Zero-coupon • Convertible CONCEPT Types of Bonds 3 When an investor purchases stock, he or she becomes a(n) __________ of the issuing company. • employee • director • owner • creditor CONCEPT Defining Stock 4 Chen purchased a 30-year corporate bond in 2018 that promised to pay him 4% interest semi-annually for the life of the loan. The corporation reserved the right to redeem the bond in 2038. Which of those numbers represents the bond's call feature? • 2038 • 30 • 4 • 2018 CONCEPT Key Characteristics of Bonds 5 Select the true statement about default risk. • Default risk relates to a bond's periodic coupon payments, but not to its maturity payment. • Bondholders have a degree of legal protection against default risk, but it is not comprehensive. • Bondholders are guaranteed to be repaid in full if a company enters bankruptcy. • It is the risk that the bond's price will fall below its par value. CONCEPT Bond Risk 6 Which of the following is a disadvantage of bonds for a potential investor? • Bondholders risk a significant price drop if a large number of bonds are sold at once. • They have less legal protection than stocks. • Some bonds can be redeemed early by the issuer. • They are more likely than stocks to end up valueless if a company goes bankrupt. CONCEPT Advantages and Disadvantages of Bonds 7 Which of the following is true for calculating the present value of multiple cash flows? • The PV of multiple cash flows is the sum of the FV of each individual cash flow divided by the interest rate. • It is more complex to find the PV of annuities than the PV of irregular cash flows. • You can only find the PV of multiple cash flows if they originate at the same time. • All of the cash flows must be discounted to the same point in time. CONCEPT Valuing Multiple Cash Flows 8 Select the statement that is true of common stock. • Despite having fewer financial protections, common stock typically outperforms preferred stock. • Common stock has a stronger claim to a company's assets than preferred stock. • Companies issue dividends to common stockholders before preferred stockholders. • Common stockholders do not have a right of first refusal when new stock is issued. CONCEPT Types of Stock 9 Which of the following best describes a bond? • A debt instrument whose rate of return can fluctuate based on market conditions. • A debt security that gives an investor an ownership share in the entity issuing the bond. • A type of loan with a fixed rate of return that can be outstanding indefinitely. • A debt security that typically pays an investor a fixed rate of return for a specified period of time. CONCEPT Understanding Bonds 10 Which descriptor relates to the market-based approach for valuing corporations? • Considered the truest estimate • Involves an analysis of risk • Considers the weighted average cost of capital • Involves the average cost of a unit of company income CONCEPT Valuing the Corporation 11 Which of the following is the most accurate measure of how much interest you accrue on an investment? • APR • NPV • EAR • Nominal APR CONCEPT Yield 12 A fund that is designed to follow a major stock index and represents an attractive, inexpensive option for investors is a(n) __________. • hedge fund • pension fund • mutual fund • exchange-traded fund CONCEPT Stock Markets 13 Determine the value of a stock with the following variables using the constant growth model: • Current annual dividend: $1.30 per share • Required return rate: 7% • Constant growth rate: 5% • $69.55 • $63.75 • $65.00 • $68.25 CONCEPT Stock Valuation 14 Select the best definition of an annuity-due. • An annuity that has matured • An annuity whose payments are made at the end of the period • An annuity whose payments are made at the beginning of the period • An annuity whose payments can be made at any point during the period CONCEPT Annuities 15 Select the pairing that is correctly matched. • Common stock: the value of the stock is dependant upon the overall value of the company • Preferred stock: cannot be converted for common stock shares • Common stock: the issuer must honor any missed dividend payments • Preferred stock: stockholder receives interest from the issuer CONCEPT Rules and Rights of Common and Preferred Stock 16 Consider what you have learned about valuing bonds. • A: Coupon rate = 3.5%, YTM = 4% • B: Coupon rate = 3.2%, YTM = 3.2% • C: Coupon rate = 2.8%, YTM = 3.5% • D: Coupon rate = 4%, YTM = 3.7% Which of the bonds is selling at a premium? • D • B • A • C CONCEPT Valuing Bonds 17 You would like to have $10,000 in an account after eight years’ time. If the account earns 2.5% compounded interest yearly, how much would you have to deposit today? • $8,333 • $9,464 • $9,765 • $8,207 CONCEPT Present Value, Single Cash Flows 18 Ashlee's friend owes her $100, but he cannot pay it back today. Instead, Ashlee's friend promises to pay her $120 in one year to account for the time value of money. That extra $20 represents the __________. • present value • discount • pricing • interest CONCEPT Introduction to the Time Value of Money 19 Which of the following accurately describes a flat yield curve? • A curve with a minimal spread between short-term and long-term maturities and that indicates concern or doubt about the strength of the economy. • A curve that slopes upward as maturities lengthen and that indicates fear that the economy is about to enter a recession. • A curve that rises sharply and then levels off as maturities lengthen and that indicates a transition between a period of economic stagnation to one of growth. • A curve that slopes downward as maturities lengthen and that indicates confidence that economic activity will grow in the future. CONCEPT The Basics of Interest Rates 20 Select the statement that correctly explains the relationship between interest rates and present or future value. • The interest rate and the present value of an investment are directly related. • Assuming other variables stay the same, if the interest rate increases, the present value of an investment decreases. • Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases. • Assuming other variables stay the same, if the interest rate increases, the future value of an investment decreases. CONCEPT