FINA 3000 POPE UGA TEST 1
QUESTIONS AND ANSWERS 100%
ACCURATE
T/F: A perpetuity is an annuity that never ends. - ANSWERTrue
T/F: When a borrower makes extra payments to principal, interest payments are
accelerated to make up for losses to the bank. - ANSWERFalse
T/F: One result of increasing leverage is that shareholders will expect a greater return
on their investment because their position is now riskier. - ANSWERTrue
T/F: For an investor, there is greater risk in forming a sole proprietorship versus a
corporation. - ANSWERTrue.
Corporations give investors limited liability whereas sole proprietorships, the sole
investor has all the risk and return.
T/F: If we increase the interest rate, the present value of an ordinary annuity increases.
- ANSWERFalse
the present value will decrease!!
T/F: As the number of periods increases, present value decreases - ANSWERTrue
FUTURE value would increase!!
T/F: A zero coupon bond is considered a discount bond. - ANSWERTrue
T/F: A bond that matures in ten years would have a greater interest rate risk than a
bond that matures in five years. - ANSWERTrue
T/F: Suppose that Moody's changes the credit rating for Big Cat Fireworks from BBB to
BB. We would expect the price of Big Cat bonds to increase. - ANSWERFalse.
Their credit worthiness rating has gone down, meaning that they are less likely to pay
back their creditors. therefore, their stock price would go DOWN
Suppose that Moody's upgrades the credit rating on Disney bonds from AA to AAA. We
would expect the coupon rate on future Disney bonds to be lower. - ANSWERTrue
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 annuity. - ANSWERTrue
T/F: Suppose you are looking at two different car loans. One offers a term of 60
payments while the other offers a term of 84 payments. Both loans have the same
annual percentage rate (APR). It is true that you will pay more interest with the 84
payment loan (assuming same priced car). - ANSWERTrue
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 safe. - ANSWERFalse.
Govt bonds have low rates of return because they are safe. Higher risk = higher return.
YTM = theoretical IRR earned by an investor who buys the bond today at the market
price, assuming that the bond will be held until maturity, and that all coupon and
principal payments will be made on schedule.
T/F: The future value of an annuity due is greater than the future value of an ordinary
annuity (assuming same number of payments and interest rate). - ANSWERTrue
an annuity due will have one extra payment than an ordinary annuity so it's value will be
higher
T/F: The tax benefits of owning a house increase over time. - ANSWERFalse
homeowners can deduct mortgage interest from their federal taxable income but
interest payments DECREASE over time.
T/F: The interest portion increases and the principal portion decreases over time under
a typical loan amortization schedule - ANSWERFalse
Interest decreases and principal increases
T/F: For firms with slow moving inventory, the quick ratio is a better measure of liquidity
than the current ratio. - ANSWERTrue
T/F: A liquidity ratio measures the firm's ability to meet short-term cash obligations. -
ANSWERTrue
T/F: The effective annual rate (EAR) measures the annual compounded return on
investment - ANSWERTrue
T/F: a zero coupon bond has no value because the firm is bankrupt - ANSWERFalse
QUESTIONS AND ANSWERS 100%
ACCURATE
T/F: A perpetuity is an annuity that never ends. - ANSWERTrue
T/F: When a borrower makes extra payments to principal, interest payments are
accelerated to make up for losses to the bank. - ANSWERFalse
T/F: One result of increasing leverage is that shareholders will expect a greater return
on their investment because their position is now riskier. - ANSWERTrue
T/F: For an investor, there is greater risk in forming a sole proprietorship versus a
corporation. - ANSWERTrue.
Corporations give investors limited liability whereas sole proprietorships, the sole
investor has all the risk and return.
T/F: If we increase the interest rate, the present value of an ordinary annuity increases.
- ANSWERFalse
the present value will decrease!!
T/F: As the number of periods increases, present value decreases - ANSWERTrue
FUTURE value would increase!!
T/F: A zero coupon bond is considered a discount bond. - ANSWERTrue
T/F: A bond that matures in ten years would have a greater interest rate risk than a
bond that matures in five years. - ANSWERTrue
T/F: Suppose that Moody's changes the credit rating for Big Cat Fireworks from BBB to
BB. We would expect the price of Big Cat bonds to increase. - ANSWERFalse.
Their credit worthiness rating has gone down, meaning that they are less likely to pay
back their creditors. therefore, their stock price would go DOWN
Suppose that Moody's upgrades the credit rating on Disney bonds from AA to AAA. We
would expect the coupon rate on future Disney bonds to be lower. - ANSWERTrue
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 annuity. - ANSWERTrue
T/F: Suppose you are looking at two different car loans. One offers a term of 60
payments while the other offers a term of 84 payments. Both loans have the same
annual percentage rate (APR). It is true that you will pay more interest with the 84
payment loan (assuming same priced car). - ANSWERTrue
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 safe. - ANSWERFalse.
Govt bonds have low rates of return because they are safe. Higher risk = higher return.
YTM = theoretical IRR earned by an investor who buys the bond today at the market
price, assuming that the bond will be held until maturity, and that all coupon and
principal payments will be made on schedule.
T/F: The future value of an annuity due is greater than the future value of an ordinary
annuity (assuming same number of payments and interest rate). - ANSWERTrue
an annuity due will have one extra payment than an ordinary annuity so it's value will be
higher
T/F: The tax benefits of owning a house increase over time. - ANSWERFalse
homeowners can deduct mortgage interest from their federal taxable income but
interest payments DECREASE over time.
T/F: The interest portion increases and the principal portion decreases over time under
a typical loan amortization schedule - ANSWERFalse
Interest decreases and principal increases
T/F: For firms with slow moving inventory, the quick ratio is a better measure of liquidity
than the current ratio. - ANSWERTrue
T/F: A liquidity ratio measures the firm's ability to meet short-term cash obligations. -
ANSWERTrue
T/F: The effective annual rate (EAR) measures the annual compounded return on
investment - ANSWERTrue
T/F: a zero coupon bond has no value because the firm is bankrupt - ANSWERFalse
