FINANCIAL STATEMENT MODELING EXAM 1 2025 NEW EDITION WITH
CURRENTLY TESTING QUESTIONS WITH COMPLETE SOLUTIONS
The 3 equivalent ways of calculating the present value of a single cash flow are:
1. PV formula
2. PV function
3. PV timeline
The effect of future value of a single cash flow when you increase the PV
an increase in the FV
The effect of future value when you increase the discount rate
an increase in FV
The effect of future value when you increase the number of periods
an increase in the FV
Fully explain the formula used for calculating the FV of each cash flow
Each cash flow is compounded at the Discount Rate for the remaining periods
,What is the name of the term that the Present Value is divided by to get the Payment. Why
does this formula give the Payment amount?
Present Value Interest Factor of Annuity. APV = PMT X PVIFA. So, dividing by the Present
Value Interest Factor undo's the product, and gives you the PMT.
Show the formula for calculating the Annuity Present Value using the Annuity Future Value,
Discount Rate, and # of Periods in Excel Notation
APV = AFV/(1+r)^t
State the effect of increasing the payment amount on the APV and AFV
APV = increase in FV
AFV = increase in FV
Can the constant discount rate method be used to calculate NPV in the general case where
the discount rate changes over time? Why/Why not?
No, because the NPV function & constant discount formula only allow for one constant
discount rate.
Fully explain the NPV function used to calculate the NPV in cell b21
The NPV function in Excel assumes that Year 0 cash flow occurs at the end of the year
instead of the beginning, so you add it to the NPV of the remaining years using the NPV
function. The NPV function takes the cash flows from each year, discounts it by the
nominal discount rate (which is found by compounding the inflation rate & the real
discount rate) and summing them up (including the initial investment)
,Is the NPV of the project shown acceptable for investment? Why/Why not
A project is acceptable if the NPV is positive
If we add the inflation rate and the real discount rate to get the nominal discount rate, how
will it be different from the formula in b9?
It won't give us the effect/measurement of the increase in the real discount rate due to
inflation
Why is the coupon bond yield to maturity close to, but not exactly equal to, the yield to
maturity of the four-year treasury strip?
Because the yield of the coupon bond is a weighted average of the yields for each of the 8
periods. The biggest cash flow is on the maturity date, and the biggest weight in the
weighted average is on that date. So, it's closest to the yield at the maturity date. But now
the same.
State whether the EAR convention results in a higher or lower bond price than the APR
convention in and give the reason for this.
higher bond price because it is a lower discount rate, which from the laws of discounting
cash flows results in a higher bond price.
State and explain the differences between the curvatures of the yield to maturity curve and
the forward rate curve.
Forward rates curve is not smooth, whereas the Yield Curve is a compounded average of
the Forward rates so it has a smoother curve.
, Fully explain the formula for calculating the forward rate of the Ten Year Treasury Strip.
Take the 10 year yield to maturity and divide it by the 5 year rate compounded for 5 years to
give the 5 year compounded value between years 5 and 10. Then take the 5th root to
convert it to annual rate, and subtract 1 for the principal.
Explain why the yield curve often has lower yields at the short end and the long end due to
market segmentation.
There is more demand for short-term bonds for cash management, which increases prices
of short term bonds, resulting in low yields at the short end.
List the static features regarding the shape, level, and curvature of the U.S. yield curve.
A. Four different shapes: upward sloping, downward sloping, flat, and humped.
B. The overall level of the yield curve ranges from low to high
C. The amount of curvature at the short end ranges from a little to a lot.
List the dynamic properties regarding the volatility of the U.S. yield curve.
A. Short Rates (0-5 yrs) are more volatile than long rates (15-30 yr)
B. The overall volatility of the yield curve is higher when the level is higher (early 80s)
CURRENTLY TESTING QUESTIONS WITH COMPLETE SOLUTIONS
The 3 equivalent ways of calculating the present value of a single cash flow are:
1. PV formula
2. PV function
3. PV timeline
The effect of future value of a single cash flow when you increase the PV
an increase in the FV
The effect of future value when you increase the discount rate
an increase in FV
The effect of future value when you increase the number of periods
an increase in the FV
Fully explain the formula used for calculating the FV of each cash flow
Each cash flow is compounded at the Discount Rate for the remaining periods
,What is the name of the term that the Present Value is divided by to get the Payment. Why
does this formula give the Payment amount?
Present Value Interest Factor of Annuity. APV = PMT X PVIFA. So, dividing by the Present
Value Interest Factor undo's the product, and gives you the PMT.
Show the formula for calculating the Annuity Present Value using the Annuity Future Value,
Discount Rate, and # of Periods in Excel Notation
APV = AFV/(1+r)^t
State the effect of increasing the payment amount on the APV and AFV
APV = increase in FV
AFV = increase in FV
Can the constant discount rate method be used to calculate NPV in the general case where
the discount rate changes over time? Why/Why not?
No, because the NPV function & constant discount formula only allow for one constant
discount rate.
Fully explain the NPV function used to calculate the NPV in cell b21
The NPV function in Excel assumes that Year 0 cash flow occurs at the end of the year
instead of the beginning, so you add it to the NPV of the remaining years using the NPV
function. The NPV function takes the cash flows from each year, discounts it by the
nominal discount rate (which is found by compounding the inflation rate & the real
discount rate) and summing them up (including the initial investment)
,Is the NPV of the project shown acceptable for investment? Why/Why not
A project is acceptable if the NPV is positive
If we add the inflation rate and the real discount rate to get the nominal discount rate, how
will it be different from the formula in b9?
It won't give us the effect/measurement of the increase in the real discount rate due to
inflation
Why is the coupon bond yield to maturity close to, but not exactly equal to, the yield to
maturity of the four-year treasury strip?
Because the yield of the coupon bond is a weighted average of the yields for each of the 8
periods. The biggest cash flow is on the maturity date, and the biggest weight in the
weighted average is on that date. So, it's closest to the yield at the maturity date. But now
the same.
State whether the EAR convention results in a higher or lower bond price than the APR
convention in and give the reason for this.
higher bond price because it is a lower discount rate, which from the laws of discounting
cash flows results in a higher bond price.
State and explain the differences between the curvatures of the yield to maturity curve and
the forward rate curve.
Forward rates curve is not smooth, whereas the Yield Curve is a compounded average of
the Forward rates so it has a smoother curve.
, Fully explain the formula for calculating the forward rate of the Ten Year Treasury Strip.
Take the 10 year yield to maturity and divide it by the 5 year rate compounded for 5 years to
give the 5 year compounded value between years 5 and 10. Then take the 5th root to
convert it to annual rate, and subtract 1 for the principal.
Explain why the yield curve often has lower yields at the short end and the long end due to
market segmentation.
There is more demand for short-term bonds for cash management, which increases prices
of short term bonds, resulting in low yields at the short end.
List the static features regarding the shape, level, and curvature of the U.S. yield curve.
A. Four different shapes: upward sloping, downward sloping, flat, and humped.
B. The overall level of the yield curve ranges from low to high
C. The amount of curvature at the short end ranges from a little to a lot.
List the dynamic properties regarding the volatility of the U.S. yield curve.
A. Short Rates (0-5 yrs) are more volatile than long rates (15-30 yr)
B. The overall volatility of the yield curve is higher when the level is higher (early 80s)
