Finance 301 Exam 2 Questions with Complete Answers Latest Update 2025/2026
If the price of an ordinary annuity is _______,the price of an annuity due with the same periodic
payment will be ________ - Answers $P, $P(1+i)
To reach the same future value, the periodic payment in an ordinary annuity needs to be what? -
Answers × (1+i) times larger than the payment in an otherwise equivalent annuity due.
APR - Answers is quoted simple annual percentage rate without compounding
The periodic interest rate - Answers i =APR/m
m= - Answers is the number of compounding in a year
Annual Precentage Rate is 12%, imonthly is.... - Answers 12%/12 = 1
Effective Annual Rate of Interest (EAR) - Answers is the annualized true cost of borrowing/rate
of return considering the effect of compounding
EAR formula - Answers EAR= (1+i)m -1 or EAR=(1+APR/m)m -1
amortized loan - Answers is designed to have equal loan payment each period, with the portion
of the payment allocated to the interest gradually decreasing, while the portion allocated to the
principal paid gradually increasing
Loan balance is the ________ of remaining loan payments - Answers Present Value
The loan payment is - Answers $C in PVA formula
Interest paid= - Answers Beginning loan balance× i
where i is the - Answers periodic (e.g. monthly) interest rate NOT APR
Principal paid - Answers = $C - Interest paid
End-of period loan balance= - Answers Beginning-of-period loan balance - Principal paid for the
period
Total interest payments= - Answers Total loan payments - Original loan principal
Interest-only loan - Answers the principal is not paid until maturity
for a 10-year, 5% APR interest-only loan of $200,000, the annual interest= - Answers $200000 x
5% = $10,000
Pure discount loan - Answers the principal and all compounding interest are paid at maturity.
Examples: T-bills, zero-coupon bonds.
How to calculate the annual-coupon bond value and semi-annual coupon bond value? - Answers
, The bond's yield to maturity (that is, the market required interest rate for the bond) is the
annualized discount rate in the bond pricing equation.
The bond price is inversely related to the - Answers Bond's yeild
The bond's yield also called - Answers yield to maturity (YTM) is the expected rate of return on
the bond assuming investors purchase the bond at the given the market price and hold the bond
until maturity.
A bond will sell at__________, that is, above the face value, when its coupon rate is _____________
than the bond yield to maturity - Answers premium(discount)/
greater (smaller)
Bond's interest rate risk - Answers -All else equal, value of long-term bonds is more sensitive to
interest rate changes.
-All else equal, value of low-coupon bonds is more sensitive to interest rate changes.
-All else equal, bond's re-investment risk is greater for short-term bonds.
-All else equal, bond's re-investment risk is greater for high-coupon bonds
A yield curve is - Answers a line that plots the yields of bonds against their maturity for a given
quality of bond
A bond's yield can be - Answers decomposed into inflation premium, maturity risk premium,
default risk premium and liquidity risk premium.
John Deere, an equipment manufacturer, offered buyers a payment choice between the
following two:
(1)receiving $4,000 off a base price of $88,745 if the buyer pays cash
(2) receiving 0 percent financing on a four-year loan and the buyer will pay the base price. That
is, the buyer is offer a loan of $88,745 to purchase the equipment today and will repay $88,745
four years later.
The buyer should always choose option 1 if ____________________ (multiple answers, choose all
correct ones) - Answers -If the buyer has $84,745 cash and an investment opportunity with
expected rate of return less than 1.16%.
-If the buyer doesn't have $84,745 cash and can get a bank loan with 0.5% interest rate
Consider two equally risky securities. A will provide three payments: $500 now, $800 a year later
and $1,000 two years later. B will provide a single payment of $2600 three years from now. The
appropriate interest rate is 7.5%. How would you evaluate the two securities? Choose all the
If the price of an ordinary annuity is _______,the price of an annuity due with the same periodic
payment will be ________ - Answers $P, $P(1+i)
To reach the same future value, the periodic payment in an ordinary annuity needs to be what? -
Answers × (1+i) times larger than the payment in an otherwise equivalent annuity due.
APR - Answers is quoted simple annual percentage rate without compounding
The periodic interest rate - Answers i =APR/m
m= - Answers is the number of compounding in a year
Annual Precentage Rate is 12%, imonthly is.... - Answers 12%/12 = 1
Effective Annual Rate of Interest (EAR) - Answers is the annualized true cost of borrowing/rate
of return considering the effect of compounding
EAR formula - Answers EAR= (1+i)m -1 or EAR=(1+APR/m)m -1
amortized loan - Answers is designed to have equal loan payment each period, with the portion
of the payment allocated to the interest gradually decreasing, while the portion allocated to the
principal paid gradually increasing
Loan balance is the ________ of remaining loan payments - Answers Present Value
The loan payment is - Answers $C in PVA formula
Interest paid= - Answers Beginning loan balance× i
where i is the - Answers periodic (e.g. monthly) interest rate NOT APR
Principal paid - Answers = $C - Interest paid
End-of period loan balance= - Answers Beginning-of-period loan balance - Principal paid for the
period
Total interest payments= - Answers Total loan payments - Original loan principal
Interest-only loan - Answers the principal is not paid until maturity
for a 10-year, 5% APR interest-only loan of $200,000, the annual interest= - Answers $200000 x
5% = $10,000
Pure discount loan - Answers the principal and all compounding interest are paid at maturity.
Examples: T-bills, zero-coupon bonds.
How to calculate the annual-coupon bond value and semi-annual coupon bond value? - Answers
, The bond's yield to maturity (that is, the market required interest rate for the bond) is the
annualized discount rate in the bond pricing equation.
The bond price is inversely related to the - Answers Bond's yeild
The bond's yield also called - Answers yield to maturity (YTM) is the expected rate of return on
the bond assuming investors purchase the bond at the given the market price and hold the bond
until maturity.
A bond will sell at__________, that is, above the face value, when its coupon rate is _____________
than the bond yield to maturity - Answers premium(discount)/
greater (smaller)
Bond's interest rate risk - Answers -All else equal, value of long-term bonds is more sensitive to
interest rate changes.
-All else equal, value of low-coupon bonds is more sensitive to interest rate changes.
-All else equal, bond's re-investment risk is greater for short-term bonds.
-All else equal, bond's re-investment risk is greater for high-coupon bonds
A yield curve is - Answers a line that plots the yields of bonds against their maturity for a given
quality of bond
A bond's yield can be - Answers decomposed into inflation premium, maturity risk premium,
default risk premium and liquidity risk premium.
John Deere, an equipment manufacturer, offered buyers a payment choice between the
following two:
(1)receiving $4,000 off a base price of $88,745 if the buyer pays cash
(2) receiving 0 percent financing on a four-year loan and the buyer will pay the base price. That
is, the buyer is offer a loan of $88,745 to purchase the equipment today and will repay $88,745
four years later.
The buyer should always choose option 1 if ____________________ (multiple answers, choose all
correct ones) - Answers -If the buyer has $84,745 cash and an investment opportunity with
expected rate of return less than 1.16%.
-If the buyer doesn't have $84,745 cash and can get a bank loan with 0.5% interest rate
Consider two equally risky securities. A will provide three payments: $500 now, $800 a year later
and $1,000 two years later. B will provide a single payment of $2600 three years from now. The
appropriate interest rate is 7.5%. How would you evaluate the two securities? Choose all the
