FINA 3000 Pope UGA Test 1 questions and solutions
T/F: A perpetuity is an annuity that never ends. - answersTrue
ji ji ji ji ji ji ji ji ji ji
T/F: When a borrower makes extra payments to principal, interest payments are accelerated to make up for
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
losses to the bank. - answersFalse
ji ji ji ji ji ji
T/F: One result of increasing leverage is that shareholders will expect a greater return on their investment
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
because their position is now riskier. - answersTrue
ji ji ji ji ji ji ji ji
T/F: For an investor, there is greater risk in forming a sole proprietorship versus a corporation. - answersTrue.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
Corporations give investors limited liability whereas sole proprietorships, the sole investor has all the risk and ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
return.
ji
T/F: If we increase the interest rate, the present value of an ordinary annuity increases. - answersFalse
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
the present value will decrease!!
ji ji ji ji
T/F: As the number of periods increases, present value decreases - answersTrue
ji ji ji ji ji ji ji ji ji ji ji
FUTURE value would increase!! ji ji ji
T/F: A zero coupon bond is considered a discount bond. - answersTrue
ji ji ji ji ji ji ji ji ji ji ji
T/F: A bond that matures in ten years would have a greater interest rate risk than a bond that matures in five
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
years. - answersTrue
ji ji ji
T/F: Suppose that Moody's changes the credit rating for Big Cat Fireworks from BBB to BB. We would expect
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
the price of Big Cat bonds to increase. - answersFalse.
ji ji ji ji ji ji ji ji ji ji ji
Their credit worthiness rating has gone down, meaning that they are less likely to pay back their creditors.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
therefore, their stock price would go DOWN
ji ji ji ji ji ji ji
Suppose that Moody's upgrades the credit rating on Disney bonds from AA to AAA. We would expect the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
coupon rate on future Disney bonds to be lower. - answersTrue
ji ji ji ji ji ji ji ji ji ji ji
risk goes in hand with returns --> when credit ratings are higher, risk is lowered, so the coupon rate/return is
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
lower too
ji ji
T/F: For an annuity due, each payment is received one period sooner than with an ordinary annuity. -
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
answersTrue
ji
T/F: Suppose you are looking at two different car loans. One offers a term of 60 payments while the other offers
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
a term of 84 payments. Both loans have the same annual percentage rate (APR). It is true that you will pay
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
more interest with the 84 payment loan (assuming same priced car). - answersTrue
ji ji ji ji ji ji ji ji ji ji ji ji ji
T/F: A perpetuity is an annuity that never ends. - answersTrue
ji ji ji ji ji ji ji ji ji ji
T/F: When a borrower makes extra payments to principal, interest payments are accelerated to make up for
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
losses to the bank. - answersFalse
ji ji ji ji ji ji
T/F: One result of increasing leverage is that shareholders will expect a greater return on their investment
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
because their position is now riskier. - answersTrue
ji ji ji ji ji ji ji ji
T/F: For an investor, there is greater risk in forming a sole proprietorship versus a corporation. - answersTrue.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
Corporations give investors limited liability whereas sole proprietorships, the sole investor has all the risk and ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
return.
ji
T/F: If we increase the interest rate, the present value of an ordinary annuity increases. - answersFalse
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
the present value will decrease!!
ji ji ji ji
T/F: As the number of periods increases, present value decreases - answersTrue
ji ji ji ji ji ji ji ji ji ji ji
FUTURE value would increase!! ji ji ji
T/F: A zero coupon bond is considered a discount bond. - answersTrue
ji ji ji ji ji ji ji ji ji ji ji
T/F: A bond that matures in ten years would have a greater interest rate risk than a bond that matures in five
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
years. - answersTrue
ji ji ji
T/F: Suppose that Moody's changes the credit rating for Big Cat Fireworks from BBB to BB. We would expect
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
the price of Big Cat bonds to increase. - answersFalse.
ji ji ji ji ji ji ji ji ji ji ji
Their credit worthiness rating has gone down, meaning that they are less likely to pay back their creditors.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
therefore, their stock price would go DOWN
ji ji ji ji ji ji ji
Suppose that Moody's upgrades the credit rating on Disney bonds from AA to AAA. We would expect the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
coupon rate on future Disney bonds to be lower. - answersTrue
ji ji ji ji ji ji ji ji ji ji ji
risk goes in hand with returns --> when credit ratings are higher, risk is lowered, so the coupon rate/return is
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
lower too
ji ji
T/F: For an annuity due, each payment is received one period sooner than with an ordinary annuity. -
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
answersTrue
ji
T/F: Suppose you are looking at two different car loans. One offers a term of 60 payments while the other offers
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
a term of 84 payments. Both loans have the same annual percentage rate (APR). It is true that you will pay
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
more interest with the 84 payment loan (assuming same priced car). - answersTrue
ji ji ji ji ji ji ji ji ji ji ji ji ji
