Finance exam 2 true false questions

An annuity due has a lower present value than an ordinary annuity with the same periodic payment.

False 

To reach the same future value, the periodic payment in an ordinary annuity must be greater than in an annuity due.

True

APR is the compounded annual rate of return.

False

The periodic interest rate is equal to the APR divided by the number of compounding periods per year.

True

Effective Annual Rate (EAR) takes compounding into account to give the true cost of borrowing or return.

True

An amortized loan has periodic loan payment amount that will increase over time.

False

In an amortized loan, the portion of each payment allocated to interest decreases over time.

True

 For an interest-only loan, both the principal and interest are paid off gradually over the loan’s term.

False

A pure discount loan has no periodic interest payments; the principal and interest are paid at maturity.

True

The loan balance can be determined by the future value of remaining loan payments.

False

For a loan, the interest paid each period is calculated using the APR rather than the periodic interest rate.

False

The bond’s yield to maturity (YTM) represents the annualized expected rate of return if the bond is held until maturity.

True

Bond price and bond yield are positively correlated: as one rises, the other rises.

False

 A plain vanilla bond’s coupon rate changes over time based on market conditions.

False

A bond sells at a premium when its coupon rate is higher than its yield to maturity.

True

A bond’s price will gradually decrease over time if it is selling at a discount and market interest rates stay the same.

False

A bond’s yield to maturity is always greater than its current yield if it is selling at a premium.

False

Long-term bonds are generally more sensitive to interest rate changes than short-term bonds.

True

 Bonds with lower coupon rates are more sensitive to interest rate changes than those with higher coupon rates.

True

A yield curve shows the relationship between bond yields and their maturity.

True

Bonds with different ratings will be plotted on different yield curves.

True

Bonds with high coupon rates have more reinvestment risk than bonds with low coupon rates.

True

Reinvestment risk is greater for long-term bonds than for short-term bonds.

False

An annuity due will always have a higher present value than an ordinary annuity with the same payments.

True

EAR is always less than or equal to APR.

False

 In an amortized loan, the total interest paid is the total loan payments minus the original principal.

True

For a bond, its yield to maturity includes all risk premiums: inflation, maturity, default, and liquidity.

True

A pure discount loan requires periodic payments of interest only.

False

A discount bond’s YTM is lower than its current yield.

False

 Interest rate risk is a concern for bond investors because bond prices change with market interest rates.

True

The current 3-month T-bill yield is 4.54% and the 10-year T-bill yield is 4.31%. Therefore, the maturity risk premium must be negative.

False

 If APR = 10% and compounds quarterly, the effective annual rate (EAR) will be less than 10%.

False