Exam 2 Finance

Stowell earns 20% interest compounded annually on his savings. He will deposit $1,500 today, $1,650 one year from today, and $1,820 two years from today. What will be the account balance three years from today?

• $7,140

• $7,268

• $7,152

• $7,889

$7,152

William deposited $25,000 today that would earn an annual interest of 3% each year for a period of 2 years. The amount of $25,000 represents the:

• present value of an annuity

• future value of an annuity

• present value

• future value

present value

Robert White will receive cash flows of $4,450, $4,775, and $5,125 from his investment at the end of in the next three years. If he can earn 7% on the investment, what is the future value of his investment cash flows at the end of three years.

• $15,329

• $15,427

• $16,427

• $14,427

$15,329

Damien McCoy has loaned money to his brother at an annual interest rate of 5.85%. He expects to receive $987, $1,012, $1,062, and $1,162 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother?

• $3,785

• $3,757

• $3,657

• $3,685

$3,657

To calculate the future value of a series of cash flows, we can add up all the cash flows and then calculate their compounded value at the given rate of interest.

• True

• False

False

To determine the monthly payment on a one-year loan, divide the amount of the loan by 12.

• True

• False

False

You have won the lottery and will receive 20 annual payments of $10,000 starting today. If you can invest these payment at 8.5%, what is the present value of your winnings?

• $94,633

• $102,677

• $200,000

• $524,891

$102,677

The future value of an ordinary annuity is less than the future value of an annuity due.

• True

• False

True

If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called:

• a perpetuity

• an ordinary annuity

• an annuity due

• a growing perpetuity

an ordinary annuity

Shaun Barringer has started on his first job. He plans to start saving for retirement. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn an annual return of 10%. How much will Shaun have at the end of 45 years?

• $2,667,904

• $3,594,524

• $1,745,600

• $5,233,442

$3,594,524

If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called:

• a perpetuity

• an ordinary annuity

• an annuity due

• a growing perpetuity

an annuity due

Which of the following is most like an example of a perpetuity in today’s financial markets?

• Corporate bonds

• Preferred stock dividends

• Mortgage payments

• Car loan payments

Preferred stock dividends

Stuart Waddle’s father is 55 years old and wants to set up a cash flow stream that would be forever. He would like to receive $15,000 every year, beginning at the end of this year. These payments would then continue to future generations indefinitely. If he could invest in account earning 9% annually, how much would he have to invest today to receive his perpetual cash flow?

• $166,667

• $200,000

• $222,222

• $135,200

$166,667

Brandon Ramirez wants to set up an annual perpetual scholarship at his alma mater. He is willing to invest $320,000 in an account earning 11% annually. What will be the annual scholarship that can be given from this investment?

• $50,000

• $32,600

• $35,200

• $40,000

$35,200

A perpetuity bond pays a coupon of $136 per year and has a required rate of return of 3.5%. What is the market value of the bond?

• $3,863.55

• $3,872.76

• $3,885.71

• $3,817.34

$3,885.71

Which of the following examples represents a growing annuity?

• An inflation-adjusted 25-year lease

• A 30-year mortgage

• A consol

• A share of preferred stock

An inflation-adjusted 25-year lease

You have received a share of preferred stock that pays an annual dividend of $10. Similar preferred stock issues are yielding 22.5%. What is the value of this share of preferred stock?

• $41.50

• $46.67

• $44.44

• $45.67

$44.44

A modern day example of a perpetuity is a:

• corporate bond

• treasury bond

• share of preferred stock

• share of common stock

share of preferred stock

A consol, issued by the British government to finance the Napoleonic Wars is an example of:

• growing annuity

• perpetuity

• an ordinary annuity

• annuity due

perpetuity

Sid Phillips has funded a retirement investment with $250,000 earning a return of 6.75% annually. What is the value of the annual payment that he can receive in perpetuity starting next year?

• $12,150

• $15,250

• $16,875

• $14,900

$16,875

A firm receives a cash flow from an investment that will increase by 10% annually for an infinite number of years. This cash flow is called:

• an annuity due

• a growing perpetuity

• an ordinary annuity

• a growing annuity

a growing perpetuity

Cavincare has 50 years remaining on a service contract with Martin, Inc. Today, Martin paid $120,000 for services received last year and the annual payment increases by 2.5% each year. The firm’s required rate of return is 15%. What is the value of the contract to Cavincare.

• $974,634

• $980,879

• $987,131

• $915,000

$980,879

Noel Klinger is planning to invest in an insurance company product. The product will pay $12,500 at the end of this year. Thereafter, the payments will grow annually at a 2.5% rate forever. Jack will be able to invest his cash flows at an annual rate of 5.5%. What is the present value of this investment cash flow stream?

• $326,908

• $312,766

• $416,667

• $446,667

$416,667

The effective annual rate (EAR) will equal the annual percentage rate (APR) if interest is compounded:

• daily

• monthly

• quarterly

• annually

annually

The true cost of lending is the:

• annual percentage rate

• effective annual rate

• quoted interest rate

• interest rate per period

effective annual rate

Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every month for three years. The lender quoted Surreal an APR of 8.40% with monthly compounding. What is the effective annual rate (EAR) for this loan?

• 8.40%

• 8.73%

• 8.95%

• 8.44%

8.73%

An investment pays 18% interest compounded quarterly. What is the effective annual interest rate?

• 18.9%

• 18.3%

• 19.9%

• 19.3%

19.3%

What is the key difference between a perpetuity and a 100-year ordinary annuity that affects their present values?

• The perpetuity involved decreasing payments, while the annuity involved increasing payments

• The perpetuity continues forever, whereas the annuity has a finite number of payments

• The perpetuity is discounted at a higher rate than the annuity

• The annuity payments are adjusted for inflation, while the perpetuity is not

The perpetuity continues forever, whereas the annuity has a finite number of payments

In an annuity due, when do the cash flows occur?

• At the end of each period

• At the beginning of each period

• In the middle of each period

• At irregular intervals throughout the period

At the beginning of each period

Why are monthly lease payments for renting a warehouse typically considered an annuity due?

• Because the payments occur at the end of each month

• Because the payments are made at the beginning of each month

• Because the monthly lease payments increase over time

• Because the payments occur at irregular intervals from month-to month

Because the payments are made at the beginning of each month

In a typical loan amortization schedule involving a consumer loan, the amount of each loan payment is fixed.

• Ture

• False

True

You are purchasing a used car and will make 5 annual payments of $3,500 starting one year from today. If your funds could be invested at 9%, what is the present value of the car?

• $13,614

• $20,946

• $14,839

• $17,500

$13,614

Which of the following is NOT a typical way in which interest rates are quoted in the marketplace?

• Quoted interest rate

• Interest rate per period

• Discounted interest rate

• Effective annual interest rate (EAR)

Discounted interest rate

The Truth-in-Lending Act requires borrowers to disclose the:

• effective annual interest (EAR)

• margin interest rate

• annual percentage rate (APR)

• discount interest rate

annual percentage rate (APR)

Nick invested $2,000 in a bank savings account today and another $2000 a year from now. If the bank pays interest of 10% per year, how much money will Nick have at the end of two years?

• $4,000

• $4,210

• $4,200

• $4,620

$4,620

Anna will receive $15,000 from a bank deposit in 2 years which earned an annual interest rate of 3.5%. The amount of $15,000 represents the:

• present value of an annuity

• future value

• future value of an annuity

• present value

future value

The present value of multiple cash flows is:

• greater than the sum of the cash flows

• less than the sum of the cash flows

• higher or lower than the cash flows depending on the interest rate

• equal to the sum of all the cash flows

less than the sum of the cash flows

A preferred stock would be an example of:

• a perpetuity

• an ordinary annuity

• an annuity due

• a growing annuity

a perpetuity

Which of the following statements is true of amortization?

• The computation of loan amortization is wholly based on the computation of simple interest

• Amortization solely refers to the total value to be paid by the borrower at the end of maturity

• The amortization schedule provides principal, interest, and unpaid principal balance for each period

• The amortization schedule represents only the interest portion of the loan

The amortization schedule provides principal, interest, and unpaid principal balance for each period

Newship Inc. has borrowed from its bank at an annual interest rate of 8% and will repay the loan with interest over the next five years. Its scheduled payments, starting at the end of the year are as follows: -$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments?

• $2,431,224

• $2,989,351

• $2,735,200

• $2,815,885

$2,815,885

Ransport Company has made an investment in another company that will guarantee a cash flow of $37,250 each year for the next five years. If the company uses a discount rate of 15% on its investments, what is the present value of this investment?

• $251,154

• $101,766

• $186,250

• $124,868

$124,868

Dawson Electricals has borrowed $27,850 from its bank at an annual rate of 8.5%. It plans to repay the loan in eight equal installments, beginning in a year. What is its annual loan payment?

• $4,748

• $5,134

• $4,708

• $4,939

$4,939

Tim Dodson has borrowed $8,600 to pay for his new car. The annual interest rate on the loan is 9.4%, and the loan needs to be repaid in four annual payments. What will be his annual payment if he begins his payments now?

• $2,304

• $2,850

• $2,448

• $2,229

$2,448

You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequence annual payments the will grow at a rate of 3.4%. If you use a 9% annual discount rate for investment like this, what is the present value of this growing perpetuity?

• $365,632

• $357,143

• $378,130

• $372,925

$357,143

What is the market value of a stock that paid a dividend of $3.80 last year if the dividend is increasing at 10% annually and the required rate of return on the stock is 20%?

• $39.50

• $41.80

• $38.30

• $39.80

$41.80

Milner is saving for her retirement. She will make a deposit into her IRA account at the end of each quarter for the next 36 years. The expected return on the account is 8%. How much will she have to deposit each quarter to have $650,000 in the account when she retires 36 years from today?

• $796.81

• $4,513.89

• $260.34

• $2702.61

$796.81

You are starting college this month, and your favorite aunt has agreed to give you $4,000 at the end of each of your four years and you can save $8,000 at the end of each year for the first two years after you graduate. If all of these amounts are invested at 14%, how much will you have to start graduate school, six years from now?

• $42,160

• $42,927

• $42,167

• $42,702

$42,702

James Perkins wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 8% annually. How much does he need to save each year, beginning at the end of this year, to reach his target? Assume he could earn 8% annually on any investment he makes.

• $10,900

• $16,110

• $14,273

• $13,464

$13,464

Krysel Inc. is expecting a new project to begin producing cash flows at the end of this year. They expect cash flows to be as follows:

1 - $663,547

2 - $698,214

3 - $795,908

4 - $798,326

5 - $755,444

If they can reinvest these cash flows to earn an annual return of 9.2%, what is the future value of this cash flow stream at the end of five years?

• $4,429,046

• $4,368,692

• $4,468,692

• $4,529,046

$4,429,046

Which of the following statements is true of annual percentage rate (APR)?

• The APR is the true cost of borrowing and lending

• The APR is similar to the quoted interest rate, which is a simple annual rate

• The APR calculation adjusts for the effects of compounding and, hence, the time value of money

• The APR takes compounding effect into account

The APR is similar to the quoted interest rate, which is a simple annual rate

The true cost of borrowing is the:

• quoted interest rate

• effective annual rate

• annual percentage rate

• periodic rate

effective annual rate

Raymond Bartz is trying to choose between two equally risky annuities, each paying $5,000 per year for five years. One is an ordinary annuity, and the other is an annuity due. Which of the following statements is most correct?

• The present value of an ordinary annuity must exceed the present value of the annuity due, but the future value of an ordinary annuity may be less than the future values of the annuity due

• If interest rates increase, the difference between the present value of the ordinary annuity and the present value of the annuity due remains the same

• The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of an the annuity due also exceeds the future value of the ordinary annuity

• The present value of the annuity due exceeds the present value of the ordinary annuity, while the future value of the annuity due is less than the future value of the ordinary annuity

The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value of an the annuity due also exceeds the future value of the ordinary annuity

your father is about to retire, and he wants to buy an annuity that will provide him with $91,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

• $1,482,167

• $1,442,169

• $1,472,927

• $1,328,557

$1,328,557

Which of the following equations is correct?

• Annuity due value = Ordinary annuity value x (1+i)

• Annuity due value = Ordinary annuity value + (1+i)

• Annuity due value = Ordinary annuity value / i

• Annuity due value = Ordinary annuity value / (1+i)

Annuity due value = Ordinary annuity value x (1+i)

Which of the following statements is true?

• The market for corporate stocks is thin compared to the market for corporate bonds

• Institutional investors such as life insurance companies tend to not invest in corporate bonds

• The largest investors in corporate bonds are small individual investors

• Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volume

Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volume

Which of the following statements is true of zero-coupon bonds?

• Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity

• The most frequent and regular issuer of zero-coupon securities are non-governmental agencies

• Zero coupon bonds tend to sell above their face value

• Zero coupon bonds have a yield to maturity of 0%

Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity

Prices in the corporate bond market tend to be less volatile than prices of securities sold in markets with greater trading volumes

• True

• False

False

One reason why firms issue convertible bonds is that, the bonds can be sold for:

• lower prices with higher interest rates

• higher prices with higher interest rates

• lower prices with lower interest rates

• higher prices with lower interest rates

higher prices with lower interest rates

A client has expressed interest in a ten-year zero coupon bonds with a face value of $1,000. His opportunity cost is 7%. Assuming annual compounding, what would be the current market price of these bonds?

• $700

• $51

• $508

• $1,000

$508

University Corp. issued five-year bonds that pay a coupon of 6.5% semiannually with a face value of $1,000. The current market rate for similar bonds is 5.5%. How much will you be willing to pay for the bond today?

• $958

• $1,043

• $1,023

• $1,000

$1,043

Bonds sell at a discount when the market rate of interest is:

• less than the bond’s coupon rate

• greater than the bond’s coupon rate

• equal to the bond’s coupon rate

• there is no relation between the coupon rate and market rate of interest

greater than the bond’s coupon rate

Bonds sell at a premium when the market rate of interest is:

• less than the bond’s coupon rate

• greater than the bond’s coupon rate

• equal to the bond’s coupon rate

• there is no relation between the coupon rate and market rate of interest

less than the bond’s coupon rate

Highland Corp., a U.S. company has a five-year bond whose yield to maturity is 6.5%. The bond has no coupon payments. What is the price of this zero-coupon bond? (Assume semiannual compounding for these zero-coupon bonds.)

• $927.83

• $729.88

• $726.27

• $1,113.23

$726.27

The discount rate that makes the present value of a bond’s coupons and principal payment equal to its price is the:

• holding period yield

• effective annual yield

• realized yield

• yield to maturity

yield to maturity

Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25% and currently sells at $912.34. What is the current market yield on such bonds?

• 7.5%

• 8.5%

• 6.5%

• 9.5%

8.5%

Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11% semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield?

• 11.8%

• 11.5%

• 12.5%

• 12.2%

12.2%

Five years ago, Shirley Harper bought a 10-year bond that pay 8% semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment?

• 7%

• 11%

• 10%

• 8%

10%

Suppose an investor earned a semiannual yield of 6.4% on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment?

• 12.80%

• 6.50%

• 13.21%

• 6.40%

13.21%

In regard to interest rate risk, short-term bonds:

• and longer-term bonds have no interest rate risk because their coupon interest rates are fixed

• have less interest rate risk than longer-term bonds

• and longer-term bonds have the same amount of interest rate risk because their coupon interest rates are fixed

• have more interest rate risk than longer-term bonds

have less interest rate risk than longer-term bonds

When interest rates change, the prices of lower-coupon bonds change less than the prices of higher-coupon bonds

• True

• False

False

What does interest rate risk refer to for bond investors?

• The risk that interest rates will remain constant over time

• The likelihood of bonds becoming callable early

• The chance that bond prices will move when rates change

• The probability that a bond will not pay its interest

The chance that bond prices will move when rates change

Why do long-term bonds generally exhibit greater interest rate risk than short-term bonds?

• Their prices are more sensitive to interest rate changes due to longer cash flow durations

• They are typically issued by risker companies and financially troubled municipalities

• They pay higher coupons over their life compared to shorter-term bonds

• They have fixed coupon rates that prevent price adjustments during the life of the bond

Their prices are more sensitive to interest rate changes due to longer cash flow durations

Which factor most increases a bond’s exposure to interest rate risk?

• A longer time until maturity

• More frequent interest payments

• Higher credit quality of the issuer

• Issuance by a well-known company

A longer time until maturity

Marketability is the ability of an investor:

• to sell a security quickly, at a low transaction cost, and at a price close to its fair market value

• to sell a security with the highest profit

• to sell at a profit under all circumstances

• to sell the security above its par value

to sell a security quickly, at a low transaction cost, and at a price close to its fair market value

The default risk premium is based on the probability that a bond issuer will not fulfill all of a bond’s contractual provisions.

• True

• False

True

If a corporate bond’s rating changes from AAA to AA, it means that its default risk has gone up.

• True

• False

True

Keys Corporation’s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.95%. The only difference between the two bonds, which are both extremely marketable and liquid is the chance of bankruptcy. What is the default risk premium (DRP) on Keys’ bonds?

• 1.00%

• 5.95%

• 2.00%

• 1.05%

1.05%

How does a call provision typically affect the yield on a bond?

• It increases the bond’s yield to compensate investors for the call risk

• It lowers the bond’s yield only if interest rates are expected to rise

• It has no impact on the bond’s yield as long as market rates remain stable

• It decreases the bond’s yield because of the added flexibility for the issuer

It increases the bond’s yield to compensate investors for the call risk

What does default risk refer to in the context of bonds?

• The risk associated with bonds that have a cell provision

• The likelihood that bond prices will fall if interest rates rise

• The chance that bond prices will fluctuate due to market changes

• The possibility that the bond issuer might not make the scheduled payments

The possibility that the bond issuer might not make the scheduled payments

The bonds that has no coupon payments but promise a single payment at maturity are called:

• callable bonds

• vanilla bonds

• zero coupon bonds

• convertible bonds

zero coupon bonds

Which one of the following statements is NOT true?

• Corporate bonds are more marketable than the securities that have higher daily trading volumes

• The largest investors in corporate bonds are life insurance companies and pension funds

• Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities

• The market for corporate bonds is thin compared to the market for corporate stocks

Corporate bonds are more marketable than the securities that have higher daily trading volumes

Which one of the following statements about vanilla bonds is NOT true?

• They have fixed coupon payments

• The bond’s coupon rate is calculated as an annal coupon payment divided by the bond’s face value

• Coupon payments are usually made quarterly

• The face value, or par value, for most corporate bonds is $1,000

Coupon payments are usually made quarterly

Which of the following statements is true about zero coupon bonds?

• They typically sell for a higher price than similar coupon bonds

• They typically sell at a deep discount below par when they are first issued

• They are always convertible to common stock

• They typically sell at a premium over par when they are first issued

They typically sell at a deep discount below par when they are first issued

In calculating the current price of a bond paying semiannual coupons, one needs to:

• use the semiannual rate only for discounting the annual coupons

• use double the annual coupon value

• use double the number of years for the number of payments made

• use the annual discount rate for discounting the par payment at maturity

use double the number of years for the number of payments made

Briar Corp is issuing a 10-year bond with a coupon rate of 7%. The interest rate for similar bonds is currently 9%. Assuming annual payments, what is the present value of the bond?

• $990

• $1,066

• $945

• $872

$872

Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10% on a semiannual basis. The current market rate for similar bonds is 8.8%. What should be the current price of this bond?

• $1,048

• $1,099

• $965

• $982

$1,048

Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10% on a semiannual basis. Similar bonds in the current market have a yield to maturity of 12%. What will be the price that he will get for his bond?

• $938

• $1,102

• $970

• $1,044

$938

Shana Norris wants to buy a five-year zero-coupon bonds with a face value of $1,000. Her yield to maturity is 8.5%. Assuming annual compounding, what would be the current market price of these bonds?

• $890

• $665

• $1,023

• $1,113

$665

Three years ago, Joe bought a 5-year bond, with a 10% coupon, for $1,000 and to be paid semiannually, Currently, with interest rates having risen sharply, the bond is selling for $800 and you decide to sell it off. If you had re-invested the semi-annual coupons as you received them, what would your realized yield be over the 3-year holding period?

• 10%

• 3.63%

• 6%

• 12%

3.63%

Which one of the following statements is true of a bond’s yield to maturity?

• A bond’s yield to maturity is the same as the bond’s realized yield if the bond is held to maturity

• If the yield to maturity is less than the coupon rate, the bond will sell above par value

• The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond

• The yield to mature of a bond is the same as the coupon rate assuming the bond price is below par value

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond

Alice Trang is planning to buy a six-year bond that pays a coupon of 10% semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds?

• 13%

• 12%

• 11%

• 14%

13%

Mary just bought a 20-year bond with an 8% coupon rate (paid semi-annually) and $1000 pay value for $1050. She is expecting an effective annual yield (EAY) of:

• 8.51%

• 7.65%

• 9.5%

• 10%

7.65%

Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15% semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield?

• 17%

• 18%

• 10%

• 9%

17%

Which of the following statements is true?

• As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline

• Long-term bonds have lower price volatility than short-term bonds of similar risk

• All other things equal, short-term bonds are risker than long-term bonds

• Interest rate risk decreases as maturity increases

As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline

Which of the following theorems explains the relationship between interest rates and bond prices?

• For a given change in interest rates, the prices of short-term bonds will change more drastically than the prices of long-term bonds

• Bond prices are directly related to interest rate movements

• For a given change in interest rates, the prices of higher-coupon bonds will change more drastically than the prices of lower-coupon bonds

• For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds

For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds

Which of the following statements is true?

• U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all debt securities

• U.S. Treasury bonds are considered to be the most markable of all debt securities

• The interest rate, or yield, on a security do not affect its marketability

• The lower the transaction cost are, the less marketable a security becomes

U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all debt securities

Which of the following classes of securities is likely to have the lowest corporate borrowing cost?

• AAA rated bonds

• A rated bonds

• BB rated bonds

• C rated bonds

• All of the above will have the same corporate borrowing cost

AAA rated bonds

Marketability is the ability of an investor:

• to sell the security above its par value

• to sell at a profit under all circumstances

• to sell at a security with the higher profit

• to sell a security quickly, at a low transaction cost, and at a price close to its fair market value

to sell a security quickly, at a low transaction cost, and at a price close to its fair market value

A corporate bond’s coupon rate is the annual coupon payment divided by:

• the bond’s current price

• $100

• the bond’s maturity period

• the bond’s face value

the bond’s face value

If a bond’s coupon rate is equal to the market rate of interest, then the bond will sell:

• at a price equal to its face value

• at a price greater than its face value

• at a price less than its face value

• there is no relation between the coupon rate and market rate of interest

at a price equal to its face value