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# Time Value of Money and Yield Curve

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50. The yield curve is
a. inverted when short term rates are higher than long term rates
b. normal when it slopes upward to the right
c. a plot of interest rates versus term, also called the term structure of interest rates
d. all of the above

51. The federal government can always avoid default on its issues because of its unique right to:
a. change Treasury bond yields to zero at its
discretion.
c. tax.
b. print money. d. wage war.

52. Which exchange does not have a physical location?
a. New York Stock Exchange (NYSE)
b. American Stock Exchange (AMEX)
c. National Association of Securities Dealers Automated Quotation System (NASDAQ)
d. Securities and Exchange Commission (SEC)

53. Which of the following statements about time lines is false?
a. A time line is a graphic portrayal of a time value problem.
b. Time zero is the present point in time.
c. Future time periods are to the right of zero.
d. Time is portrayed along a vertical line.

54. The higher the rate of interest:
a. the larger the present value of a future sum of money
b. the smaller the future value of an amount invested today
c. the smaller the present value of a future sum of money
d. all of the above

55. The process of finding present values is frequently called
a. annualizing c. discounting
b. compounding d. leasing
56. If the interest rate is 0%,
a. future amounts have zero present value.
b. future amounts have an infinite present value.
c. the present value of amounts to be received in the future is equal to the sum of those
amounts.
d. the future value of an investment is less than the sum of its cash flows.

57. Which of the following would increase the future value of an amount?
a. an increase in the interest rate
b. an increase in the amount
c. an increase in the time until future value is to be received
d. a and b
e. all of the above

58. Opportunity cost is the:
a. benefit that would have been available from the next best use of money.
b. prime rate for large firms.
c. unemployment rate.
d. rate on standard savings accounts.

59. You have just won a \$5 million lottery to be received in twenty annual equal payments of \$250,000. What will happen to the present value of your winnings if the interest rate increases.
a. it will be worth less c. it will not change
b. it will be worth more d. none of the above

60. Assume that you have just won \$5,000,000 in the lottery and will receive \$250,000 per year for the next 20 years. How much is your prize worth today if the interest rate is 8%?
a. \$1,072,731 c. \$2,185,219
b. \$2,454,525 d. \$1,165,250

61. You are considering buying a new car. The sticker price is \$15,000 and you have \$2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10% and you wish to pay for the car over a 5-yearperiod, what are your monthly car payments?
a. \$216.67 d. \$285.78
b. \$252.34 e. \$318.71
c. \$276.21

62. You want to purchase a car for \$40,000 when you graduate in two years. At that time you will take out a 5-year bank loan at 12% compounded monthly. Based on your estimated earnings, you think you'll be able to afford loan payments of \$750 per month. You plan to save up the difference between the cost of the car and the amount you'll borrow by making quarterly deposits over the next two years in a bank account that pays 8% compounded quarterly. How large must those deposits be? (Round to the nearest dollar)
a. \$523 c. \$732
b. \$637 d. \$845

#### Solution Preview

50. The yield curve is
An inverted yield curve occurs when long-term yields fall below short-term yields
The yield curve has usually been "normal" meaning that yields rise as maturity lengthens
The yield curve is the relation between the interest rate (or cost of borrowing) and the time to maturity

d. all of the above
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

51. The federal government can always avoid default on its issues because of its unique right to:

b. print money.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

52. Which exchange does not have a physical location?
The OTC, unlike the other two, does not have a physical location. It is a network of security dealers, most of whom are connected by a computer link called NASDAQ (National Association of Securities Dealers Automated Quotation System)

c. National Association of Securities Dealers Automated Quotation System (NASDAQ)

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

53. Which of the following statements about time lines is false?
Time line is portrayed on a horizontal _______________ line. So, d is ...

#### Solution Summary

The soklution solves in detail, time value problems

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## Valuing Debt & Debt Policy

THEME 1

1. Explain how changes in debt-equity ratio impact the beta of the firm's equity. Provide a mathematical example to support your analysis.

2. What are the ramifications of a firm having a "less than optimal" or "wrong" capital structure?

THEME 2

1. In describing an optimal investment portfolio for someone who is 22 years of age, what would you recommend to them with respect to their distribution of stocks and bonds? Would your recommendation change if the person were 45 years old? Would it change if they were 85 years old?

2. If you were going to assess the riskiness of bonds, what types of characteristics (variables) would you consider? For example, "time" would be a variable (long vs. short-term bonds). Which of the variables that you have listed would be the most important? How would you rank order your considerations?

3. Using the Internet, find an example of how bonds' returns demonstrate the "term structure of interest rates."

4. Why do bonds of different maturities have different yields in terms of the expectations, liquidity, and segmentation hypotheses? Describe how these hypotheses relate to two different situations: 1) when the yield curve is upward sloping; 2) when the yield curve is downward sloping

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