# PV, FV Bond concepts

PV versus FV

4. If the "discount" (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

a. True

b. False

The discounting is the process of finding the PV of a future cash flow and is the reciprocal, or reverse of compounding.

5. The present value of a future sum decreases as either the discount rate or the number of discount periods per year increases.

a. True

b. False

PV versus FV

6. Which of the following statements is most correct?

a. If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

b. To increase present consumption beyond present income normally requires either the payment of interest or else an opportunity cost of interest foregone.

c. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value.

d. Disregarding risk, if the present value of a sum is equal to its future value, either k = 0 or t = 0.

e. Each of the statements above is true.

Time value concepts

7. Which of the following statements is most correct?

a. A 5-year $100 annuity due will have a higher present value than a 5- year $100 ordinary annuity.

b. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and same interest rate.

c. If an investment pays 10 percent interest compounded annually, its effective rate will also be 10 percent.

d. Statements a and c are correct.

e. All of the statements above are correct.

Bond concepts

8. A 10-year corporate bond has an annual coupon payment of 9 percent. The bond is currently selling at par ($1,000). Which of the following statements is most correct?

a. The bond's yield to maturity is 9 percent.

b. The bond's current yield is 9 percent.

c. If the bond's yield to maturity remains constant, the bond's price will remain at par.

d. Both answers a and c are correct.

e. All of the answers above are correct.

Proxy

9. A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock. A proxy can be an important tool relating to control of the firm.

a. True

b. False

Required return

10. An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

a. Increase.

b. Decrease.

c. Fluctuate.

d. Remain constant.

e. Possibly increase, possibly decrease, or possibly remain unchanged.

Preferred stock concepts

11. Which of the following statements is most correct?

a. One of the advantages to the firm associated with financing using preferred stock rather than common stock is that control of the firm is not diluted.

b. Preferred stock provides steadier and more reliable income to investors than common stock.

c. One of the advantages to the firm of financing with preferred stock is that 70 percent of the dividends paid out are tax deductible.

d. Statements a and c are correct.

e. Statements a and b are correct.

Common stock concepts

12. Which of the following statements is most correct?

a. One of the advantages of financing with stock is that a greater proportion of stock in the capital structure can reduce the risk of a takeover bid.

b. A firm with classified stock can pay different dividends to each class of shares.

c. One of the advantages of financing with stock is that a firm's debt ratio will decrease.

d. Both statements b and c are correct.

e. All of the statements above are correct.

#### Solution Preview

4. If the "discount" (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

b. False

5. The present value of a future sum decreases as either the discount rate or the number of discount periods per year increases.

a. True

6. Which ...