Principle of Finance Milestone 2 Sophia Milestone. Answered, Latest Fall 2023-2024.

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Principle of Finance Milestone 2 Sophia Course Answer 1 You would like to have $8,000 in an account after four years' time. If the account earns 4% compounded interest yearly, how much would you... have to deposit today? · $7,249 · $6,838 · $7,692 · $6,897 CONCEPT Present Value, Single Cash Flows 2 Select the true statement about interest rate risk. · It stems from the fact that bond prices and market interest rates are inversely correlated. · It is the risk that a bond's coupon payment will fall if market interest rates fall. · Interest rate risk is particularly problematic for investors who do not wish to sell their bonds. · Shorter-term bonds are more sensitive to interest rate risk than longer-term bonds. CONCEPT Bond Risk 3 Which of the following accurately describes a flat yield curve? · A curve with a minimal spread between short-term and long-term maturities and that indicates concern or doubt about the strength of the economy. · A curve that slopes downward as maturities lengthen and that indicates confidence that economic activity will grow in the future. · A curve that rises sharply and then levels off as maturities lengthen and that indicates a transition between a period of economic stagnation to one of growth. · A curve that slopes upward as maturities lengthen and that indicates fear that the economy is about to enter a recession. CONCEPT The Basics of Interest Rates 4 Select the pairing that is correctly matched. · Common stock: may only be sold on the secondary market · Preferred stock: the value of the stock is not affected by market factors · Common stock: usually has a pre-negotiated dividend · Preferred stock: stockholders' claim to assets is subordinate to that of debtholders CONCEPT Rules and Rights of Common and Preferred Stock 5 You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually. What is the value of your $30,000 in five years? · $26,878 · $27,000 · $33,000 · $33,122 CONCEPT Future Value, Single Cash Flows 6 Which of the following best describes a bond? · A type of loan with a fixed rate of return that can be outstanding indefinitely. · A debt security that typically pays an investor a fixed rate of return for a specified period of time. · A debt security that gives an investor an ownership share in the entity issuing the bond. · A debt instrument whose rate of return can fluctuate based on market conditions. CONCEPT Understanding Bonds 7 Hunter is going to receive $3,000 in one year and he wants to know its equivalent value today. The process of determining the answer is called ______. · pricing · discounting · compounding · rating CONCEPT Introduction to the Time Value of Money 8 A fund that is designed to follow a major stock index and represents an attractive, inexpensive option for investors is a(n) __________. · mutual fund · hedge fund · pension fund · exchange-traded fund CONCEPT Stock Markets 9 Select the best definition of an annuity-due. · An annuity whose payments are made at the end of the period · An annuity that has matured · An annuity whose payments can be made at any point during the period · An annuity whose payments are made at the beginning of the period CONCEPT Annuities 10 Select the statement that is true of preferred stock. · Preferred stock has less protection than common stock if a company goes bankrupt. · Preferred stock does not change in value. · Preferred stock can be converted into common stock. · Preferred stockholders have a degree of control over corporate policy. CONCEPT Types of Stock 11 Which of the following is true for calculating the future value of multiple cash flows? · It is simpler to find the FV of irregular cash flows than of annuities. · You must choose the same point in the future for each individual cash flow to determine the FV of multiple investments. · To find the FV of multiple cash flows, add the PV of each cash flow together and use the total in the formula for FV. · You can only find the FV of multiple cash flows if the payments occur with the same regularity. CONCEPT Valuing Multiple Cash Flows 12 Consider what you have learned about valuing bonds. ·A: Coupon rate = 3.5%, YTM = 4% ·B: Coupon rate = 3.2%, YTM = 3.2% ·C: Coupon rate = 2.8%, YTM = 3.5% ·D: Coupon rate = 4%, YTM = 3.7% Which of the bonds is selling at a premium? · D · C · A · B CONCEPT Valuing Bonds 13 In calculating the yield of an investment, what is EAR equivalent to? · NPV · IRR · APY · APR CONCEPT Yield 14 Chen purchased a 30-year corporate bond in 2018 that promised to pay him 4% interest semi-annually for the life of the loan. The corporation reserved the right to redeem the bond in 2038. Which of those numbers represents the bond's call feature? · 4 · 30 · 2018 · 2038 CONCEPT Key Characteristics of Bonds 15 Determine the value of a stock with the following variables using the constant growth model: ·Current annual dividend: $0.85 per share ·Required return rate: 7% ·Constant growth rate: 4% · $28.33 · $29.47 · $30.32 · $22.74 CONCEPT Stock Valuation 16 When an investor purchases stock, he or she becomes a(n) __________ of the issuing company. · director · creditor · owner · employee CONCEPT Defining Stock 17 Which of the following is a disadvantage of bonds for a potential investor? · They have less legal protection than stocks. · Bondholders risk a significant price drop if a large number of bonds are sold at once. · Some bonds can be redeemed early by the issuer. · They are more likely than stocks to end up valueless if a company goes bankrupt. CONCEPT Advantages and Disadvantages of Bonds 18 Which descriptor relates to the asset-based approach for valuing corporations? · Considers the weighted average cost of capital · Analyzes what the company owns · Involves an analysis of risk · Multiplies the share price by number of shares outstanding CONCEPT Valuing the Corporation 19 Max is willing to take on a little risk when she buys a bond, but she wants to be compensated for her risk with an elevated interest rate. What kind of bond should she buy? · Zero-coupon · Convertible · Subordinated · Inflation-linked CONCEPT Types of Bonds 20 Select the statement that correctly explains the relationship between interest rates and present or future value. · Assuming other variables stay the same, if the interest rate increases, the present value of an investment decreases. · The interest rate and the present value of an investment are directly related. · Assuming other variables stay the same, if the interest rate increases, the future value of an investment decreases. · Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases. CONCEPT Additional Detail on Present and Future Values 1 An investment fund that uses more complex investment strategies to generate returns for their wealthy or institutional investors is a(n) __________. · exchange-traded fund · mutual fund · index fund · hedge fund CONCEPT Stock Markets 2 Preemptive rights allow stockholders to acquire __________ before the general public. · dividends · new stock · company assets · preexisting shares CONCEPT Defining Stock 3 Janice purchased a $1,000 10-year Treasury note that promised to pay her 1.125% interest every 6 months for the life of the loan. Which of those numbers is the par value of the note? · 6 · 1,000 · 1.125 · 10 CONCEPT Key Characteristics of Bonds 4 Rochelle wants to buy a bond, but she wants to avoid interest rate risk. She also prefers to receive a payment every three months instead of the traditional six months. What type of bond should she buy? · Government · Zero-coupon · Fixed-rate · Floating-rate CONCEPT Types of Bonds 5 Select the statement that is true of preferred stock. · Preferred stock does not change in value. · Preferred stockholders have a degree of control over corporate policy. · Preferred stock has less protection than common stock if a company goes bankrupt. · Preferred stock can be converted into common stock. CONCEPT Types of Stock 6 Which of the following best describes a bond? · A debt security that gives an investor an ownership share in the entity issuing the bond. · A debt security that typically pays an investor a fixed rate of return for a specified period of time. · A type of loan with a fixed rate of return that can be outstanding indefinitely. · A debt instrument whose rate of return can fluctuate based on market conditions. CONCEPT Understanding Bonds 7 You make a loan of $400 with a 6% annual compounded interest for a period of seven years. What is your $400 worth seven years later? · $601 · $568 · $199 · $232 CONCEPT Future Value, Single Cash Flows 8 Which of the following is true for calculating the future value of multiple cash flows? · To find the FV of multiple cash flows, add the PV of each cash flow together and use the total in the formula for FV. · It is simpler to find the FV of irregular cash flows than of annuities. · You can only find the FV of multiple cash flows if the payments occur with the same regularity. · You must choose the same point in the future for each individual cash flow to determine the FV of multiple investments. CONCEPT Valuing Multiple Cash Flows 9 Which of the following is an advantage of bonds for a potential investor? · Prices remain the same regardless of whether market interest rates change. · Since there is only one type of bond, they are easy to understand. · The interest rate on a bond can increase if a credit rating agency upgrades the bond. · They offer predictability when it comes to long-term financial planning. CONCEPT Advantages and Disadvantages of Bonds 10 Which of the following is the most accurate measure of how much interest you accrue on an investment? · NPV · APR · EAR · Nominal APR CONCEPT Yield 11 Select one advantage of an annuity for a borrower. · The payment amount may go down if interest rates fall. · The sum of all the payments will be less than the original loan amount. · Annuities do not charge interest. · It can be easier to make regular payments rather than a single lump sum. CONCEPT Annuities 12 Select the pairing that is correctly matched. · Common stock: usually has a pre-negotiated dividend · Preferred stock: the value of the stock is not affected by market factors · Common stock: may only be sold on the secondary market · Preferred stock: stockholders' claim to assets is subordinate to that of debtholders CONCEPT Rules and Rights of Common and Preferred Stock 13 You would like to have $10,000 in an account after eight years’ time. If the account earns 2.5% compounded interest yearly, how much would you have to deposit today? · $8,333 · $8,207 · $9,765 · $9,464 CONCEPT Present Value, Single Cash Flows 14 Consider what you have learned about valuing bonds. ·A: Coupon rate = 4.5%, YTM = 5.2% ·B: Coupon rate = 5%, YTM = 4.5% ·C: Coupon rate = 3.5%, YTM = 3.75% ·D: Coupon rate = 4%, YTM = 4% Which of the bonds is selling at par? · C · A · D · B CONCEPT Valuing Bonds 15 Which descriptor relates to the market-based approach for valuing corporations? · Considered the truest estimate · Involves the average cost of a unit of company income · Considers the weighted average cost of capital · Involves an analysis of risk CONCEPT Valuing the Corporation 16 Ashlee's friend owes her $100, but he cannot pay it back today. Instead, Ashlee's friend promises to pay her $120 in one year to account for the time value of money. That extra $20 represents the __________. · present value · interest · pricing · discount CONCEPT Introduction to the Time Value of Money 17 Determine the value of a stock with the following variables using the constant growth model: ·Current annual dividend: $1.30 per share ·Required return rate: 7% ·Constant growth rate: 5% · $63.75 · $69.55 · $65.00 · $68.25 CONCEPT Stock Valuation 18 Select the true statement about default risk. · Bondholders are guaranteed to be repaid in full if a company enters bankruptcy. · Default risk relates to a bond's periodic coupon payments, but not to its maturity payment. · Bondholders have a degree of legal protection against default risk, but it is not comprehensive. · It is the risk that the bond's price will fall below its par value. CONCEPT Bond Risk 19 Which of the following accurately describes an inverted yield curve? · A negatively sloping curve that may be an indication that the economy is about to enter a period of contraction. · A positively sloping curve that indicates that investors are uncertain about the direction of the economy. · A negatively sloping curve that may indicate that the economy is about to enter a period of inflationary growth. · A positively sloping curve that may indicate that the economy is about to enter a deflationary period. CONCEPT The Basics of Interest Rates 20 Select the statement that correctly explains the relationship between interest rates and present or future value. · Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases. · Assuming other variables stay the same, if the interest rate increases, the present value of an investment decreases. · The interest rate and the present value of an investment are directly related. · Assuming other variables stay the same, if the interest rate increases, the future value of an investment decreases. CONCEPT Additional Detail on Present and Future Values 1 Select the pairing that is correctly matched. · Preferred stock: the value of the stock is not affected by market factors · Common stock: may only be sold on the secondary market · Preferred stock: stockholders' claim to assets is subordinate to that of debtholders · Common stock: usually has a pre-negotiated dividend CONCEPT Rules and Rights of Common and Preferred Stock 2 A corporation that makes shares of stock available for the public to purchase is an example of an __________. · intermediary · investor · investment trust · issuer CONCEPT Stock Markets 3 Select the statement that correctly explains the relationship between interest rates and present or future value. · Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases. · Assuming other variables stay the same, if the interest rate increases, the present value of an investment decreases. · The interest rate and the present value of an investment are directly related. · Assuming other variables stay the same, if the interest rate increases, the future value of an investment decreases. CONCEPT Additional Detail on Present and Future Values 4 Which of the following accurately describes a flat yield curve? · A curve that slopes upward as maturities lengthen and that indicates fear that the economy is about to enter a recession. · A curve that slopes downward as maturities lengthen and that indicates confidence that economic activity will grow in the future. · A curve that rises sharply and then levels off as maturities lengthen and that indicates a transition between a period of economic stagnation to one of growth. · A curve with a minimal spread between short-term and long-term maturities and that indicates concern or doubt about the strength of the economy. CONCEPT The Basics of Interest Rates 5 Consider what you have learned about valuing bonds. ·A: Coupon rate = 2.5%, YTM = 3% ·B: Coupon rate = 3%, YTM = 2.75% ·C: Coupon rate = 3.5%, YTM = 3.5% ·D: Coupon rate = 4%, YTM = 3.5% Which of the bonds is selling at a discount? · A · C · D · B CONCEPT Valuing Bonds 6 Determine the value of a stock with the following variables using the constant growth model: ·Current annual dividend: $2.75 per share ·Required return rate: 8.5% ·Constant growth rate: 6% · $119.35 · $114.70 · $116.60 · $110.00 CONCEPT Stock Valuation 7 In the case of liquidation, shareholders have a right to company assets after __________. · directors · founders · debt-holders · owners CONCEPT Defining Stock 8 Select the true statement about interest rate risk. · It stems from the fact that bond prices and market interest rates are inversely correlated. · Interest rate risk is particularly problematic for investors who do not wish to sell their bonds. · It is the risk that a bond's coupon payment will fall if market interest rates fall. · Shorter-term bonds are more sensitive to interest rate risk than longer-term bonds. CONCEPT Bond Risk 9 In calculating the yield of an investment, what is the relationship between APR and APY? · APR can be higher or lower than the APY of a compounding investment, depending on how high the interest rate is. · APR is always slightly lower than APY if an investment is earning compounding interest. · APR and APY are two ways of expressing the same measurement of yield. · APR is always slightly higher than APY if an investment is earning compounding interest. CONCEPT Yield 10 Max is willing to take on a little risk when she buys a bond, but she wants to be compensated for her risk with an elevated interest rate. What kind of bond should she buy? · Inflation-linked · Zero-coupon · Subordinated · Convertible CONCEPT Types of Bonds 11 You would like to have $8,000 in an account after four years' time. If the account earns 4% compounded interest yearly, how much would you have to deposit today? · $7,692 · $6,897 · $6,838 · $7,249 CONCEPT Present Value, Single Cash Flows 12 Select the statement that is true of preferred stock. · Preferred stock is generally thought to be more risky than common stock. · Preferred stock is not considered equity. · Owners of preferred stock have a stronger claim to a company's assets than owners of common stock. · Owners of preferred stock have more voting rights than owners of common stock. CONCEPT Types of Stock 13 Ashlee's friend owes her $100, but he cannot pay it back today. Instead, Ashlee's friend promises to pay her $120 in one year to account for the time value of money. That extra $20 represents the __________. · pricing · discount · present value · interest CONCEPT Introduction to the Time Value of Money 14 Which of the following is a disadvantage of bonds for a potential investor? · Some bonds can be redeemed early by the issuer. · Bondholders risk a significant price drop if a large number of bonds are sold at once. · They are more likely than stocks to end up valueless if a company goes bankrupt. · They have less legal protection than stocks. CONCEPT Advantages and Disadvantages of Bonds 15 Which of the following is true for calculating the future value of multiple cash flows? · You must choose the same point in the future for each individual cash flow to determine the FV of multiple investments. · You can only find the FV of multiple cash flows if the payments occur with the same regularity. · It is simpler to find the FV of irregular cash flows than of annuities. · To find the FV of multiple cash flows, add the PV of each cash flow together and use the total in the formula for FV. CONCEPT Valuing Multiple Cash Flows 16 Chen purchased a 30-year corporate bond in 2018 that promised to pay him 4% interest semi-annually for the life of the loan. The corporation reserved the right to redeem the bond in 2038. Which of those numbers represents the bond's call feature? · 2018 · 4 · 2038 · 30 CONCEPT Key Characteristics of Bonds 17 Select the best definition of an annuity-due. · An annuity whose payments can be made at any point during the period · An annuity that has matured · An annuity whose payments are made at the beginning of the period · An annuity whose payments are made at the end of the period CONCEPT Annuities 18 You loan $30,000 of your life savings to a friend for five years at 2% simple interest annually. What is the value of your $30,000 in five years? · $33,000 · $27,000 · $33,122 · $26,878 CONCEPT Future Value, Single Cash Flows 19 Which descriptor relates to the asset-based approach for valuing corporations? · Multiplies the share price by number of shares outstanding · Considers the weighted average cost of capital · Analyzes what the company owns · Involves an analysis of risk CONCEPT Valuing the Corporation 20 What effect would a CCC credit rating likely have on a bond? · The bond's interest rate would be unaffected because credit rating agencies are not considered impartial. · The bond would have a typical interest rate because the bond is considered investment grade. · The bond would have a lower interest rate because the credit rating is poor. · The bond would have a higher interest rate to compensate for increased risk. CONCEPT 1 Nadia is going to receive $1,000 from her grandparents next year. According to the time value of money, the gift of $1,000 is worth __________ a gift of $1,000 if she received it today. · the same as · twice as much as · less than · more than CONCEPT Introduction to the Time Value of Money 2 Consider what you have learned about valuing bonds. ·A: Coupon rate = 3.5%, YTM = 4% ·B: Coupon rate = 3.2%, YTM = 3.2% ·C: Coupon rate = 2.8%, YTM = 3.5% ·D: Coupon rate = 4%, YTM = 3.7% Which of the bonds is selling at a premium? · B · C · D · A CONCEPT Valuing Bonds 3 Which of the following best describes a bond? · A debt security that gives an investor an ownership share in the entity issuing the bond. · A debt instrument whose rate of return can fluctuate based on market conditions. · A debt security that typically pays an investor a fixed rate of return for a specified period of time. · A type of loan with a fixed rate of return that can be outstanding indefinitely. CONCEPT Understanding Bonds 4 Which descriptor relates to the income approach for valuing corporations? · Estimates the cost of replacing a company's resources · Involves the capital asset pricing model · Reflects the equilibrium between buyers and sellers of company stock · Multiplies the share price by the number of shares outstanding CONCEPT Valuing the Corporation 5 Which of the following is true for calculating the present value of multiple cash flows? · All of the cash flows must be discounted to the same point in time. · You can only find the PV of multiple cash flows if they originate at the same time. · The PV of multiple cash flows is the sum of the FV of each individual cash flow divided by the interest rate. · It is more complex to find the PV of annuities than the PV of irregular cash flows. CONCEPT Valuing Multiple Cash Flows 6 Select the pairing that is correctly matched. · Preferred stock: stockholder receives interest from the issuer · Common stock: the issuer must honor any missed dividend payments · Preferred stock: cannot be converted for common stock shares · Common stock: the value of the stock is dependant upon the overall value of the company CONCEPT Rules and Rights of Common and Preferred Stock 7 Hans purchased a 20-year corporate bond in 2015 that promised to pay him 3% interest semi-annually for the life of the loan. The corporation reserved the right to redeem the bond in 2020. Which of those numbers is the bond's maturity? · 20 · 2020 · 2015 · 3 CONCEPT Key Characteristics of Bonds 8 Bill wants to buy a bond whose face value is substantially higher than its market price. What kind of bond should he buy? · Zero-coupon · Government · Asset-backed · Inflation-linked CONCEPT Types of Bonds 9 Select the best definition of an ordinary annuity. · An annuity whose payments are made at the beginning of the period · An annuity that makes payments forever · An annuity whose payments can be made at any point during the period · An annuity whose payments are made at the end of the period CONCEPT Annuities 10 Which of the following accurately describes a normal yield curve? · A negatively sloping curve that indicates the expectation that the economy will contract in the future. · A positively sloping curve that indicates confidence in sustained economic growth in the future. · A positively sloping curve that indicates the expectation that inflation will fall in the future. · A negatively sloping curve that indicates confidence in rising inflation in the future. CONCEPT The Basics of Interest Rates 11 Select the true statement about reinvestment risk. · It is the risk that a bond's price will fall below its par value. · A smart investor can eliminate reinvestment risk in addition to interest rate risk. · Reinvestment risk is inversely related to interest rate risk. · Callable bonds are less exposed to reinvestment risk. CONCEPT Bond Risk 12 Select the statement that is true of preferred stock. · Preferred stock has less protection than common stock if a company goes bankrupt. · Preferred stockholders have a degree of control over corporate policy. · Preferred stock does not change in value. · Preferred stock can be converted into common stock. CONCEPT Types of Stock 13 An investment fund that uses more complex investment strategies to generate returns for their wealthy or institutional investors is a(n) __________. · exchange-traded fund · hedge fund · index fund · mutual fund CONCEPT Stock Markets 14 You make a loan of $400 with a 6% annual compounded interest for a period of seven years. What is your $400 worth seven years later? · $601 · $199 · $568 · $232 CONCEPT Future Value, Single Cash Flows 15 In calculating the yield of an investment, what is EAR equivalent to? · APY · NPV · APR · IRR CONCEPT Yield 16 Preemptive rights allow stockholders to acquire __________ before the general public. · preexisting shares · dividends · company assets · new stock CONCEPT Defining Stock 17 You would like to have $30,000 in an account after five years' time. If the account earns 3% compounded interest yearly, how much would you have to deposit today? · $28,092 · $29,126 · $26,087 · $25,878 CONCEPT Present Value, Single Cash Flows 18 Determine the value of a stock with the following variables using the constant growth model: ·Current annual dividend: $1.30 per share ·Required return rate: 7% ·Constant growth rate: 5% · $63.75 · $65.00 · $69.55 · $68.25 CONCEPT Stock Valuation 19 Which of the following is an advantage of bonds for a potential investor? · Since there is only one type of bond, they are easy to understand. · Prices remain the same regardless of whether market interest rates change. · They offer predictability when it comes to long-term financial planning. · The interest rate on a bond can increase if a credit rating agency upgrades the bond. CONCEPT Advantages and Disadvantages of Bonds 20 Select the statement that correctly explains the relationship between interest rates and present or future value. · Assuming other variables stay the same, if the interest rate decreases, the future value of an investment increases. · The interest rate and the present value of an investment are inversely related. · Assuming other variables stay the same, if the interest rate increases, the present value of an investment increases. · Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases. Which of the following is an advantage of bonds for a potential investor? · All bonds have the same interest rate, so they are predictable. · The diversity of bond types means they respond easily to market needs. · They typically generate higher returns than stocks. · Companies can choose to pay off bonds early. Select the statement that is true of common stock. · Common stockholders do not have a right of first refusal when new stock is issued. · Despite having fewer financial protections, common stock typically outperforms preferred stock. · Companies issue dividends to common stockholders before preferred stockholders. · Common stock has a stronger claim to a company's assets than preferred stock. Select the statement that correctly explains the relationship between interest rates and present or future value. · Assuming other variables stay the same, if the interest rate increases, the future value of an investment increases. · The interest rate and the future value of an investment are inversely related. · Assuming other variables stay the same, if the interest rate decreases, the present value of an investment decreases. · Assuming other variables stay the same, if the interest rate decreases, the future value of an investment increases. Because a bond is a legal contract, what could happen if a borrower fails to meet their obligation? · The bond could be reevaluated by a rating agency. · The borrower could be required to prepare an offering memorandum. · The borrower could face bankruptcy proceedings. · The lender could then own the bond outright. Select the pairing that is correctly matched. · Preferred stock: is a less stable investment than common stock with fewer rights of ownership · Common stock: holders can mail in their votes if they can't attend a company's annual general meeting · Preferred stock: may be purchased by converting common stock shares into preferred ones · Common stock: may come with an additional dividend provision attached to company financial goals Which of the following is true for calculating the future value of multiple cash flows? · You can only find the FV of multiple cash flows if they all have the same interest rate. · To find the FV of multiple annuities, multiply the sum of all the present values by the interest rate plus time period. · If the cash flows aren't uniform, you must find the FV of each cash flow and then add them together. · It is more complex to find the FV of annuities than the FV of irregular cash flows. [Show More]

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