Finance Present Value Quiz
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Questions and Answers

What is the present value of $100 expected two years from today at a discount rate of 6%?

  • $89.00
  • $106.00
  • $112.36 (correct)
  • $100.00

    • What is present value defined as?

  • Future cash flows multiplied by the factor (1 + r)^t
  • Present cash flows compounded into the future
  • Inverse of future cash flows
  • Future cash flows discounted to the present by an appropriate discount rate (correct)

    • If the annual interest rate is 12.00%, what is the two-year discount factor?

  • 0.7972 (correct)
  • 0.8065
  • 0.8929
  • 1.2544

    • If the present value of cash flow X is $240, and the present value of cash flow Y is $160, then the present value of the combined cash flows is:

    <p>$400 (B)</p> Signup and view all the answers

    The rate of return is also called the:

    <p>I, II, and III (C)</p> Signup and view all the answers

    What is used as a measure of a bond’s interest rate risk or sensitivity to a change in its yield?

    <p>Duration (C)</p> Signup and view all the answers

    How is modified duration (ModDur) calculated?

    <p>Macaulay duration divided by one plus the bond’s yield to maturity (B)</p> Signup and view all the answers

    When is a bond sold at a premium?

    <p>CR &gt; CY &gt; YTM (A)</p> Signup and view all the answers

    How is Macaulay duration (MacDur) calculated?

    <p>Weighted average of the number of years until each of the bond’s promised cash flows is to be paid (B)</p> Signup and view all the answers

    What does a bond's annual Macaulay duration represent?

    <p>The weighted average of the number of years until each of the bond’s promised cash flows is to be paid (C)</p> Signup and view all the answers

    What is used as a measure of a bond’s interest rate risk or sensitivity to a change in its yield?

    <p>Macaulay duration (C)</p> Signup and view all the answers

    How is modified duration (ModDur) calculated?

    <p>Macaulay duration divided by one plus the bond’s yield to maturity (D)</p> Signup and view all the answers

    When is a bond sold at a premium?

    <p>CR &gt; CY &gt; YTM (C)</p> Signup and view all the answers

    What does a bond's annual Macaulay duration represent?

    <p>Weighted average of the number of years until each of the bond’s promised cash flows is to be paid (C)</p> Signup and view all the answers

    If the present value formula is used to value bonds, what does CR represent when the bond is sold at par?

    <p>CR = CY = YTM (B)</p> Signup and view all the answers

    Study Notes

    Present Value and Discount Rates

    • Present value (PV) calculates the worth of future cash flows today, accounting for a specific discount rate.
    • PV of $100 expected two years from now at a 6% discount rate is approximately $89.00.
    • Present value formula: ( PV = \frac{FV}{(1 + r)^n} ) where ( FV ) is future value, ( r ) is the discount rate, and ( n ) is the time in years.

    Discount Factors

    • For an annual interest rate of 12.00%, the two-year discount factor is approximately 0.7972.
    • Discount factor formula: ( DF = \frac{1}{(1 + r)^n} ).

    Combined Present Values

    • Present value of cash flow X is $240 and cash flow Y is $160; combined present value becomes $400.

    Rate of Return Terminology

    • The rate of return is also known as the yield.

    Bond Interest Rate Sensitivity

    • A bond’s interest rate risk or sensitivity to changes in yield is measured by duration.
    • Modified duration (ModDur) indicates the percentage change in price for a 1% change in yield.

    Modified Duration Calculation

    • Modified duration is calculated as ( \text{MacDur} / (1 + r) ) where MacDur is Macaulay duration.

    Premium Bonds

    • A bond sells at a premium when the market interest rates are lower than the bond’s coupon rate.

    Macaulay Duration

    • Macaulay duration (MacDur) is the weighted average time until cash flows are received.
    • A bond's annual Macaulay duration represents the time value of cash flows, enabling investors to assess interest rate sensitivity.

    Bond Valuation

    • In bond valuation at par, CR represents the coupon rate, equalling the market rate.

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    Description

    Test your knowledge of present value and discounting with this quiz. Answer questions on calculating present value, discount rates, and interest rates.

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