Finance Quiz on Present Value and Bonds

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Questions and Answers

What does the term 'Present Value' refer to?

The money available at the present time. (correct)

The final amount after all interest has been calculated.

The interest over a period.

The future worth of an investment.

Why is a Peso today worth more than a Peso tomorrow?

Because of its potential for growth through interest. (correct)

Because it has the same value over time.

Because inflation reduces the value of money.

Because it can be exchanged for goods immediately.

Which variable represents the timeline for an investment?

Interest Rate

Number of Periods (correct)

Future Value

Payment Amount

What defines an ordinary annuity?

Payments made at the end of consecutive periods. Signup and view all the answers

What is the primary characteristic of a lump sum payment?

A single payment at a specific time. Signup and view all the answers

Which term denotes the rate at which money grows over an investment's lifespan?

Interest Rate Signup and view all the answers

What is the Future Value of an investment?

The total amount expected to be received in the future. Signup and view all the answers

In an investment scenario, what does 'PMT' stand for?

Payment Amount Signup and view all the answers

What is the primary characteristic of zero coupon bonds?

They provide capital appreciation through discounts. Signup and view all the answers

What occurs if a company's bond rating is downgraded?

The coupon rate must be increased. Signup and view all the answers

What is meant by 'call premium' in bond terms?

The difference between face value and call price. Signup and view all the answers

What is a common feature of most corporate bonds?

They include a call provision. Signup and view all the answers

What are original issue discount (OID) bonds primarily recognized for?

They are issued at a price significantly below par value. Signup and view all the answers

How is the call premium structured over the years?

It declines at a constant rate each year. Signup and view all the answers

What is referred to as 'call protection' in bond agreements?

A period during which bonds cannot be called. Signup and view all the answers

What determines the original maturity of a bond?

The time frame specified at the time of issue. Signup and view all the answers

What distinguishes an annuity due from other types of annuities?

Payments start at the beginning of each period. Signup and view all the answers

How is present value calculated for an annuity due?

By discounting future cash flows to present value. Signup and view all the answers

What is a characteristic of a perpetuity?

It consists of infinite cash flows occurring at regular intervals. Signup and view all the answers

If Jessica takes out a loan of $25,000 with a 7% annual interest rate for 5 years, what does her monthly payment represent?

The present value of her annuity due payments. Signup and view all the answers

How much will John's investment of $10,000 grow to in 10 years at an annual interest rate of 8%?

$21,589.25 Signup and view all the answers

What is contained in the formula for the present value of an annuity due?

The present value, annuity payment, interest rate, and number of periods. Signup and view all the answers

In the context of financial management, what is the significance of the time value of money?

It allows for the valuation of future cash flows considering inflation. Signup and view all the answers

What is the key difference between the future value and present value of an investment?

Future value accounts for interest over time, while present value discounts future amounts. Signup and view all the answers

What does the cash flow from a standard coupon-bearing bond primarily include?

Interest payments during the bond's life plus the principal payment at maturity Signup and view all the answers

If a bond is selling at a discount, what can be inferred about the relationship between its coupon rate and the market interest rate?

The coupon rate is lower than the market interest rate Signup and view all the answers

What will happen to the price of a fixed-rate bond if the market interest rate decreases?

The bond price will rise above its par value Signup and view all the answers

In the bond price formula, which component contributes the present value of cash flows received during the bond's lifetime?

Present Value of Interest Payments Signup and view all the answers

Given a coupon rate of 10% and a market interest rate of 15%, what will be the bond's value if it is sold at a discount?

$707.63 Signup and view all the answers

What term describes a bond that sells for more than its par value?

Premium bond Signup and view all the answers

Which of the following is NOT a component of the bond price formula?

Market Interest Rate Adjustment Signup and view all the answers

In the case of a bond selling at its par value, what is true about the coupon rate and the market interest rate?

The coupon rate equals the market interest rate Signup and view all the answers

What happens to the price of a bond when the market interest rate increases?

The price of the bond falls. Signup and view all the answers

If a bond's coupon interest is fixed, what component of the bond may vary over time?

The bond’s yield. Signup and view all the answers

How is the Yield to Maturity (YTM) best described?

It is the promised rate of return if all payments are made. Signup and view all the answers

If you have $1,000 to invest when current bonds are paying $50 interest annually, what would likely happen to bonds that yield $100 annually?

Their price will increase due to higher demand. Signup and view all the answers

What does a semiannual coupon payment structure entail compared to an annual structure?

The same total interest payments but distributed differently. Signup and view all the answers

Which of the following is NOT one of the three yield calculations for bonds?

Total Yield (TY) Signup and view all the answers

What is the relationship between interest rate changes and bond prices?

Higher interest rates reduce bond prices. Signup and view all the answers

What does the coupon payment represent in a bond's structure?

The periodic interest payment to bondholders. Signup and view all the answers

What is the primary purpose of the Price to Sales Ratio?

To compare share price to revenue per share Signup and view all the answers

What is considered when determining if shares are underpriced or overpriced?

The market value compared to intrinsic value Signup and view all the answers

Which value measures the accounting value of a company per share?

Book Value Signup and view all the answers

Which factor is NOT a part of the Capital Budgeting Process?

Selecting projects based solely on past performance Signup and view all the answers

What does Liquidation Value indicate?

Earnings available after meeting debts Signup and view all the answers

When should investors sell their shares based on market value and intrinsic value criteria?

When MV > IV Signup and view all the answers

What is the main characteristic of Rational Investors in an efficient market?

They believe that market prices reflect intrinsic values Signup and view all the answers

What is the definition of Capital Budgeting?

The analysis of investment projects for inclusion in the capital budget Signup and view all the answers

Study Notes

Time Value of Money

The concept that money now is worth more than the same amount in the future due to its potential earning capacity.

Variables

Present Value (PV): The current starting amount, initial investment.
Future Value (FV): The ending amount at a future time.
Number of Periods (N or T): The timeline of the investment, can be measured in years, quarters, months, or days.
Interest Rate (I or R): The growth rate of the investment over its lifetime.
Payment Amount (PMT): A series of equal, evenly spaced cash flows (or uneven).

Types of Time Value of Money

Lump Sum: A single payment made at a particular time, no cash flow between PV and FV.
Present Value Lump Sum: Payment at the beginning of the timeline.
Future Value Lump Sum: Payment at the end of the timeline.

Examples

Future Value with Annual Rate: Juan saves Php 5,000 annually for 3 years at 10% interest.
Future Value with Compounding Rate: Juan saves Php 5,000 annually for 3 years at 10% interest compounded quarterly.
Present Value with Annual Rate: Juan plans to have Php 6,655 for his trip in 3 years with 10% interest. How much needs to be saved today
Present Value with Compounding Rate: Juan plans to have Php 6,655 for his trip in 3 years with 10% interest compounded quarterly. How much needs to be saved today

Ordinary Annuity

A series of equal payments made at the end of consecutive periods over a fixed length of time.

Present Value Ordinary Annuity

Formula to calculate the present value of an ordinary annuity.

Future Value Ordinary Annuity

Formula to calculate the future value of an ordinary annuity.

Annuity Due

A series of equal and consecutive payments that starts at the beginning of each time period.

Present Value Annuity Due

Formula to calculate the present value of an annuity due.

Future Value Annuity Due

Formula to calculate the future value of an annuity due.

Perpetuity

A series of equal, infinite cash flows occurring at the end of each period, with no end point.

Present Value Perpetuity

Formula to calculate the present value of a perpetuity.

Time Value of Money Problems

Examples of applying time value of money concepts to solve real-world problems.

Lump Sum Present Value

Calculation of present value of a future lump sum.

Annuity Due Present Value

Calculation of present value of future annuity due payments.

Lump Sum Future Value

Calculation of future value of a present lump sum.

Bond Valuation

Introduction to bonds and their characteristics. Details of major types of bonds (treasury, corporate, municipal, foreign).
Key characteristics of bonds (par value, coupon interest rate, maturity date).
Provisions to call or redeem bonds (additional sum that the company pays).
Other provisions and features, including convertible bonds, warrants, income bonds, and indexed bonds.

Bond Pricing

How interest rate changes affect bond prices.
Formulas for calculating bond price (present value calculations needed)

Yield to Maturity

The rate of return expected on a bond if it is held until maturity. -Formula

Yield to Call

The rate of return expected if the bond is called before maturity. -Formula

Stock Valuation

Methods for valuing common stock (book value, liquidation value, discounted cash flow).
Relative valuation technique (price-earnings ratio, price-to-sales ratio).

Capital Budgeting

Types of projects (independent, mutually exclusive).
Capital budgeting criteria (payback period, average rate of return, net present value, profitability index, internal rate of return)

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Description

Test your knowledge on key financial concepts including Present Value, Future Value, and characteristics of different types of bonds and annuities. This quiz covers essential terms and definitions that every finance student should understand. Dive into the world of investment and learn about the dynamics affecting the value of money over time.