Exam 6: Financial Concepts and Interest Rates

The rate which equates the purchase price of a security with the present value of all its expected annual net cash inflows is the:

The yield to maturity on a security indicates the rate at which the market is prepared to exchange present dollars in exchange for future dollars promised by the security.

The spread between bid and asked prices quoted by a security dealer generally increases with longer maturities.

If a bond carries a coupon of $60 and a par value of $1,000, then its coupon rate must be 6 percent.

Using the yield-approximation formula discussed in your text, determine the average annual yield on a bond whose current price is $1,100, par value is $1,000, coupon rate is 12 percent and whose term to maturity is ten years. Your answer is (to the nearest tenth of a percent):

The Truth in Savings Act requires depository institutions in the U.S. to figure a customer's interest return on the amount of his or her lowest account balance.

You repay your home mortgage loan by making monthly payments of $850 per month each month for 30 years. If you borrowed $100,000, what was the total amount you paid over the life of the mortgage?

The difference, FV-P, yields the amount of compound interest earned on an investment made at any particular compound rate, r, according to your textbook.

The average price/earnings ratio (P/E) for the US stock market is around

Money market assets such as US treasury bills are sold at a discount.

The British consol is a variable income perpetual financial instrument issued by the British government that promises its holder a fixed coupon payment every year ad infinitum.

XYZ corporation's common stock is selling today at $40 per share; the company pays quarterly dividends of $2 per share. Thus, the stock's current yield is 5 percent.

Perpetual financial instruments may be either a fixed income securities or variable return assets, such as corporate stock.

Research has shown that consumers have benefited greatly from requiring lenders to quote an APR on their loans; individuals and families appear to be heavily influenced by these APR figures and vigorously shop around for credit when the lender's quoted APR seems too high.

A customer opening a new deposit account in the United States is entitled to have the return on his or her deposit calculated on the average balance, not the lowest balance, in his or her account.

The compounding of interest means that a lender of funds will earn interest income on both the principal amount and on accumulated interest.

The interest rate which banks, credit unions and other lending institutions must report to a loan customer under federal law is the:

Most financial institutions offer their depositors compound interest today.

Under the terms of most fixed and variable-rate mortgage loans the closer a home mortgage loan gets to maturity subsequent monthly payments will consist mostly of repaying the loan principal itself.

In price quotations on corporate bonds, the value of the estimated yield spread is given in basis points.