Exam 6: Financial Concepts and Interest Rates

Consumers appear to ignore the APR quoted by lenders and base their borrowing decisions on the size of the monthly installment payments.

Any interest rate is a ratio of two quantities -- the denominator consists of the cash benefits promised to a lender of funds over a specified period of time and the numerator is the total amount of money loaned.

A bond has a coupon rate of 11 percent and a face (par) value of $1,000. This bond's annual coupon will be:

The yield to maturity represents the rate of return an investor would receive if he bought the asset and chose to hold the asset for its entire life.

The spread between bid and ask prices of securities provides the security dealer's return for creating a market for a particular security.

You repay your home mortgage loan by making monthly payments of $650 per month each month for 25 years. If you borrowed $70,000, how much interest did you pay?

The interest rate on a loan which charges the borrowing customer only for the period of time the borrower actually has use of borrowed funds and may be derived from the formula I = Pxrxt is the:

In the formula FV=P(1 + r)t discussed in the text, the term FV represents:

The coupon rate is a useful measure of the rate of return on a bond because it takes into account fluctuations in the bond's market price.

The revenue stream associated with a bond normally consists of a number of identical periodic coupon payments plus the par value of the bond received at maturity.

Interest rates on U.S. Treasury bills, commercial paper and selected other short-term financial instruments are based on a 360-day year and do not compound interest.

The longer the period of time over which interest earnings are compounded, the more rapidly does interest earned grow.

To compute the investment rate (IR), you need

Present-value tables may be used to calculate yield to maturity but not holding-period yield.

The most common form of a perpetual financial instrument is corporate stocks and U.S. Treasury bonds.

Stock prices in the U.S. are measured in dollars and decimal fractions of a dollar, such as $40.25 per share.

The "Asked Yield" is the yield to maturity an investor purchasing the Treasury from the Dealer would receive if he bought the security and held it to maturity.

A basis point is one hundredth of a percentage point.

The yield-to-maturity formula takes account of receipts of income from a security but not repayments of the principal of a loan.

Par value or face value is the amount that the investor receives upon maturity of the asset.