PRESENT VALUES AND FUTURE VALUES

Multiple Choice. Identify the letter of the choice that best completes the statement or answers the question.

1. Which of the following statements is most correct? [A] Some of the cash flows shown on a time line can be in the form
of annuity payments, but none can be uneven amounts. [B] A time line is not meaningful unless all cash flows occur
annually. [C] Time lines are useful for visualizing complex problems prior to doing actual calculations. [D] Time lines
cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. [E] Time
lines cannot be constructed for annuities where the payments occur at the beginning of the periods.
2. Which of the following statements is most correct? [A] Some of the cash flows shown on a time line can be in the form
of annuity payments, but none can be uneven amounts. [B] A time line is not meaningful unless all cash flows occur
annually. [C] Time lines are not useful for visualizing complex problems prior to doing actual calculations. [D] Time
lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.[E]
Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the
periods.
3. Which of the following statements is most correct? [A] Time lines cannot be constructed where some of the payments
constitute an annuity but others are unequal and thus are not part of the annuity. [B] A time line is not meaningful
unless all cash flows occur annually. [C] Time lines are not useful for visualizing complex problems prior to doing actual
calculations.[D] Time lines can be constructed to deal with situations where some of the cash flows occur annually but
others occur quarterly. [E] Time lines can only be constructed for annuities where the payments occur at the end of
the periods, i.e., for ordinary annuities.
4. Which of the following statements is most correct? [A] A time line is not meaningful unless all cash flows occur
annually. [B] Time lines are not useful for visualizing complex problems prior to doing actual calculations. [C] Time
lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur
quarterly. [D] Time lines can only be constructed for annuities where the payments occur at the end of the periods,
i.e., for ordinary annuities. [E]Time lines can be constructed where some of the payments constitute an annuity but
others are unequal and thus are not part of the annuity.
5. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected
cash flows. Which of the following would lower the calculated value of the investment? [A] The discount rate
decreases. [B] The cash flows are in the form of a deferred annuity, and they total to P100,000. You learn that the
annuity lasts for only 5 rather than 10 years, hence that each payment is for P20,000 rather than for P10,000. [C]The
discount rate increases. [D] The riskiness of the investment’s cash flows decreases. [E] The total amount of cash flows
remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
6. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected
cash flows. Which of the following would increase the calculated value of the investment? [A] The discount rate
increases. [B] The cash flows are in the form of a deferred annuity, and they total to P100,000. You learn that the
annuity lasts for 10 years rather than 5 years, hence that each payment is for P10,000 rather than for P20,000. [C]The
discount rate decreases. [D] The riskiness of the investment’s cash flows increases. [E] The total amount of cash flows
remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.
7. Which of the following statements is most correct? [A] If some cash flows occur at the beginning of the periods while
others occur at the ends, then we have what the textbook defines as a variable annuity. [B] The cash flows for an
ordinary (or deferred) annuity all occur at the beginning of the periods. [C] If a series of unequal cash flows occurs at
regular intervals, such as once a year, then the series is by definition an annuity. [D] The cash flows for an annuity due
must all occur at the ends of the periods.[E]The cash flows for an annuity must all be equal, and they must occur at
regular intervals, such as once a year or once a month.
8. Which of the following statements is most correct? [A] If some cash flows occur at the beginning of the periods while
others occur at the ends, then we have what the textbook defines as a variable annuity. [B] The cash flows for an
ordinary (or deferred) annuity all occur at the beginning of the periods. [C] If a series of unequal cash flows occurs at
regular intervals, such as once a year, then the series is by definition an annuity.[D]The cash flows for an annuity due
must all occur at the beginning of the periods. [E] The cash flows for an annuity may vary from period to period, but
they must occur at regular intervals, such as once a year or once a month.
9. Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following
statements is most correct? [A] The periodic rate of interest is 5% and the effective rate of interest is also 5%. [B] The
periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. [C] The periodic rate of interest is 5% and
the effective rate of interest is greater than 5%.[D]The periodic rate of interest is 1.25% and the effective rate of
interest is greater than 5%. [E] The periodic rate of interest is 2.5% and the effective rate of interest is 5%.
10. A P250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is
CORRECT? [A] The proportion of interest versus principal repayment would be the same for each of the 8 payments.
[B] The annual payments would be larger if the interest rate were lower. [C] If the loan were amortized over 10 years
rather than 8 years, and if the interest rate were the same in either case, the first payment would include more pesos
of interest under the 8-year amortization plan.[D]The proportion of each payment that represents interest as opposed
to repayment of principal would be lower if the interest rate were lower. [E] The last payment would have a higher
proportion of interest than the first payment.
11. A P150,000 loan is to be amortized over 6 years, with annual end-of-year payments. Which of these statements is
most correct? [A] The proportion of interest versus principal repayment would be the same for each of the 7
payments. [B] The annual payments would be larger if the interest rate were lower. [C] If the loan were amortized
over 10 years rather than 6 years, and if the interest rate were the same in either case, the first payment would include
more pesos of interest under the 6-year amortization plan. [D] The proportion of each payment that represents
interest as opposed to repayment of principal would be higher if the interest rate were lower.[E]The proportion of
each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
12. Which of the following statements regarding a 20-year (240-month) P225,000, fixed-rate mortgage is CORRECT?
(Ignore taxes and transactions costs.) [A] The outstanding balance declines at a slower rate in the later years of the
loan’s life. [B] The remaining balance after three years will be P225,000 less one third of the interest paid during the
first three years.[C]Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and
principal payments) are constant. [D] Interest payments on the mortgage will increase steadily over time, but the total
amount of each payment will remain constant. [E] The proportion of the monthly payment that goes towards
repayment of principal will be lower 10 years from now than it will be the first year.
13. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest
rate of 8% is most correct? [A] Exactly 8% of the first monthly payment represents interest. [B] The monthly payments
will decline over time.[C]A smaller proportion of the last monthly payment will be interest, and a larger proportion
will be principal, than for the first monthly payment. [D] The total peso amount of principal being paid off each month
gets smaller as the loan approaches maturity. [E] The amount representing interest in the first payment would be
higher if the nominal interest rate were 6% rather than 8%.
14. At the end of 10 years, which of the following investments would have the highest future value? Assume that the
effective annual rate for all investments is the same and is greater than zero.[A]Investment A pays P250 at the
beginning of every year for the next 10 years (a total of 10 payments). [B] Investment B pays P125 at the end of every
6-month period for the next 10 years (a total of 20 payments). [C] Investment C pays P125 at the beginning of every
6-month period for the next 10 years (a total of 20 payments). [D] Investment D pays P2,500 at the end of 10 years
(just one payment). [E] Investment E pays P250 at the end of every year for the next 10 years (a total of 10 payments).
15. Which of the following statements is most correct? [A] An investment that has a nominal rate of 6% with semiannual
payments will have an effective rate that is smaller than 6%.[B]The present value of a 3-year, P150 annuity due will
exceed the present value of a 3-year, P150 ordinary annuity. [C] If a loan has a nominal annual rate of 8%, then the
effective rate can never be greater than 8%. [D] If a loan or investment has annual payments, then the effective,
periodic, and nominal rates of interest will all be different. [E] The proportion of the payment that goes toward interest
on a fully amortized loan increases over time.
16. Which of the following bank accounts has the highest effective annual return?[A]An account that pays 8% nominal
interest with daily (365-day) compounding. [B] An account that pays 8% nominal interest with monthly compounding.
[C] An account that pays 8% nominal interest with annual compounding. [D] An account that pays 7% nominal interest
with daily (365-day) compounding. [E] An account that pays 7% nominal interest with monthly compounding.
17. You plan to invest some money in a bank account. Which of the following banks provides you with the highest
effective rate of interest? [A] Bank 1; 6.1% with annual compounding. [B] Bank 2; 6.0% with monthly compounding.
[C] Bank 3; 6.0% with annual compounding. [D] Bank 4; 6.0% with quarterly compounding.[E]Bank 5; 6.0% with daily
(365-day) compounding.
18. Which of the following statements is most correct? [A] The time to maturity does not affect the change in the value
of a bond in response to a given change in interest rates. [B] You hold two bonds. One is a 10-year, zero coupon, bond
and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If
the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. [C]
The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in
interest rates. [D] The longer the time to maturity, the smaller the change in the value of a bond in response to a given
change in interest rates.[E]You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond
that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the
current level, the zero coupon bond will experience the larger percentage decline.
19. Which of the following events would make it more likely that a company would choose to call its outstanding callable
bonds? [A] Market interest rates rise sharply. [B]Market interest rates decline sharply. [C] The company's financial
situation deteriorates significantly. [D] Inflation increases significantly. [E] The company’s bonds are downgraded.
20. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is most
correct? [A] The bond is selling below its par value. [B] The bond is selling at a discount. [C]If the yield to maturity
remains constant, the bond’s price one year from now will be lower than its current price. [D] The bond’s current yield
is greater than 9%. [E] If the yield to maturity remains constant, the bond’s price one year from now will be higher
than its current price.
21. Which of the following statements is most correct? [A] An indenture is a bond that is less risky than a mortgage bond.
[B] The expected return on a corporate bond will generally exceed the bond's yield to maturity. [C] If a bond’s coupon
rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity. [D] Under our
bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated. [E]All
else equal, senior debt generally has a lower yield to maturity than subordinated debt.
22. Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds
were made callable after 5 years at a 5% call premium, how would this affect their required rate of return? [A] There
 is no reason to expect a change in the required rate of return. [B] The required rate of return would decline because
the bond would then be less risky to a bondholder.[C]The required rate of return would increase because the bond
would then be more risky to a bondholder. [D] It is impossible to say without more information. [E] Because of the call
premium, the required rate of return would decline.
23. Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable
a bond to be issued at par? [A]Adding a call provision. [B] The rating agencies change the bond's rating from Baa to
Aaa. [C] Making the bond a first mortgage bond rather than a debenture. [D] Adding a sinking fund. [E] Adding
additional restrictive covenants that limit management's actions.
24. Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%? [A]
20-year, 10% coupon bond. [B] 20-year, 5% coupon bond. [C] 1-year, 10% coupon bond. [D]20-year, zero coupon bond.
[E] 10-year, zero coupon bond.
25. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the
largest percentage increase in price? [A] A 1-year bond with a 15% coupon. [B] A 3-year bond with a 10% coupon. [C]
A 10-year zero coupon bond. [D] A 10-year bond with a 10% coupon. [E] An 8-year bond with a 9% coupon.
26. Which of the following bonds has the greatest interest rate price risk? [A] A 10-year, P1,000 face value, zero coupon
bond. [B] A 10-year, P1,000 face value, 10% coupon bond with annual interest payments. [C] All 10-year bonds have
the same price risk since they have the same maturity. [D] A 10-year, P1,000 face value, 10% coupon bond with
semiannual interest payments. [E] A 10-year P100 annuity.
27. If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in
value? [A] A 1-year bond with an 8% coupon. [B] A 10-year bond with an 8% coupon. [C] A 10-year bond with a 12%
coupon. [D] A 10-year zero coupon bond. [E] A 1-year zero coupon bond.
28. Which of the following statements is most correct? [A] Most sinking funds require the issuer to provide funds to a
trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature. [B] A sinking
fund provision makes a bond more risky to investors at the time of issuance. [C] Sinking fund provisions never require
companies to retire their debt; they only establish “targets” for the company to reduce its debt over time. [D] If
interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the
bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price. [E]Sinking
fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates
decline after the bond has been issued.
29. Nicholas Industries can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable,
and has no sinking fund. Alternatively, Nicholas could issue a 20-year bond that is convertible into common equity,
may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Nicholas
would have to pay on the convertible, callable bond? [A] It could be less than, equal to, or greater than 6%. [B] Greater
than 6%. [C] Exactly equal to 8%. [D] Less than 6%. [E] Exactly equal to 6%.
30. The YTMs of three P1,000 face value bonds that mature in 10 years and have the same level of risk are equal. Bond A
has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at
par. Assuming interest rates remain constant for the next 10 years, which of the following statements is most correct?
[A] Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected
to change, their prices should all remain at their current levels until maturity. [C] Bond C sells at a premium (its price
is greater than par), and its price is expected to increase over the next year. [C] Bond A sells at a discount (its price is
less than par), and its price is expected to increase over the next year. [D] Over the next year, Bond A’s price is expected
to decrease, Bond B’s price is expected to stay the same, and Bond C’s price is expected to increase. [E] Bond A’s
current yield will increase each year.
31. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par (P1,000). Which of the
following statements is not correct? [A] The bond’s yield to maturity is 9%. [B] The bond’s current yield is 9%. [C] If
the bond’s yield to maturity remains constant, the bond will continue to sell at par. [D] The bond’s current yield
exceeds its capital gains yield. [E] The bond’s expected capital gains yield is positive.
32. Which of the following statements is most correct? [A] If a bond’s yield to maturity exceeds its coupon rate, the bond
will sell at par. [B] All else equal, if a bond’s yield to maturity increases, its price will fall. [C] If a bond’s yield to maturity
exceeds its coupon rate, the bond will sell at a premium over par. [D] All else equal, if a bond’s yield to maturity
increases, its current yield will fall. [E] A zero coupon bond's current yield is equal to its yield to maturity.
33. Stephenson Co.’s 15-year bond with a face value of P1,000 currently sells for P850. Which of the following statements
is CORRECT? [A] The bond’s current yield exceeds its yield to maturity. [B] The bond’s yield to maturity is greater than
its coupon rate. [C] The bond’s current yield is equal to its coupon rate. [D] If the yield to maturity stays constant until
the bond matures, the bond’s price will remain at P850. [E] The bond’s coupon rate exceeds its current yield.
34. A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following
statements is CORRECT? [A] If the yield to maturity remains at 8%, then the bond’s price will decline over the next
year. [B] The bond’s coupon rate is less than 8%. [C] If the yield to maturity increases, then the bond’s price will
increase. [D] If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year. [E]
The bond’s current yield is less than 8%.
35. Which of the following statements is CORRECT? [A] On an expected yield basis, the expected capital gains yield will
always be positive because an investor would not purchase a bond with an expected capital loss. [B] On an expected
yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is
not expected to pay any cash coupon interest. [C] If a coupon bond is selling at par, its current yield equals its yield to
 maturity. [D] The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher
yield to maturity than Bond B. [E] If a bond is selling at a discount, the yield to call is a better measure of return than
the yield to maturity.
36. A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond
has a yield to maturity of 6%. Which of the following statements is CORRECT? [A] The bond is currently selling at a
price below its par value. [B] If market interest rates remain unchanged, the bond’s price one year from now will be
lower than it is today. [C] The bond should currently be selling at its par value. [D] If market interest rates remain
unchanged, the bond’s price one year from now will be higher than it is today. [E] If market interest rates decline, the
price of the bond will also decline.
37. An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon. Both bonds have the
same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following
statements would be CORRECT? [A] Both bonds would decline in price, but the 10-year bond would have the greater
percentage decline in price. [B] The prices of both bonds would increase by the same amount. [C] One bond's price
would increase, while the other bond’s price would decrease. [D] The prices of the two bonds would remain constant.
[E] The prices of both bonds will decrease by the same amount.
38. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and
the YTM is expected to remain constant. Which of the following statements is CORRECT? [A] The prices of both bonds
will remain unchanged. [B] The price of Bond A will decrease over time, but the price of Bond B will increase over time.
[C] The prices of both bonds will increase by 7% per year. [D] The prices of both bonds will increase over time, but the
price of Bond A will increase by more. [E] The price of Bond B will decrease over time, but the price of Bond A will
increase over time.
39. Which of the following statements is CORRECT? [A] All else equal, long-term bonds have less interest rate price risk
than short-term bonds. [A] All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
[B] All else equal, short-term bonds have less reinvestment rate risk than long-term bonds. [D] All else equal, long-
term bonds have less reinvestment rate risk than short-term bonds. [E] All else equal, high-coupon bonds have less
reinvestment rate risk than low-coupon bonds.
40. Which of the following statements is CORRECT? [A] Long-term bonds have less interest rate price risk but more
reinvestment rate risk than short-term bonds. [B] If interest rates increase, all bond prices will increase, but the
increase will be greater for bonds that have less interest rate risk. [C] Relative to a coupon-bearing bond with the same
maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk. [D] Long-term bonds
have less interest rate price risk and also less reinvestment rate risk than short-term bonds. [E] One advantage of a
zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.