# FINC510 FINAL EXAM JUNE 2015 (A+++++++++++) - 92146

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1. Which of the following statements is CORRECT?

a. Time lines are useful for visualizing complex problems prior to doing actual calculations.

b. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods

c. A time line is not meaningful unless all cash flows occur annually.

d. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

e. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

2. Which of the following statements is CORRECT?

a. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

b. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.

c. A time line is not meaningful unless all cash flows occur annually.

d. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

e. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

3. Which of the following statements is CORRECT?

a. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

b. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

c. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

d. A time line is not meaningful unless all cash flows occur annually.

e. 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.

4. Which of the following statements is CORRECT?

a. 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.

b. Time lines are not useful for visualizing complex problems prior to doing actual calculations.

c. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

d. Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

e. A time line is not meaningful unless all cash flows occur annually.

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 increase the calculated value of the investment?

a. The discount rate decreases.

b. The discount rate increases.

c. The riskiness of the investment's cash flows increases.

d. The cash flows are in the form of a deferred annuity, and they total to \$100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for \$10,000 rather than for \$20,000.

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.

6. Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant?

a. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.

b. If inflation is expected to decline, there can be no maturity risk premium.

c. If the pure expectations theory holds, the corporate yield curve must be downward sloping.

d. If the pure expectations theory holds, the Treasury yield curve must be downward sloping.

e. The expectations theory cannot hold if inflation is decreasing.

7. Which of the following statements is CORRECT, other things held constant?

a. If companies have fewer good investment opportunities, interest rates are likely to increase.

b. If expected inflation increases, interest rates are likely to increase.

c. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.

e. If individuals increase their savings rate, interest rates are likely to increase.

8. Which of the following would be most likely to lead to a higher level of interest rates in the economy?

a. The Federal Reserve decides to try to stimulate the economy.

b. The economy moves from a boom to a recession.

c. The level of inflation begins to decline.

d. Households start saving a larger percentage of their income.

e. Corporations step up their expansion plans and thus increase their demand for capital.

9. If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

a. The yields on the two securities would be equal.

b. It is impossible to tell without knowing the coupon rates of the bonds.

c. The yield on a 10-year bond would be less than that on a 1-year bill.

d. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.

e. It is impossible to tell without knowing the relative risks of the two securities.

10. Which of the following statements is CORRECT?

a. If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.

b. If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.

c. If the expectations theory holds, the Treasury bond yield curve will never be downward sloping.

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