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1. Which of the following statements is 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 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 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 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 $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

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.

1. 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.

2. 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.

3. 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.

4. 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.

5. Which of the following bonds has the greatest interest rate price risk?

a. A 10-year, $1,000 face value, zero coupon bond.

b. A 10-year, $1,000 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, $1,000 face value, 10% coupon bond with semiannual interest payments.

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