DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy Department
Quiz 1

I. Multiple Choice. Read and select the best answer in each question.

1. If a bonds value rises above its par value during its life, interest rates have
a. Gone up
b. Gone down
c. Stayed the same
d. There is no correlation with interest rates
2. What will be the price of a bond in which the YTM is higher than the coupon rate?
a. Below its face value
b. Above its face value
c. At face value
d. There is no relationship between the price and the yield
3. What happens when a bonds expected cash flows are discounted at a rate lower than the bonds coupon rate?
a. The price of the bond increases
b. The coupon rate of the bond increases
c. The par value of the bond decreases
d. The coupon payments will be adjusted to the new discount rate
4. Which of the following is correct?
a. Bond prices and interest rates move in the same direction, i.e., if interest rates rise, so will bond prices.
b. The market price of a discount bond will approach the bonds par value as the maturity date approaches.
Barring changes in the profitability of default, the value of the bond cannot fail to increase each year as the
time to maturity approaches.
c. The current yield on a noncallable discount bond will normally exceed the bonds yield to maturity.
d. The current yield on a noncallable discount bond will normally exceed the bonds coupon interest rate.
5. Stocks that have high financial rewards are generally accompanied by:
a. High dividend payments
b. Low dividend payments because of internally generated growth
c. High risk
d. All of the above

III. Problems. Show your solution.

1. What will a deposit of $4,500 left in the bank be worth under the following conditions:
a. Left for nine years at 7% interest?
b. Left for six years at 10% compounded semiannually?
c. Left for five years at 8% compounded quarterly?
d. Left for 10 years at 12% compounded monthly?

2. The Lexington Property Development Company has a $10,000 note receivable from a customer due in three years.
How much is the note worth today if the interest rate is
a. 9%?
b. 12% compounded monthly?
c. 8% compounded quarterly?
d. 18% compounded monthly?

3. What interest rate would you need to get to have an annuity of $7,500 per year accumulate to $279,600 in 15 years?

4. How many years will it take for $850 per year to amount to $20,000 if the interest rate is 8%?