Question

Spring 2020 Version Multiple Choice. 3 point each. Please blacken the circle on the Scantron sheet corresponding to the BEST answer. 1. As a commercial loan customer, I would prefer a loan with because it is less expensive a. daily compounding b. weekly compounding c.level total payments and monthly compounding d. level principal payments e level total payments 2. The market for the first public offering of shares is called the a secondary market b. used market cover the counter market d. broker market e primary market 3. If the general level of interest rates goes up and I am holding a bond with a fixed coupon rate, I would expect the value of my bond to a stay the same b. double Cincrease d. decrease e not enough information to tell 4. If Alex owns 500 shares in a company with cumulative voting and the most votes he can cast for himself in the next board election is 1000 votes, how many board positions are open? a. Five b. Four C. Three d. TWO e. One 5. The Rule of 72's a. Is about doubling the present value to get the future value. b. Says that 72 divided by the payment gives you the number of years to double. c. Says that the rate divided by 72 gives you the number of years to double. d. Both a and b e. Both a and c 6 A perpetuity with a payment of $35,000 per year and a return of 5% would cost you a $1,120,000 b. $2,283,714 C. $1,600,000 d. $700,000 e. $228,571

Answer 1

1. Option D:- Level Principal payments

( Explanation- The commercial loan customer would prefer this as it involves interest component in the monthly payment to decrease significantly over time i.e. the principal payment remains constant, while the interest portion is reduced over the term of the loan which ultimately results in a total payment that declines over time.)

2. Option E:- Primary Market

( Explanation :- The market for the first offering of shares or the Initial Public Offering( IPO) or the stock market launch is known as the Primary market and it is called so as for the first time the shares are being listed for the company)

3. Option D:- Decrease

( Explanation:- If the bond pays a fixed coupon rate and the general market interest rate rises, then people will no longer prefer the lower fixed interest rate paid by a bond, and the value of the bond will decrease.)

4. Option D:- Two

( Explanation:- In cumulative voting system, the shareholder can vote all of its shares for a single candidate and can avoid voting for the other candidate. So, in this case Alex owns 500 shares, so had it been normal voting he would have 500 votes for each candidate but this is cumulative voting which means if he have maximum of 1000 votes and he owns 500 shares, it means 2 candidates are contesting. Because in case of 2 candidates, he has 500x2= 1000 votes to be casted in anyones favour)

5. Option C:- Says that the rate divided by 72 gives you the number of years to double

( Explanation:- The Rule of 72 talks about determining how long an investment will take to double given a fixed annual rate of interest. Under this if we divide 72 by annual rate of interest we get an idea about how long it will take to double the initial investment)

6. Option D:- $700,000

( Explanation:- Here, we need to calculate the Present Value of perpetuity

PV = C / R

Where:

PV = Present value

C = Amount of continuous cash payment

r = Interest rate or yield

So, PV= $35,000/5% = $700,000)