Chapter 4: Questions 4-1 through 4-5 on page 183

- Define each of the following terms:
- PV; I; INT; FVN; PVAN; FVAN; PMT; M; INOM
- Opportunity cost rate
- Annuity; lump-sum payment; cash flow; uneven cash flow stream
- Ordinary (or deferred) annuity; annuity due
- Perpetuity; consol
- Outflow; inflow; time line; terminal value
- Compounding; discounting
- Annual, semiannual, quarterly, monthly, and daily compounding
- Effective annual rate (EAR or EFF%); nominal (quoted) interest rate; APR; periodic rate
- Amortization schedule; principal versus interest component of a payment; amortized loan

- What is an
*opportunity cost rate*? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used to evaluate all potential investments?

- An
*annuity*is defined as a series of payments of a fixed amount for a specific number of periods. Thus, $100 a year for 10 years is an annuity, but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does*not*constitute an annuity. However, the entire series*does contain*an annuity. Is this statement true or false?

- If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the
*total growth*would be 100%, but the*annual growth rate*would be*less than*10%. True or false? Explain.

- Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.

Chapter 5: Questions 5-1 through 5-5 on page 231

- Define each of the following terms:
- Bond; Treasury bond; corporate bond; municipal bond; foreign bond
- Par value; maturity date; coupon payment; coupon interest rate
- Floating-rate bond; zero coupon bond; original issue discount bond (OID)
- Call provision; redeemable bond; sinking fund
- Convertible bond; warrant; income bond; indexed bond (also called a purchasing power bond)
- Premium bond; discount bond
- Current yield (on a bond); yield to maturity (YTM); yield to call (YTC)
- Indentures; mortgage bond; debenture; subordinated debenture
- Development bond; municipal bond insurance; junk bond; investment-grade bond
- Real risk-free rate of interest, r*; nominal risk-free rate of interest, rRF
- Inflation premium (IP); default risk premium (DRP); liquidity; liquidity premium (LP)
- Interest rate risk; maturity risk premium (MRP); reinvestment rate risk
- Term structure of interest rates; yield curve
- “Normal” yield curve; inverted (“abnormal”) yield curve

- “Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain.

- The rate of return on a bond held to its maturity date is called the bond’s yield to maturity. If interest rates in the economy rise after a bond has been issued, what will happen to the bond’s price and to its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond’s price? Why or why not?

- If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.

- A sinking fund can be set up in one of two ways. Discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and its bondholders.

**Business School Assignment Instructions**

The requirements below must be met for your paper to be accepted and graded:

Write between 750 – 1,250 words (approximately 3 – 5 pages) using Microsoft Word in APA style.

Use font size 12 and 1” margins.

Include cover page and reference page.

At least 80% of your paper must be original content/writing.

No more than 20% of your content/information may come from references.

Use at least three references from outside the course material; one reference must be from EBSCOhost. Text book, lectures, and other materials in the course may be used, but are not counted toward the three reference requirement.

Cite all reference material (data, dates, graphs, quotes, paraphrased words, values, etc.) in the paper and list on a reference page in APA style.

References must come from sources such as scholarly journals found in EBSCOhost or on Google Scholar, government websites and publications, reputable news media (e.g. CNN , The Wall Street Journal, The New York Times) websites and publications, etc. Sources such as Wikis, Yahoo Answers, eHow, blogs, etc. are not acceptable for academic writing.

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