Financial Accounting and Reporting: Questions and Terms

Questions

Complete the following questions: 

Define:

PV;

INT;

FNn;

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.

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, ;

Nominal risk-free rate of interest, 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.