Grantham FIN307 Chapter 4,5  Principles of Finance
FIN307Leonweek2assignment
Chapter 4 & 5
Francisco Leon
Grantham University
FIN307 Principles of Finance
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.
Instructor:
Questions
(41)
Define each of the following terms:
PV; I; INT; FVN; PVAN; FVAN; PMT; M; INOM
Opportunity cost rate
Annuity; lumpsum 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
(42)
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?
(43)
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?
(44)
If a firm’s earnings per share grew from $1 to $2 over a 10year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.
(45)
Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
(51)
Define each of the following terms:
Bond; Treasury bond; corporate bond; municipal bond; foreign bond
Par value; maturity date; coupon payment; coupon interest rate
Floatingrate 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; investmentgrade bond
Real riskfree rate of interest, r*; nominal riskfree 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
(52)
“Shortterm interest rates are more volatile than longterm interest rates, so shortterm bond prices are more sensitive to interest rate changes than are longterm bond prices.” Is this statement true or false? Explain.
(53)
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?
(54)
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.
(55)
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.

Rating:
5/
Solution: Grantham FIN307 Chapter 4,5  Principles of Finance