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UNIT 2 — MILESTONE 2
Score
... [Show More] 19/20
You passed this Milestone
19 questions were answered correctly.
1 question was answered incorrectly.
1
Select one advantage of an annuity for a borrower.
Annuities do not charge interest.
It can be easier to make regular payments rather than a single lump sum.
The payment amount may go down if interest rates fall.
The sum of all the payments will be less than the original loan amount.
CONCEPT
Annuities
2
Which of the following is true for calculating the future value of multiple cash flows?
To find the FV of multiple cash flows, add the PV of each cash flow together and use the total in the
formula for FV.2/15/2021 Sophia :: Welcome
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You must choose the same point in the future for each individual cash flow to determine the FV of
multiple investments.
You can only find the FV of multiple cash flows if the payments occur with the same regularity.
It is simpler to find the FV of irregular cash flows than of annuities.
CONCEPT
Valuing Multiple Cash Flows
3 Y
ou loan $30,000 of your life savings to a friend for five years at 2% simple interest annually.
What is the value of your $30,000 in five years?
$33,000
$27,000
$33,122
$26,878
CONCEPT
Future Value, Single Cash Flows
4
A fund that is designed to follow a major stock index and represents an attractive, inexpensive option for
investors is a(n) __________.
exchange-traded fund
mutual fund2/15/2021 Sophia :: Welcome
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hedge fund
pension fund
CONCEPT
Stock Markets
5
Ashlee's friend owes her $100, but he cannot pay it back today. Instead, Ashlee's friend promises to pay her $120
in one year to account for the time value of money.
That extra $20 represents the __________.
discount
pricing
present value
interest
CONCEPT
Introduction to the Time Value of Money
6
In calculating the yield of an investment, what is EAR equivalent to?
IRR
APR
NPV
APY2/15/2021 Sophia :: Welcome
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CONCEPT
Yield
7
What effect would a CCC credit rating likely have on a bond?
The bond would have a lower interest rate because the credit rating is poor.
The bond would have a typical interest rate because the bond is considered investment grade.
The bond's interest rate would be unaffected because credit rating agencies are not considered impartial.
The bond would have a higher interest rate to compensate for increased risk.
CONCEPT
Understanding Bonds
8
Select the pairing that is correctly matched.
Common stock: may come with an additional dividend provision attached to company financial goals
Common stock: holders can mail in their votes if they can't attend a company's annual general meeting
Preferred stock: may be purchased by converting common stock shares into preferred ones
Preferred stock: is a less stable investment than common stock with fewer rights of ownership
CONCEPT
Rules and Rights of Common and Preferred Stock
9
Janice purchased a $1,000 10-year Treasury note that promised to pay her 1.125% interest every 6 months for
the life of the loan.2/15/2021 Sophia :: Welcome
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Which of those numbers is the par value of the note?
10
6
1.125
1,000
CONCEPT
Key Characteristics of Bonds
10
When an investor purchases stock, he or she becomes a(n) __________ of the issuing company.
employee
creditor
director
owner
CONCEPT
Defining Stock
11
Which descriptor relates to the asset-based approach for valuing corporations?
Analyzes what the company owns2/15/2021 Sophia :: Welcome
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Considers the weighted average cost of capital
Multiplies the share price by number of shares outstanding
Involves an analysis of risk
CONCEPT
Valuing the Corporation
12
Select the true statement about default risk.
Bondholders are guaranteed to be repaid in full if a company enters bankruptcy.
Default risk relates to a bond's periodic coupon payments, but not to its maturity payment.
Bondholders have a degree of legal protection against default risk, but it is not comprehensive.
It is the risk that the bond's price will fall below its par value.
CONCEPT
Bond Risk
13
Consider what you have learned about valuing bonds.
A: Coupon rate = 2.5%, YTM = 3%
B: Coupon rate = 3%, YTM = 2.75%
C: Coupon rate = 3.5%, YTM = 3.5%
D: Coupon rate = 4%, YTM = 3.5%
Which of the bonds is selling at a discount?
B D2/15/2021 Sophia :: Welcome
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A C
CONCEPT
Valuing Bonds
14
Select the statement that correctly explains the relationship between interest rates and present or future
value.
Assuming other variables stay the same, if the interest rate decreases, the future value of an investment
increases.
The interest rate and the present value of an investment are inversely related.
Assuming other variables stay the same, if the interest rate decreases, the present value of an investment
decreases.
Assuming other variables stay the same, if the interest rate increases, the present value of an investment
increases.
CONCEPT
Additional Detail on Present and Future Values
15
You would like to have $10,000 in an account after eight years’ time.
If the account earns 2.5% compounded interest yearly, how much would you have to deposit today?
$9,765
$9,4642/15/2021 Sophia :: Welcome
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$8,333
$8,207
CONCEPT
Present Value, Single Cash Flows
16
Which of the following is an advantage of bonds for a potential investor?
Companies can choose to pay off bonds early.
The diversity of bond types means they respond easily to market needs.
All bonds have the same interest rate, so they are predictable.
They typically generate higher returns than stocks.
CONCEPT
Advantages and Disadvantages of Bonds
17
Determine the value of a stock with the following variables using the constant growth model:
Current annual dividend: $1.30 per share
Required return rate: 7%
Constant growth rate: 5%
$68.25
$63.75
$65.002/15/2021 Sophia :: Welcome
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$69.55
CONCEPT
Stock Valuation
18
Rochelle wants to buy a bond, but she wants to avoid interest rate risk. She also prefers to receive a payment
every three months instead of the traditional six months.
What type of bond should she buy?
Government
Floating-rate
Fixed-rate
Zero-coupon
CONCEPT
Types of Bonds
19
Which of the following accurately describes an inverted yield curve?
A positively sloping curve that indicates that investors are uncertain about the direction of the economy.
A negatively sloping curve that may be an indication that the economy is about to enter a period of
contraction.
A positively sloping curve that may indicate that the economy is about to enter a deflationary period.
A negatively sloping curve that may indicate that the economy is about to enter a period of inflationary
growth.2/15/2021 Sophia :: Welcome
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CONCEPT
The Basics of Interest Rates
20
Select the statement that is true of preferred stock.
Preferred stock can be converted into common stock.
Preferred stockholders have a degree of control over corporate policy.
Preferred stock has less protection than common stock if a company goes bankrupt.
Preferred stock does not change in value.
CONCEPT
Types of Stock
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