Question 1

Answer the questions below:

Accepted Answer

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...

Question 2

A bond that matures in one year has a $500 face value and a $60 coupon What is the price of the bond if the interest rate is 6 percent and the bond was purchased by the present owner for $450?

Accepted Answer

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Question 3

When the interest rate is 10 percent, what is the price of a bond that matures in one year, has a $300 face value, and has a coupon of $20 per year?

Accepted Answer

The price of a bond is calculated by discounting the future cash flows (coupon payments and the face value) back to their present value. In this case, the bond has a coupon of $20 and will pay the face value of $300 at maturity in one year. The total cash flow in one year is $320 ($20 coupon + $300 face value). To find the present value (price of the bond), we use the formula: Present Value = Future Cash Flow / (1 + interest rate). Plugging in the numbers: Price = $320 / (1 + 0.10) = $320 / 1.10 = $290.90.

Question 4

Bond prices and bond yields are positively related.

Accepted Answer

Bond prices and yields are inversely related. When bond prices go up, yields go down, and vice versa.

Question 5

Suppose an investor buys a share of stock for $40 and sells it for $45 after one year. At the end of that year, the dividend per stock is $1. The company has 100,000 shares outstanding and a total profit for the year of $500,000. Calculate the price-earnings ratio for this firm at the time the stock was sold.

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Question 6

Calculate the maximum price that should be paid for a bond with a face value of $100, a coupon of $12, and a maturity date of three years from now if the prevailing interest rate is 15 percent.

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Question 7

Suppose a bond with a face value of $1,000 pays a coupon of $200, and the bond matures in 50 years. If the interest rate is currently 15 percent, calculate the approximate price of the bond.

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Question 8

A bond pays a fixed percent of its face value every year. Explain what happens to the price of the bond when interest rates in the economy increase.

Accepted Answer

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Question 9

Suppose a bond with a face value of $100 matures in two years. If the coupon is $8 and the current interest rate is 5 percent, what is the current price of the bond?

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Question 10

What is the yield on a very long-term bond with a $500 face value, a coupon of $35, and a current price of $650?

Accepted Answer

To calculate the yield of the bond, we need to use the formula:

Yield = (Annual Interest + (Face Value - Current Price) / Years to Maturity) / ((Face Value + Current Price) / 2)

Plugging in the numbers, we get:

Yield = (35 + (500 - 650) / 100) / ((500 + 650) / 2)
Yield = 5.4%

Therefore, the yield on this bond is 5.4%. Answer choice C is correct.

Question 11

Suppose a coupon of $15 is paid on a bond that matures indefinitely and has a $200 face value. If the interest rate is 9 percent, what is the price of the bond?

Accepted Answer

The price of a perpetuity (a bond that matures indefinitely) is calculated by dividing the annual payment by the interest rate. Here, the annual payment is $15, and the interest rate is 9% or 0.09. Thus, the price of the bond is $15 / 0.09 = $166.67.

Question 12

Which of the following best describes a risk-averse individual?

Accepted Answer

A risk-averse individual is someone who prefers to avoid risks and uncertainty, even if it means missing out on potential gains. Option C shows that the individual would rather have a lower payoff guaranteed (having $10) than taking a risk (on a coin toss) that could potentially have a higher payoff.

Question 13

The face value of a bond is the principal that will be paid back when the bond matures.

Accepted Answer

The face value of a bond is also known as the par value or the principal amount. It is the amount that the bond issuer agrees to pay back to the bondholder when the bond matures.

Question 14

The rate of return on a bond is equal to the dividend plus the change in the price of the bond as a percentage of the price.

Accepted Answer

The rate of return on a bond is not equal to the dividend. Bonds typically do not pay a dividend, but rather pay interest. The rate of return on a bond is equal to the interest payments received plus any capital gains or losses on the bond as a percentage of the initial investment.

Question 15

The yields on bonds tend to rise when firms have higher earnings.

Accepted Answer

Bond yields typically rise due to expectations of higher inflation or interest rates, not directly because of firms' higher earnings. Higher earnings can influence stock prices more directly than bond yields.

Question 16

A bond's yield is the fixed amount that the borrower agrees to pay the bondholder each year.

Accepted Answer

A bond's yield is not a fixed amount but rather the rate of return the bondholder receives on their investment, which can fluctuate based on the bond's price and interest payments.

Question 17

Suppose an investor buys a share of stock for $200 and sells it for $220 after one year. At the end of that year, the dividend per stock is $5. The company has 250,000 shares outstanding and a total profit for the year of $1,000,000. Calculate the rate of return on this stock for the investor.

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Question 18

Suppose a share of stock was purchased 20 years ago for $20, and its current value is $300. Also suppose that the current dividend per share is $15 and that interest rates are 11.5 percent. Calculate the current dividend yield.

Accepted Answer

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Question 19

For a bond, a higher yield means a lower face value.

Accepted Answer

A higher yield on a bond typically means that the bond is selling for a lower price relative to its face value, not that its face value is lower. The yield is a function of the bond's price relative to its interest payments and face value, not the face value itself.

Question 20

Suppose a share of stock was purchased 10 years ago for $10. One year ago it was worth $85 and today it is worth $81. A dividend of $.50 per share was paid by the corporation today. Calculate the rate of return for this stock.

Accepted Answer

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Quiz 16: Capital and Financial Markets

Answer the questions below:

A bond that matures in one year has a $500 face value and a $60 coupon What is the price of the bond if the interest rate is 6 percent and the bond was purchased by the present owner for $450?

When the interest rate is 10 percent, what is the price of a bond that matures in one year, has a $300 face value, and has a coupon of $20 per year?

Bond prices and bond yields are positively related.

Calculate the maximum price that should be paid for a bond with a face value of $100, a coupon of $12, and a maturity date of three years from now if the prevailing interest rate is 15 percent.

Suppose a bond with a face value of $1,000 pays a coupon of $200, and the bond matures in 50 years. If the interest rate is currently 15 percent, calculate the approximate price of the bond.

A bond pays a fixed percent of its face value every year. Explain what happens to the price of the bond when interest rates in the economy increase.

Suppose a bond with a face value of $100 matures in two years. If the coupon is $8 and the current interest rate is 5 percent, what is the current price of the bond?

What is the yield on a very long-term bond with a $500 face value, a coupon of $35, and a current price of $650?

Suppose a coupon of $15 is paid on a bond that matures indefinitely and has a $200 face value. If the interest rate is 9 percent, what is the price of the bond?

Which of the following best describes a risk-averse individual?

The face value of a bond is the principal that will be paid back when the bond matures.

The rate of return on a bond is equal to the dividend plus the change in the price of the bond as a percentage of the price.

The yields on bonds tend to rise when firms have higher earnings.

A bond's yield is the fixed amount that the borrower agrees to pay the bondholder each year.

Suppose an investor buys a share of stock for $200 and sells it for $220 after one year. At the end of that year, the dividend per stock is $5. The company has 250,000 shares outstanding and a total profit for the year of $1,000,000. Calculate the rate of return on this stock for the investor.

Suppose a share of stock was purchased 20 years ago for $20, and its current value is $300. Also suppose that the current dividend per share is $15 and that interest rates are 11.5 percent. Calculate the current dividend yield.

For a bond, a higher yield means a lower face value.

Suppose a share of stock was purchased 10 years ago for $10. One year ago it was worth $85 and today it is worth $81. A dividend of $.50 per share was paid by the corporation today. Calculate the rate of return for this stock.