Question 1

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

The answer of A bond that matures in one year...

Question 2

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 3

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

The answer of A bond pays a fixed percent of...

Question 4

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

Accepted Answer

A risk-averse individual would prefer a situation with guaranteed outcomes rather than a situation with uncertain outcomes, even if the potential gain is higher. In this case, option C provides a guaranteed outcome of $10 rather than taking a chance on the coin toss.

Question 5

Calculate the expected return on a $6,000 bond that pays 6 percent of face value and whose price has a 30-percent chance of falling by $1,000 and a 70-percent chance of rising by $1,000.

Accepted Answer

The answer of Calculate the expected return on a $6,000...

Question 6

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?

Accepted Answer

The answer of Suppose a bond with a face value...

Question 7

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.

Accepted Answer

The answer of Suppose an investor buys a share of...

Question 8

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.

Accepted Answer

The answer of Calculate the maximum price that should be...

Question 9

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

The yield on a bond is the annual interest payment divided by the current price of the bond. 
Annual interest payment = coupon rate x face value = $35 
Yield = ($35/$650) x 100% = 5.4%

Question 10

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.

Accepted Answer

The answer of Suppose a bond with a face value...

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

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

The answer of Suppose a share of stock was purchased...

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, and represents the amount that will be paid back to the bondholder when the bond reaches its maturity date.

Question 14

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.

Accepted Answer

The answer of Suppose an investor buys a share of...

Question 15

Bond prices and bond yields are positively related.

Accepted Answer

Bond prices and bond yields have an inverse relationship - as bond prices go up, bond yields go down, and vice versa.

Question 16

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 equal to the interest paid on the bond as a percentage of its face value, not the dividend. Additionally, the change in price of the bond does not affect the rate of return, but rather results in a capital gain or loss for the investor.

Question 17

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 18

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 19

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 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