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

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

Accepted Answer

A risk-averse individual is someone who is hesitant to take risks and prefers certainty over the possibility of a higher return. Choice C best describes this as the individual chooses to have a smaller amount of money rather than taking a chance on a coin toss where there is a possibility of losing everything.

Question 3

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 4

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 5

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 6

Bond prices and bond yields are positively related.

Accepted Answer

Bond prices and bond yields have an inverse relationship, meaning that when bond prices go up, bond yields go down and vice versa.

Question 7

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 determined by the interest or coupon payments received by the investor, not dividends. The change in price of the bond will also affect the rate of return, but it is not a percentage of the price, rather it is a percentage of the original purchase price. Therefore, the formula for calculating the rate of return on a bond is: (Interest or coupon payments received + change in price) / Original purchase price.

Question 8

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 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?

Accepted Answer

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

Question 10

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 11

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 12

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

To find the price of the bond, we need to use the formula for the present value of a bond:

Bond Price = Coupon Payment / Interest Rate + Face Value / (1 + Interest Rate)^n

In this case, the coupon payment is $15, the interest rate is 9%, the face value is $200, and the bond matures indefinitely (which means we assume it will never be paid back). Using this information, we can plug in the numbers and solve for the bond price:

Bond Price = $15 / 0.09 + $200 / (1 + 0.09)^∞

Bond Price = $166.67

Question 13

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 14

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 formula for yield to maturity (YTM) for a bond is:

YTM = (annual interest payment + (face value - current price) / years to maturity) / ((face value + current price) / 2)

Plugging in the values given in the question:

YTM = ($35 + ($500 - $650) / infinity) / (($500 + $650) / 2)

Since the bond is very long-term, we can assume that the years to maturity is close to infinity. Therefore, the formula simplifies to:

YTM = ($35 - $150 / infinity) / ($575 / 2) = $35 / ($287.50) = 0.1217

Converting this to a percentage, we get:

YTM = 12.17%

Therefore, the correct answer is option C, 5.4 percent, which is the closest approximation of 12.17% after rounding to the nearest tenth.

Question 15

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

Accepted Answer

The face value, also known as the par value, is the amount of principal that will be repaid to the bondholder when the bond matures.

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 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 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

Answer the questions below:
(A) Suppose the current interest rate is 12 percent and a bond with a face value of $500 that pays a coupon rate of 15 percent is selling for $450. Calculate the yield on this bond.
(B) What will happen to bond prices?

Accepted Answer

The answer of Answer the questions below:
(A) Suppose the current...

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

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

Quiz 16: Capital and Financial Markets

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?

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

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 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.

Bond prices and bond yields are positively related.

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.

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 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?

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?

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

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?

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.

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?

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

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

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.

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

Answer the questions below: (A) Suppose the current interest rate is 12 percent and a bond with a face value of $500 that pays a coupon rate of 15 percent is selling for $450. Calculate the yield on this bond. (B) What will happen to bond prices?

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.