Question 1

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 2

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 maturity value and represents the amount that the bond issuer will repay the bondholder when the bond matures.

Question 3

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 4

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 5

Bond prices and bond yields are positively related.

Accepted Answer

Bond prices and bond yields are actually inversely related. As bond prices increase, bond yields decrease and vice versa.

Question 6

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 7

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 interest...

Question 8

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 9

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...

Question 10

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

Accepted Answer

A risk-averse individual is someone who prefers a sure outcome over a gamble with an uncertain outcome. Option C shows an individual who is risk-averse as they prefer to keep the $10 they have rather than gambling on a coin toss that the odds are not in their favor, even if it means possibly earning $20. The other options involve investment choices which have varying degrees of risk and are not necessarily indicative of a risk-averse individual.

Question 11

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 actually calculated using the bond's yield, which takes into account both the coupon payments and the change in price of the bond. The dividend is only applicable to stocks, not bonds.

Question 12

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 13

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 14

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

First, calculate the annual coupon payment: $15 (coupon payment) / $200 (face value) = 0.075 or 7.5%.
Next, calculate the present value of the bond: 
PV = $15 / 0.09 + $200 / (1 + 0.09)^1 
PV = $166.67
Therefore, the price of the bond is $166.67, which makes choice C the correct answer.

Question 15

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 16

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 17

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 can be calculated using the following formula: 
Yield = (Coupon Payment / Current Price) x 100%
In this case, the coupon payment is $35 and the current price is $650. 
Yield = (35/650) x 100% 
Yield = 0.0538 x 100% 
Yield = 5.38% 
So the yield is 5.4 percent, which is option C.

Question 18

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