Question 1

For bonds, price sensitivity to a given change in interest rates generally increases as years remaining to maturity increases.

Accepted Answer

As years remaining to maturity increase, the bond's cash flows become more distant and uncertain, resulting in more interest rate risk, which increases the bond's price sensitivity to changes in interest rates.

Question 2

Which of the following statements about bonds is most correct?

Accepted Answer

The yield to maturity on a bond is fixed as long as the bond is held until maturity. This is because the yield to maturity takes into account the discounted present value of all future cash flows, including interest payments and the principal repayment at maturity. The coupon rate on the bond, which is the fixed annual interest rate stated on the bond, does not change over the life of the bond. However, the price of a bond does fluctuate with changes in market interest rates, as reflected in the bond's yield to maturity.

Question 3

Which of the following will generally result in a higher price for a bond?

Accepted Answer

A higher coupon rate means the bond will pay a higher amount of interest relative to its face value, making it more attractive to investors and therefore commanding a higher price.

Question 4

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

Long-term bonds are generally more sensitive to interest rate changes than short-term bonds, meaning that their prices are more volatile in response to interest rate fluctuations.

Question 5

Which of the following statements is correct?

Accepted Answer

This is known as the par value, or face value, of the bond. When the coupon rate and the market rate match, investors are indifferent between buying the bond or other investments because they can earn the same return elsewhere. Therefore, the bond will sell at the par value. Options A and B are incorrect because if the market rate is higher than the bond's coupon rate, the bond will sell at a discount, and if the market rate is lower than the bond's coupon rate, the bond will sell at a premium. Option D is incorrect because at least one of the statements is correct, and option E is incorrect because only one statement is correct.

Question 6

The market value of any real or financial asset, including stocks, bonds, or art work, can be found by determining future cash flows and then discounting them back to the present.

Accepted Answer

The answer of The market value of any real or...

Question 7

The coupon rate and the required rate for a specific issue of bonds, such as IBM's 7% bonds that were issued in 2011, both vary over time as economic factors change.

Accepted Answer

The coupon rate of a bond, such as IBM's 7% bonds issued in 2011, is fixed and does not change over time. It is determined at the time of issuance. However, the required rate of return (or yield) demanded by investors can vary over time due to changes in economic factors.

Question 8

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction from interest rate movements.For example, if interest rates rise, bond prices fall.

Accepted Answer

This is a fundamental principle of bond markets - when interest rates increase, the fixed coupon payments of existing bonds become less attractive to investors, causing their prices to decrease in order to provide a higher yield to new investors. Conversely, when interest rates decrease, bond prices tend to rise as the fixed coupon payments become more competitive in the market.

Question 9

Fish & Chips Inc.has two bond issues outstanding, and both sell for $701.22.The first issue has a coupon rate of 8 percent and 20 years to maturity.The second has an identical yield to maturity as the first bond, but only 5 years until maturity.Both issues pay interest annually.What is the annual interest payment on the second issue?

Accepted Answer

The fact that both bonds are selling at the same price implies that they have the same yield to maturity. Since the first bond's coupon rate is fixed at 8%, we can infer that the second bond's coupon rate must also be 8%. Therefore, the annual interest payment on the second bond is (8%)(Face Value) = (8%)($1000) = $80. However, since the second bond has only 5 years until maturity, we need to discount this annual payment back to the present using a 5-year discount rate that gives us a present value of $701.22. Using a financial calculator, we can solve for this discount rate to be 11.21%. Therefore, the present value of the annual interest payment is $80/(1.1121)^5 = $37.12, which is the annual interest payment on the second bond.

Question 10

The ____ yield is the annual dollar coupon interest paid on a bond divided by the bond's current market price.

Accepted Answer

The answer of The ____ yield is the annual dollar...

Question 11

The cash flows associated with common stock are difficult to evaluate due to the uncertainty and variability associated with them.

Accepted Answer

Unlike bonds or other fixed-income securities, the cash flows associated with common stock are not guaranteed and can fluctuate significantly based on various factors such as company performance, industry trends, and market conditions. This uncertainty and variability make it challenging to evaluate the future cash flows of common stock accurately.

Question 12

The total expected future yield on a bond consists of a(n) ____ yield which is usually positive and a(n) ____ yield which can be positive or negative.

Accepted Answer

The total expected future yield on a bond includes interest yield, which is usually positive and capital gain yield, which can be positive or negative. Therefore, option D is the correct choice. Option A, B, and C are incorrect because they do not fully describe the components of the total expected future yield on a bond.

Question 13

A four-year, zero-coupon Treasury bond sells at a price of $762.8952.A three-year, zero-coupon Treasury bond sells at a price of $827.8491.Assuming the pure expectations theory is correct, what does the market believe the price of one-year, zero-coupon bonds will be in three years?

Accepted Answer

The answer of A four-year, zero-coupon Treasury bond sells at...

Question 14

Which of the following statements is correct?

Accepted Answer

Expected returns as estimated by a marginal investor are always positive since investors will only invest if they believe they will earn a positive return. However, realized returns can sometimes be negative due to market factors such as unforeseen events or poor company performance. Therefore, option B is the correct statement.

Question 15

A two-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $873.4387.A one-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $938.9671.If the pure expectations theory is correct, for what price should one-year zero-coupon Treasury bonds sell one year from now?

Accepted Answer

The answer of A two-year zero-coupon Treasury bond with a...

Question 16

A 20-year original maturity bond with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates.)

Accepted Answer

Both bonds have the same duration (time left to maturity) and therefore the same interest rate price risk, assuming all other factors like coupon rates and default risk are equal.

Question 17

The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.

Accepted Answer

The constant growth model, also known as the Gordon model, can be used to find the price of perpetual preferred stock or any other perpetuity that pays a constant dividend or cash flow. This is because the formula for the model takes into account the expected future cash flows and the required rate of return on the investment.

Question 18

Assume that you would like to purchase 100 shares of preferred stock that pays an annual dividend of $6 per share.However, you have limited resources now, so you cannot afford the purchase price.In fact, the best that you can do now is to invest your money in a bank account earning a simple interest rate of 6 percent, but where interest is compounded daily (assume a 365-day year).Because the preferred stock is riskier, it has a required annual rate of return of 12 percent (assume that this rate will remain constant over the next 5 years).For you to be able to purchase this stock at the end of 5 years, how much must you deposit in your bank account today, at t = 0?

Accepted Answer

The answer of Assume that you would like to purchase...

Question 19

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

Accepted Answer

The total return on a share of stock includes both the dividend yield and any capital gains or losses from the stock's price appreciation or depreciation, less any commissions or fees paid when buying or selling the stock.

Question 20

The ____ yield is the percentage change in the value of an investment.

Accepted Answer

Capital gains yield measures the percentage change in the value of an investment from its purchase price to its current price, which includes both increases or decreases. The other options (interest, total, and current) do not fully capture the change in value of an investment.

Quiz 10: Valuation Concepts

For bonds, price sensitivity to a given change in interest rates generally increases as years remaining to maturity increases.

Which of the following statements about bonds is most correct?

Which of the following will generally result in a higher price for a bond?

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Which of the following statements is correct?

The market value of any real or financial asset, including stocks, bonds, or art work, can be found by determining future cash flows and then discounting them back to the present.

The coupon rate and the required rate for a specific issue of bonds, such as IBM's 7% bonds that were issued in 2011, both vary over time as economic factors change.

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction from interest rate movements.For example, if interest rates rise, bond prices fall.

The ____ yield is the annual dollar coupon interest paid on a bond divided by the bond's current market price.

The cash flows associated with common stock are difficult to evaluate due to the uncertainty and variability associated with them.

The total expected future yield on a bond consists of a(n) yield which is usually positive and a(n) yield which can be positive or negative.

A four-year, zero-coupon Treasury bond sells at a price of $762.8952.A three-year, zero-coupon Treasury bond sells at a price of $827.8491.Assuming the pure expectations theory is correct, what does the market believe the price of one-year, zero-coupon bonds will be in three years?

Which of the following statements is correct?

A 20-year original maturity bond with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates.)

The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.

The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

The ____ yield is the percentage change in the value of an investment.