HLST 3250 Lecture Notes - Lecture 2: Bond Valuation, Zero-Coupon Bond, Dividend Yield

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19 Apr 2017

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Chapter 10 valuation and rates of return: the valuation of a financial asset is based on the concept of determining the present value of future cash flows. True false: the prices of financial assets are based on the expected value of future cash flows, discount rate, and past dividends. True false: the market determined required rate of return is also called the discount rate. True false: the discount rate depends on the market"s perceived level of risk associated with an individual security. True false: by using different discount rates, the market allocates capital to companies based on their risk, efficiency, and expected returns. True false: most bonds promise both a periodic return and a lump-sum payment. True false: a 10-year bond pays 6% annual interest in semi-annual payments. True false: the price of a bond is equal to the present value of all future interest payments added to the present value of the principal.

Related Questions

Read each statement below indicate if it true or false, and give a brief explanation of your answer.

1. When a bond is sold at a discount, the cash received is less than the present value of the future cash flows from the bond, based on the market rate of interest on the date of issue.

A the discount amount equals to the difference between the cash received and the present value of the future cash flows.

B. the cash received is more than the present value of the future cash flows.

C. the cash received is equal to the present value of the future cash flows.

D. because the market rate of interest is used when calculating the present value of the future cash flows.

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True or False - The mean-reverting behavior of sales growth and return on equity that is demonstrated by the broader market can be applied to all companies in that market.

True or False - The Discounted Dividend method of valuation is based on the premise that a company's value can be determined by the present value of future dividends (including any liquidating dividends).

True or False - Abnormal Earnings arise when a company is able to produce earnings that exceed the expected rate of return on equity.

True or False - Accounting analysis and ratio analysis provide only a superfluous understanding of a company's current performance and should not, therefore, be relied upon as reliable indicators of continued performance.

*** References would be great too, I cannot find a CONFIRMED answer for these 4 questions*** TYou

QUESTION 1 The largest investors in corporate bonds are life insurance companies and pension funds. True False 5 points QUESTION 2 Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market. True False 5 points QUESTION 3 The value (or price) of a bond is the present value of its expected future cash flows. True False 5 points QUESTION 4 Bond prices decline when the interest rate decreases. True False 5 points QUESTION 5 The face or par value for bonds is the amount paid to bondholders at maturity and is usually equal to $1,000. True False 5 points QUESTION 6 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. True False 5 points QUESTION 7 Zero coupon bonds have no coupon payments so they sell for more than their par value. True False 5 points QUESTION 8 Interest rate risk is the risk that bond prices will fluctuate when the interest rate changes. True False 5 points QUESTION 9 US Treasury securities are considered risky investments because the coupon payments are unpredictable. True False 5 points QUESTION 10 Bonds are very difficult to value because their future cash flows are very difficult to predict. True False 5 points QUESTION 11 If the bond's coupon rate is equal to the market rate then the bond will sell at a price equal to its face value greater than its face value less than its face value equal to its foreign currency value, e.g., its price in British pounds 5 points QUESTION 12 When calculating the price of a bond that pays a semiannual coupon one needs to use double the number of years until maturity for the number of payments use half the annual coupon payment use half the annual rate of return as the discount rate all of the above 5 points QUESTION 13 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments more than the price of the bond equal to zero equal to the price of the bond less than the price of the bond 5 points QUESTION 14 Which one of the following statements is true? All else equal long-term bonds have lower price volatility than short-term bonds. There is an inverse relation between bond prices and market interest rates. All else equal short-term bonds are more risky than long-term bonds. All else equal US government bonds are more risky than corporate bonds. 5 points QUESTION 15 An investor owns a 10-year US government bond with a 9 percent coupon rate. If the yield-to-maturity on the bond is 8 percent then this bond is selling for its par value. a discount. a premium. its face value. 5 points QUESTION 16 BA Corp is issuing a 10-year bond with a coupon rate of 8 percent and a par value of $1,000. The market interest rate on similar bonds is currently 6 percent. If the coupon payments are made annually, what is the value of this bond? 5 points QUESTION 17 Knight, Inc. has issued a 3-year bond with a $1,000 par value and an annual coupon rate of 6 percent. The current market rate of interest is 5 percent. What is the value of this bond if the coupon payments are made semiannually? 5 points QUESTION 18 Diane Carter is interested in buying a 5-year zero coupon bond with a face value of $5,000. If the market interest rate on these types of bonds is currently 9 percent, what is the current price of this bond? 5 points QUESTION 19 Rudy Sandberg wants to invest in 4-year bonds that are currently priced at $933.76. The bonds have a coupon rate of 6 percent and annual coupon payments. If the par value of the bonds is $1,000, what is the bond's yield-to-maturity? 5 points QUESTION 20 You own a 5-year bond with a face value of $1,000 and a coupon rate of 5 percent with annual payments. The bond is currently worth $810.46. If market interest rates remain unchanged, what will be the value of the bond next year when there are 4 years left until maturity?

HLST 3250 Lecture Notes - Lecture 2: Bond Valuation, Zero-Coupon Bond, Dividend Yield

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