Question

What is the fair value of a $1,000 bond with an 8% coupon rate and a required rate of return of 15%?

A. More than $1,000

B. Less than $1,000

C. Equal to $1,000

2. To increase the present value, the discount rate (interest rate) should:

A. Increase

B. Decrease

3. In calculating the costs of sources of fund, the tax rate is important to which of the following source of fund?

A. Common shares

B. Retained earnings

C. Bonds

D. Preferred shares

4. Bonds are considered a riskier investment than common stock for investors.

A. True

B. False

5. Preferred stockholders are owners of the corporation and have rights upon liquidation and to receive dividends

A. True

B. False Q

Answer 1

Part 1:

Value of Bond = PV of Cash flows from it.

If Coupon rate > discount rate, Value of Bond is more than Fair Value and Vice versa.

Thus in the given case Value of bond is less than 1000.

OPtion B

Part 2:

There is inverse relation between Value of bond and Discount rate.

Thus to increase PV of bond, Discount rate should be reduced.

OPtion B

Part 3:

Tax rate shall be considered in case of ABove line item ( Above PAT ) expenditure.

Thus calculation of cost of Bonds, tax on int shall be considered.

All other costs such as retained earnings, Dividend etc are below line item expenditure.

OPtion C

Part 4:

Int and redumption of bond value will have high proirity than Preference share as well as Equity shares.

Further Int rate is fixed for Bonds.

Thus bonds are not riskier compared to COmmon stock.

OPtion B

Part 5:

Preferential stock holders have preferential rights over common stock holder in receiving the dividend as well as liquidation proceedings.

Option A is correct