Question

In: Finance

1. Which is better to own during a period of declining interest rates in terms of...

1. Which is better to own during a period of declining interest rates in terms of reinvestment rate risk?

a. a zero coupon bond

b. a bond with a 13% coupon

c. a bond with a variable interest rate

d. a municipal bond

2. When receiving a 10% stock dividend, the owner of 427 shares of stock will receive

a. 4.27 shares.

b. 42.7 shares.

c. 43 shares.

d. 42 shares plus cash.

3. A $1,000 par bond with a closing price of 107 in the financial press has a dollar price of

a. $107.00.

b. $1,070.00.

c. $1,700.00.

d. $10,700.

4.

Sam is a 50 share shareholder in MOP Inc. that earned $2 million, had 100,000 shares outstanding and a price-earnings ratio of 18. What is the current market value of Sam s investment in MOP Inc.?

a. $1800

b. $360

c. $18,000

d. $15,000

Expert Solution

1. Answer-> a zero-Coupon Bond

Zero-coupon bond does not involve any coupon payments and hence the reinvestment risk for a zero-coupon bond is zero. Hence, Zero Coupon Bonds (ZCB) are better to own during a period of declining interest rates in terms of reinvestment rate risk.

2. When receiving a 10% stock dividend, the owner of 427 shares of stock will receive 42 shares plus cash

Since it is impossible to trade fractional shares so usually the company buys the fractional share and pays cash to the shareholder.

Answer-> 42 shares plus cash

3. 3. A $1,000 par bond with a closing price of 107 in the financial press has a dollar price of $1070

Closing price = 107 for a 100 face value bond

Hence the dollar value of a $1000 par bond will be $1070

Answer -> 1070

4. Sam is a 50 share shareholder in MOP Inc. that earned $2 million, had 100,000 shares outstanding and a price-earnings ratio of 18. The current market value of Sam s investment in MOP Inc.is $18000

P/E =18

Price per share / Earning per share = 18

Earning per share = 2000000/100000 = 20

Therefore, the price per share = 18*20 = 360

No. of shares that SAM has = 50

Current market value of Sam's investment = 50*360 = 18,000

Answer-> $18000

jeff jeffy answered 5 months ago

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