Question

1.The share price of Goliath bank at the beginning of 2016 was $80. In the middle of 2016 Goliath paid a dividend (income) on each share of $5 and at the end of 2016 the share price was $90. What was the gross return on a Goliath share in 2016?

(a) 1.10

(b) 1.125

(c) 1.1875

(d) 0.944

(e) 0.0625

2.Consider a bond with a term of two years, a principal or face value of $2,000 and that pays an end-year

coupon of $50.

If the market interest rate on similar bonds is 2%, what is the (approximate) initial price of the bond?

(a) $2,019

(b) $2,000

(c) $2,100

(d) $2,060

(e) $2,050

3.Consider a bond with a term of two years, a principal or face value of $2,000 and that pays an end-year coupon of $50.

Suppose that at the end of the first year after the first coupon payment of $50 has been paid, the market interest rate falls to 1%. The market price of the bond at the beginning of the second year would be (approximately):

(a) $2,000

(b) $2,019

(c) $2,010

(d) $2,030

(e) $2,050

5.Other things equal, a rise in market interest rates will result in current bondholders experiencing;

(a) capital gains due to a rise in bond prices.

(b) capital gains due to a fall in bond prices.

(c) capital losses due to a fall in bond prices.

(d) capital losses due to a rise in bond prices.

(e) none of the above

6.The unit of account function of money refers to which of the following?

(a) Its role as a financial asset.

(b) Its use in purchasing financial assets.

(c) Its use in purchasing goods and services.

(d) Its use in measuring prices of goods, services and assets.

(e) Both (b) and (c)

7.Which of the following is the main property of a fiat currency?

(a) Its value depends on the price of gold.

(b) It can be exchanged at an economy's central bank for gold.

(c) It has no actual physical form.

(d) It has no fundamental value other than as a medium of exchange.

(e) Both (c) and (d)

Answer 1

Hi,

Hope you are doing well!

Question:

Answer:

1). Answer:

Gross Return = [(P1 - P0) + Dividend]/P0

Where,

P0 = Initial price of a stock

P1 = Ending stock price

Gross return on a Goliath share in 2016 = [(Price in 2016 - Price in 2015) + Dividend]/Price in 2015

=  [(80 - 90) + 5]/80

= (10+5)/80 = 15/80 = 0.1875

Gross return on a Goliath share in 2016 = 0.1875

0r

0.1875*100 = 18.75%

Note= So, right answer is 0.1875 but in the given option there is some printing mistake.

2). Answer:

a). $2019.38

Face value = $2,000

Coupon =  $50.

Interest rate= 2%

Time= 2 years

Bond Price =  (C_n / (1+YTM)^ⁿ )+ P / (1+i)ⁿ

Where,

C =Coupon payment in the nth period

YTM = Interest rate,

P = Face value of the bond

= 50/(1+2%)^1 + 50/(1+2%)^2 + 2,000/(1+2%)^2

= 50/(1.02)^1 + 50/(1.02)^2 + 2,000/(1.02)^2

=  50/1.02 + 50/1.0404 + 2,000/1.0404

= 49.01 + 48.05 + 1922.32 = $2019.38

Bond Price = $2019.38

3). Answer:

b). $.2019

Face value = $2,000

Coupon =  $50.

Interest rate fall= 2%

Time= 2 years

Bond interest rate / yield = (Coupon rate/bond price)*100

= (50/2000)*100

= 0.025*100 = 2.5%

Interest rate = 2.5%

Now interest rate fall by 1% then the (approximate) initial price of the bond:

Bond Price =  (C_n / (1+YTM)^ⁿ )+ P / (1+i)ⁿ

= 50/(1+1.5%)^1 + 2,000/(1+1.5%)^1

= 50/(1.015)^1 + 2,000/(1.015)^1

=  50/1.015 + 2,000/1.015

= 49.26 + 1970.44 = $.2019.70

Bond Price =$.2019.70

5). Answer:

(c) capital losses due to a fall in bond prices.

Bond price and interest rate move in opposite direction. When interest rate increase then bond price fall and vice-versa. So Bondholders experiencing capital losses due to a fall in bond prices.

6). Answer:

a) Its role as a financial asset.

The unit of account is one of the functions of money. A unit of account in financial accounting describe the specific assets and liabilities that are reported in financial statements rather than the units used to measure them.

7). Answer:

d) It has no fundamental value other than as a medium of exchange.

Fiat money is type of currency that is printed by the central bank without backed by a commodity such as gold. You can see in the US how fiat money is printing by the Fed as an the best example.

Thank You