Question

01. True or False? Gains and losses recognized this year should be included in next year’s cash flow. a. True b. False 02. True or False? The risk-free rate is said to be nominal because it reflects a premium for inflation. a. True b. False 03. True or False? The yield of a corporate bond only depends on its coupon rate, its time-to-maturity, its par value, and the number of coupons per year. a. True b. False

Answer 1

1.  Gains and losses recognized this year should be included in next year’s cash flow.

Ans: True

Once we have all net cash balances for each of the three sections of the cash flow statement, we sum them all up to find the net cash increase or decrease for the given time period. We then take this amount and add it to the opening cash balance to eventually arrive at the closing cash balance.

The opening cash balance is last year’s closing cash balance. We can find this amount from last year’s cash flow statement and balance sheet statement.

2. The risk-free rate is said to be nominal because it reflects a premium for inflation.

Ans: True

The sum of the real risk free interest rate and inflation premium is considered as nominal risk free interest rate.

3. The yield of a corporate bond only depends on its coupon rate, its time-to-maturity, its par value, and the number of coupons per year

Ans: Bond yield is the return an investor realizes on a bond. The bond yield can be defined in different ways. Setting the bond yield equal to its coupon rate is the simplest definition. The current yield is a function of the bond's price and its coupon or interest payment, which will be more accurate than the coupon yield if the price of the bond is different than its face value. More complex calculations of a bond's yield will account for the time value of money and compounding interest payments. These calculations include yield to maturity (YTM), bond equivalent yield (BEY) and effective annual yield (EAY).