Question

If the yield of maturity of the bond is lower than the coupon rate, the price of this bond will be?

Select one:

a. Higher than the par value.

b. Lower than the par value.

c. Equal the par value.

The situation in which the current market price is greater than intrinsic value is called:

Select one:

a. All answers are incorrect.

b. Equilibrium.

c. Stock undervalued.

d. Stock overvalued.

An investor is considering purchasing a 10-year zero-coupon bond of $1,000 par value. If the current interest rate for equally risky bonds is 13%. The bond will be sold at?

Select one:

a. Discount.

b. Fair value.

c. Premium.

The price of a corporate bond which has a par value of $1000 and coupon payment is 8% and yield is 5%. The maturity of the bond is 10 years will be?

Select one:

a. Higher than the par value

b. Lower than the par value

c. Equal the par value

Answer 1

1)	When the yield to maturity of a bond is lower than the coupon rate, the price of the bond
	will be higher than the par value. On the other hand, When the yield to maturity of a bond is higher
	than the coupon rate, the price of the bond will be lower than the par value.
	a. Higher than the par value.
2)	When the current market price of a stock for example is greater than the fair value of the stock,
	the stock is considered to be overvalued.
	The situation in which the current market price is greater than intrinsic value is called:
	d. Stock overvalued.
3)	Par/Face value	1000
	Annual Coupon rate	0
	Annual coupon	0
	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 13% and t is the time period in years.
	price of the bond = sum of present values of future cash flows
	r	0.13
	mt	1	2	3	4	5	6	7	8	9	10
	future cash flow	0	0	0	0	0	0	0	0	0	1000
	present value	0	0	0	0	0	0	0	0	0	294.5883
	sum of present values	294.59
	The bond will be sold at $294.59.
	The bond will be sold at a
	a. Discount.
4)	Par/Face value	1000
	Annual Coupon rate	0.08
	Annual coupon	80
	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 5% and t is the time period in years.
	price of the bond = sum of present values of future cash flows
	r	0.05
	t	1	2	3	4	5	6	7	8	9	10
	future cash flow	80	80	80	80	80	80	80	80	80	1080
	present value	76.19048	72.56236	69.10701	65.8162	62.68209	59.69723	56.85451	54.14715	51.56871	663.0263
	sum of present values	1231.65
	The price of the corporate bond will be $1231.65.
	a. Higher than the par value