True and False 1.Investment finance, as opposed to corporate finance, involves valuation and purchase of financial...

True and False

1.Investment finance, as opposed to corporate finance, involves valuation and purchase of financial instruments.

2.Bond valuation is essentially time value of money

3. A bond's yield to maturity is essentially the same as its IRR

4. A bond that pays interest with additional bonds would be considered a PIK bond.

5. A liquidity premium is paid to bond issuers with a high current ratio and TIE ratio.

Solutions

Expert Solution

1. True

The reason is that investment finance is used for to grow the money via investment in financial instruments like bonds and certificate of deposits. Whereas, corporate financing is related to procuring funds through various sources to finance a project.

2) True

bond valuation is required to calculate the present value of future interest payment. It involves the time value of money by discounting the future cash flow to arrive at the present value.

3) True

The reason is that IRR of the project is the discounting rate that equates the present value of future cash flow to its initial investment. Thus YTM is equal to IRR as investment in bonds are similar to investment in projects.

4)True

Payment in Kind (PIK) bonds are those bonds which pays interest along with extra issue like cash or additional bonds.

5)True

The reason is that liquidity premium is paid to bond issuer for holding the bond for longer period. It is generally paid to bond issuer for high current ratio and TIE ratio.

jeff jeffy answered 1 year ago

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