Question

20. Which of the following statements about a bond is true?

All else being equal, the lower the coupon rate on a bond, the higher the price of the bond

The value of a bond cannot be traded in the market at its face value

If the yield curve is downward sloping, long-term yields are lower than short-term yields because market interest rates are expected to decrease.

If the yield curve is downward sloping, long-term yields are lower than short-term yields because market interest rates are expected to increase

1. Which of the following statements is false?

Separation of ownership and management can be an advantage

When a company becomes insolvent, shareholders are liable for all debts of the company

Transfer of ownership at the corporate level is easy

Income of a sole proprietorship is taxed at the personal level

2. A firm has a PE ratio of 15, current share price of $45, number of shares outstanding is 100,000 and the value of total equity is $4.5 M. What is the Net Income ?

$1.33 M

$ 225,000

$ 2.25 M

$300,000

3.

Calculate the value of a bond (to the nearest dollar) that pays annual coupon rate of 8% paid semi-annually, has a face value of $1,000 that matures in 15 years if the current yield to maturity on an equivalent security is 9%.

$946

$785

$486

$919

4. At what rate of interest would you be indifferent between $1000 now and a perpetuity of $30 pa?

10%

15%

3%

33.3%

Answer 1

20. Which of the following statements about a bond is true?

If the yield curve is downward sloping, long-term yields are lower than short-term yields because market interest rates are expected to decrease.

it is known fact that the effect of market interest rates are higher on long term bonds than short term bonds. Thus when yield curve is downward sloping the long term yields are lower than short term yields

1. Which of the following statements is false?

When a company becomes insolvent, shareholders are liable for all debts of the company

The shareholders wont pay all debts of the company instead the shareholders will get their money back from insolvent company only after paying all the creditors, government liabilities and preferred stock.

2. A firm has a PE ratio of 15, current share price of $45, number of shares outstanding is 100,000 and the value of total equity is $4.5 M. What is the Net Income ?

$300,000

Net Income = Market Price * Shares O/s / PE Ratio = 45 * 100000 / 15 = $300000

3.Calculate the value of a bond (to the nearest dollar) that pays annual coupon rate of 8% paid semi-annually, has a face value of $1,000 that matures in 15 years if the current yield to maturity on an equivalent security is 9%.

$919 (Rounded off from $918.6)

4. At what rate of interest would you be indifferent between $1000 now and a perpetuity of $30 pa?

3%

Indfferent Rate

$1000 = $30 / Interest rate

Interest rate = 30 / 1000 = 3%