Week04_TutorialQuestions - SCHOOL OF BANKING AND FINANCE...

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Tutorial Questions 1 SCHOOL OF BANKING AND FINANCE FINS1613 BUSINESS FINANCE Session 2, 2011 TUTORIAL QUESTIONS WEEK 4 - The Valuation of a Firm’s Securities Please note that some answers are exact when rounded to 2 or 3 decimal places because of the use of PV tables rather than calculators. Multiple-choice Questions Bond Valuation 1. One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the __________ the time to maturity, the __________ the change in price. a. longer; smaller b. shorter; larger c. longer; greater d. shorter; smaller e. Statements c and d are correct 2. You are considering investing in three different bonds. Each bond matures in 10 years and has a face value of $1,000. The bonds have the same level of risk, so the yield to maturity is the same for each. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming that interest rates are expected to remain at their current level for the next 10 years, which of the following statements is most correct? a. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year. b. Bond A's price is expected to decrease over the next year, Bond B's price is expected to stay the same, and Bond C's price is expected to increase over the next year. c. Since the bonds have the same yields to maturity, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until the bonds mature. d. Bond C sells at a premium (its price is greater than par), and its price is expected to
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This note was uploaded on 10/20/2011 for the course COMMERCE 3502 taught by Professor All during the One '11 term at University of New South Wales.

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Week04_TutorialQuestions - SCHOOL OF BANKING AND FINANCE...

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