1) It is commonly accepted that a perpetuity must continue for at least 50 years
ID: 2665404 • Letter: 1
Question
1) It is commonly accepted that a perpetuity must continue for at least 50 years.a) True
b) False
2) What is the value of a bond that has a par value of $1,000, a coupon of $80 (annually), and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the nearest $10.
a) $320
b) $500
c) $810
d) $790
3) Tangier Manufacturing's common stock has a beta of 1.8. If the expected risk free return is 5% and the expected return on the market is 16%, what is the expected return on Tangier's stock?
a) 13.5%
b) 19.8%
c) 24.8%
d) 28.8%
4) If a bond sells for its par value, the coupon interest rate and yield to maturity are equal.
a) True
b) False
5) Genny, Inc. bonds have a 9% coupon rate with semi-annual coupon payments. They have 9 1/2 years to maturity and a par value of $1,000. Compute the value of Genny's bonds if investors' required rate of return is 7%.
a) $1,135.47
b) $973.33
c) $1,137.10
d) $950.00
Explanation / Answer
a) False
b) Calculating the Current value of the bond using excel sheet:
Step1: Go to excel and click "insert" to insert the function.
Step2: Select the "PV" function as we are finding the current value of the bond in this case.
Step3: Enter the values as Rate = 11%; Nper = 11; PMT = -80; FV = -1000
Step4: Click "OK" to get the desired value.
The value comes to " $813.8"
Therefore, the current value of the bond is c) $810
c) Calculating the expected return using CAPM equation:
Re = Rf + Beta [Rm - Rf]
= 0.05 + 1.8 [0.16 - 0.05]
= 0.05 + 1.8 (0.11)]
= 0.248 or 24.8%
Therefore, the correct option is c) 24.8%
d) True
e) Calculating the current price of the bond using excel sheet:
Step1: Go to excel and click "insert" to insert the function.
Step2: Select the "PV" function as we are finding the current value of the bond in this case.
Step3: Enter the values as Rate = 7%/2; Nper = 19; PMT = -45; FV = -1000
Step4: Click "OK" to get the desired value.
Therefore, the value comes to $1137.10
Therefore, the correct option is c) $1,137.10
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