Question

47: The current value of a bond is based:

	A.	On the present value of the coupons and the future value.
	B.	On the present value of all future cash flows related to the bond
	C.	On the present value of the coupons plus the present value of the price.
	D.	On the yield to maturity and the coupon rate.

48: A stock’s capital gains yield will never be negative. TRUE OR FALSE

52: Diversification can not reduce the level of systematic risk. TRUE OR FALSE

Answer 1

(47) Option A (On the present value of the coupons and the future value)

Option B is somewhat right too but the bond only has certain coupons and Future Value of which Present Value gives the current price of bond whereas Option B gives a hint of uncertain Cash flows in the bond which is not applicable in real life.

Option C is wrong because value of a bond is the Present Value of coupons and Future Value

Option D is wrong because yield to maturity is only used to calculate present value while coupon is not the only cash flow.

(48) False

Reason - stock’s capital gains yield can be negative if the price of the stock falls below the price at which the stock was purchased.

(52) True

Reason - Diversification is used reduce the level of Unsystematic risk because systematic risk cannot be avoided by Diversification.