Question

A firm wants to issue new bonds for some much-needed expansion projects. The firm currently has bonds on the market that are priced at par value. The current bonds have a face value of $1000. Which of the following statements is true ? Group of answer choices

A. Both bonds have the same required return therefore the same yield to maturity (YTM)

. The existing bonds have higher YTM than the new bonds

C. The existing bonds have lower YTM than the new bonds.

D. The existing bonds have lower coupon than the YTM

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%.

Group of answer choices

A. $919

B. $486

C. $946

D. $785

Which of the following statements is false?

Group of answer choices

A. Transfer of ownership at the corporate level is easy

B. Separation of ownership and management can be an advantage

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

D. Income of a sole proprietorship is taxed at the personal level

Which of the following statements is true ?

Group of answer choices

A. The present value of an annuity represents an infinite series of equal payments

B. If you earn compound interest then you earn interest on the original amount of principal and interest received

C. The present value of a perpetuity represents a finite series of equal payments

D. If you earn simple interest then you earn interest on the original amount of principal and interest received

Answer 1

1. Option A is correct

Both the bonds are priced at par value and trading at par. hence both will have same YTM

2. Use PV function to find the Price of the bond.

=PV(rate,nper,pmt,fv,type)

rate=9%/2=4.5%

nper=2*15=30

pmt=(8%*1000)/2=80/2=40

fv=1000

=PV(4.5%,30,40,1000,0)

PV=$918.56, approx $919

Option A is correct

3. Shareholder's are not liabile for any debt outstanding. Shareholder's are only limited by shares.

Option C is False

4. Option B is correct

The compound interest is that you earn interest on the original amount of principal and interest received.