Financial Management Test 3 | Questions and Correct Solutions Latest Update 2024

Financial Management Test 3 | Questions and Correct Solutions Latest Update 2024 An investment had a nominal return of 10.3 percent last year. If the real return on the investment was only 5.7 percent, what was the inflation rate for the year? - Answer - 4.35% h=[(1+0.103)/(1+0.057)]-1= 0.0435 or 4.35% A bond that pays interest annually yields a rate of return of 6.25 percent. The inflation rate for the same period is 4 percent. What is the real rate of return on this bond? - Answer - 2.16% 1+.0625=(1+r)x(1+.04) r=1.0625/1.04-1= 0.0216 or 2.16% Wine and Roses, Inc., offers a bond with a coupon of 9.50 percent with semiannual payments and a yield to maturity of 10.56 percent. The bonds mature in 8 years. What is the market price of a $1,000 face value bond? - Answer - PV=[(0.095x1000)/2]x1-(1/[1+(0.1056/2)]^2x8)/0.1056/2+1000/[1+0.1056/2]^2 x8=504.69+439.00= 943.69 Lincoln Park Co. has a bond outstanding with a coupon rate of 5.88 percent and semiannual payments. The yield to maturity is 4.5 percent and the bond matures in 23 years. What is the market price if the bond has a par value of $2000? - Answer - PV = $58.80{[1 − (1/1.0225^46)]/0.0225} + $2000/1.0225^46 PV = $2392.95 Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 6.3 percent. The bond sells for $981.73 and matures in 23 years. The par value is $1000. What is the YTM of the bond? - Answer - $981.73 = $31.50{[1 − 1/(1 + r)^46]/r} + $1000/(1 + r)^46 r = 0.032, or 3.2% YTM = 3.2% × 2 = 6.45% A 17-year, semiannual coupon bond sells for $948.63. The bond has a par value of $1000 and a yield to maturity of 7.1 percent. What is the bond's coupon rate? - Answer - $948.63 = C{[1 − 1/(1 + 0.0711/2)^34]/(0.0711/2)} + $1000/(1 + 0.0711/2)^34