FINANCE 101 Chapter 10: Valuation and Rates of Return- Questions and Answers: Herzing University

Chapter 10 - Valuation and Rates of Return


Chapter 10
Valuation and Rates of Return

True / False Questions



1. The valuation of a financial asset is based on the concept of determining the present value
of future cash flows.
True False



2. The prices of financial assets are based on the expected value of future cash flows, discount
rate, and past dividends.
True False



3. The market determined required rate of return is also called the discount rate.
True False



4. The discount rate depends on the market's perceived level of risk associated with an
individual security.
True False



5. By using different discount rates, the market allocates capital to companies based on their
risk, efficiency, and expected returns.
True False



6. In estimating the market value of a bond, the coupon rate should be used as the discount
rate.
True False



7. Most bonds promise both a periodic return and a lump-sum payment.
True False




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,Chapter 10 - Valuation and Rates of Return



8. A 10-year bond pays 6% annual interest in semi-annual payments. The current market yield
to maturity is 4%. The appropriate interest factors should be in the tables under 2% for 20
periods.
True False



9. The price of a bond is equal to the present value of all future interest payments added to the
present value of the principal.
True False



10. When the interest rate on a bond and its yield to maturity are equal, the bond will trade at
par value.
True False



11. An increase in yield to maturity would be associated with an increase in the price of a
bond.
True False



12. You hold a long-term bond yielding ten percent. If interest rates fall shortly before you
sell the bond, you will sell at a higher price than if interest rates had been constant.
True False



13. When a bond trades at a discount to par, the yield to maturity on the bond will exceed the
required return.
True False



14. The yield to maturity is always equal to the interest payment of a bond.
True False




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,Chapter 10 - Valuation and Rates of Return



15. The appropriate discount rate for bonds is called the yield to maturity.
True False



16. The total required real rate of return is equal to the real rate of return plus the inflation
premium.
True False



17. Historically the real rate of return has been 2 to 3%.
True False



18. The required rate of return is payment demanded by the investor for foregoing present
consumption.
True False



19. The inflation premium is based on past and current inflation levels.
True False



20. The risk-free rate of return is equal to the inflation premium plus the real rate of return.
True False



21. The risk premium is equal to the required yield to maturity minus both the real rate of
return and the inflation premium.
True False



22. The risk premium is primarily concerned with business risk, financial risk, and inflation
risk.
True False




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, Chapter 10 - Valuation and Rates of Return



23. Business risk relates to the inability of the firm to meet its debt obligations as they come
due.
True False



24. Risk premiums are higher for riskier securities, but the risk premium cannot be higher
than the required return.
True False



25. High-risk corporate bonds are as risky as junk bonds.
True False



26. There is a negative correlation between risk and the return the investors demand.
True False



27. When inflation rises, bond prices fall.
True False



28. An increase in inflation will cause a bond's required return to rise.
True False



29. The higher the yield to maturity on a bond, the closer to par the bond will trade.
True False



30. The longer the maturity of a bond, the greater the impact on price to changes in market
interest rates.
True False




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