Exam 4: Applying the Time Value of Money to Security Valuation

You have a choice between receiving $500 now and $530 in six months' time.Current interest rates are 10% p.a.(simple interest).As a rational investor,which option would you choose and why?

Company A and Company B have identical expected earnings potential but Company B has a higher price-earnings ratio.This discrepancy:

In general,a downward-sloping term structure implies that investors expect future short-term interest rates to:

The promised yield on a non-interest-bearing security with one year to maturity,a face value of $100,a 20% chance of default and an expected market rate of return of 10%,is:

As debtholders rank ahead of shareholders it is expected that the required rate of return on debt will be less than the required rate of return on shares.

The difference between the opportunity cost of capital for a risky security and a risk-free security is referred to as the:

Interest rate risk refers to:

According to the expectations theory of the term structure of interest,if the 1-year bond rate today is 6% p.a.and the 3-year bond rate today is 7.5% p.a. ,what is the 2-year bond rate next year?

Given that dividends on a share are expected to remain indefinitely at $0.50 p.a.and that the required rate of return for the level of risk on such a share is 10% and the interest rate is 6%,the correct price for this share is:

What is the market value of a bond that has a required rate of return of 10% p.a.and pays $50 p.a.with only two years remaining to maturity,if the redemption value is $1000 and the initial market value of the bond was $850 when it was first issued eight years ago?

At what interest rate would investing $1000 in a bank leave you as well off as receiving $1078 in 12 months' time?

How much would you be prepared to pay for a share in two years' time that pays a 15c dividend each year and is currently priced at $2? Assume the required rate of return is 7.5% p.a.

Downward-sloping yield curves are inconsistent with the liquidity premium theory.

Assume the latest dividend per share,paid recently,for ACD Ltd is 90 cents and that the required rate of return on these shares is 15% p.a.If the current share price is $19.80,the expected growth rate on these shares is:

Two common methods of share valuation are dividend growth models and the _________________ ratio.

The yield to maturity on a 1-year bond purchased for $980 with a maturity value of $1100 is:

The ________________ of interest rates is the relationship between the interest rates and time to maturity.

A decision to buy an asset implies a simultaneous decision to forego:

You have just purchased a government bond for $1100 that promises to pay $100 p.a.over the next five years.The market price of the bond has just increased to $1200.A likely reason for this is:

Given that dividends on a share are expected to remain indefinitely at $1 p.a.and that the required rate of return for the level of risk on such a share is 15%,the correct price for this share: