Reference no: EM133060497

1. "Since Prices and yields on a corporate bond move in the opposite direction because the selling price in dollars must be lower and lower as the yield in percentage gets higher and higher." Would you agree/disagree with this statement? Explain by using a single example to demonstrate this seemingly "inverse relationship" about bonds' investing. Be brief, but inclusive enough.

2. A $1,000 face value corporate bond paying 10% is due to expire in 10 years time. The bond is currently selling for $1,064. Your colleague, who has an opportunity cost of 9% yield, is interested in investing in this bond and is seeking advice from you as follows"

1. Your colleague wants to know the current yield on the bond

What is it and why she wants to know this?

2. Your colleague wants to know the yield on the bond over the 10-year period

What is it and why does your colleague want to know this?

3. In dollar terms and rounding to the nearest dollar, what is the maximum price your colleague is willing to pay?

4. Would she buy the bond? Why?

3. Suppose you have a municipal bond paying 6% tax-free coupon rate and you are interested in purchasing a taxable coupon rated corporate bond paying 7.75% which bond should you choose so that you would earn the highest after tax cash flow assuming your marginal tax rate is 30%?

a. Invest in the municipal bond

b. Invest in the corporate bond

c. both bonds are equal in yields

d. insufficient information given

4. Normally the coupon rates stated on new bonds

a. do not change over the life of the bond issue

b. are set equal to the market rate plus an inflation premium

c. float with changes in the prime rate

d. are set just over the prevailing prime rate

5. A Zero-coupon or discount bond is a bond that:

a. is a floating rate bond

b. promises a series of payment over the life of the bond

c. is a convertible bond

d. promise a single payment on a future date

6. United Healthcare common stock is currently selling for $250 and is willing to pay $ 10 in dividends. An investor is seeking a 12% return by way of dividend payment per share. United is expecting a growth rate of 8%. Based on this information the investor would

a. Invest by buying more of the company's common stock

b. Sell the common stock assuming he owns the common stock

c. Hold, that is, neither buy nor sell the asset given that there is no gain nor loss on the investment one way or the other.

d. Insufficient information is given to make a decision

7. Stockholders' equity includes all of the following except:

a. Common stock at par

b. Contributed capital in excess of par

c. Treasury stock

d. Retained Earnings