Capital Raising and Securities Evaluation

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What happens to the bond price when the market interest rate rises above the coupon rate?

The bond price becomes more volatile
The bond price remains the same
The bond price rises
The bond price falls (correct)

What is the present value of the bond when the market interest rate is 9%?

£93.86
£106.71
£109.00
£100.09 (correct)

What is the relationship between the coupon rate and the market interest rate when the bond is priced at a premium to its par value?

There is no relationship between the two
Coupon rate is greater than the market interest rate (correct)
Coupon rate is less than the market interest rate
Coupon rate is equal to the market interest rate

What is the effect of an increase in interest rates on bond prices?

Bond prices fall (B) Signup and view all the answers

What is the characteristic of bonds with longer maturities in terms of interest rate risk?

They are more affected by changes in interest rates (B) Signup and view all the answers

What is the impact of a decrease in interest rates on the bond price?

The bond price rises (D) Signup and view all the answers

What is the present value of the bond when the market interest rate is 10%?

£93.86 (A), £93.86 (D) Signup and view all the answers

What is the effect of changes in interest rates on bonds with lower coupons?

They are more affected and their prices fluctuate more (B) Signup and view all the answers

What is the yield to redemption of a bond?

The constant rate of interest that discounts the bond’s future payments to its current price (A) Signup and view all the answers

What is the formula to solve for Y when t > 2?

Trial and error (A) Signup and view all the answers

What is the value of x in the equation 106x2 + 6x - 98 = 0?

0.93364 (A) Signup and view all the answers

What is the yield of a 6% bond, currently priced at 98, and due for redemption in 2 years?

7.108% (B) Signup and view all the answers

What is the relationship between the yield and the coupon rate of a bond priced at a discount?

Y > coupon rate (A) Signup and view all the answers

What is the formula to solve a quadratic equation ax2 + bx + c = 0?

x = -b ± √(b2 - 4ac) / 2a (A) Signup and view all the answers

What is the face value of the 10% bond in the example?

£100 (C) Signup and view all the answers

What is the primary purpose of an Initial Public Offering (IPO)?

To raise capital for the company's growth (A) Signup and view all the answers

What is the face value of a typical UK bond?

£100 (B) Signup and view all the answers

What is the purpose of hiring advisors in an IPO?

To facilitate the IPO process (D) Signup and view all the answers

What is the coupon rate of a bond?

The percentage of the face value that the bond pays in interest each year (A) Signup and view all the answers

What is the purpose of listing on a stock exchange?

To raise capital for the company's growth (C) Signup and view all the answers

What is the maturity date of a bond?

The date when the issuer repays the face value (C) Signup and view all the answers

What is the coupon of a bond?

The amount of interest paid each year (A) Signup and view all the answers

What is the purpose of venture capital?

To provide financing for startups (C) Signup and view all the answers

What is the PV of bond's future cash flows when the interest rate is 11%?

96.3 (B) Signup and view all the answers

What is the approximate yield of a 10% bond selling at 95?

11.3374% (C) Signup and view all the answers

What is the effective yield of a bond with a nominal yield of 11.3374%?

11.659% (C) Signup and view all the answers

What is the interest yield of a gilt price?

Annual coupon as a percentage of current price (C) Signup and view all the answers

What is the classification of a gilt price with a maturity of 7 years?

Medium (A) Signup and view all the answers

What is the formula for calculating the PV of bond's future cash flows?

P = 10 x (1 - 1/(1 + Y)^5) + 10 x (1 + Y)^(-5) (D) Signup and view all the answers

What is the relationship between the nominal yield and the effective yield?

Nominal yield is the annualized version of effective yield (B) Signup and view all the answers

What is the unit of measurement for the interest yield of a gilt price?

Percentage (D) Signup and view all the answers

What is the yield of the bond in the given example?

11.659% (B) Signup and view all the answers

Which of the following is NOT a feature of a bond?

Market value (A) Signup and view all the answers

What is the formula to calculate the present value of a bond?

P = ∑ [C / (1 + r)^t] + F / (1 + r)^n (D) Signup and view all the answers

What is the name of the model used to value shares?

Dividend discount model (C) Signup and view all the answers

What is the formula to calculate the intrinsic value of a share?

P0 = Σ [dt / (1 + r)^t] (D) Signup and view all the answers

What is the name of the constant growth model used to value shares?

Gordon Growth Model (D) Signup and view all the answers

What is the formula to calculate the present value of a perpetuity?

PV = d / r (A) Signup and view all the answers

What is the dividend per share of Nevergrow plc?

24p (D) Signup and view all the answers

If a bond has a yield of 11.659%, what is the interest rate that discounts its future payments to its current value?

Effective yield (B) Signup and view all the answers

What is the present value of a share if the dividend per share is expected to be constant and the return required by investors is 10%?

The present value of a perpetuity of the dividend per share (D) Signup and view all the answers

If a bond pays a coupon more than once a year, what is the relationship between its effective yield and its nominal yield?

The effective yield is greater than the nominal yield (B) Signup and view all the answers

What is the value of a bond that sells at a discount to its par value?

The present value of the bond's future cash flows (A) Signup and view all the answers

What is the formula for calculating the present value of a perpetuity of d?

d / r (B) Signup and view all the answers

What is the characteristic of bonds with longer maturities in terms of interest rate risk?

They have higher interest rate risk (A) Signup and view all the answers

What is the effect of an increase in interest rates on the bond price?

The bond price decreases (C) Signup and view all the answers

What is the purpose of the dividend discount model in valuing shares?

To estimate the intrinsic value of the share (D) Signup and view all the answers

What is the primary reason companies raise capital?

To fund growth, pay off debts, or finance mergers and acquisitions (C) Signup and view all the answers

What is the process called when a firm sells its shares to new investors?

Initial Public Offering (IPO) (A) Signup and view all the answers

What is the term for the percentage of the face value that a bond pays in interest each year?

Coupon rate (D) Signup and view all the answers

What type of financing involves selling shares to new investors through a stock exchange?

Listing on a stock market (B) Signup and view all the answers

What is the term for the date when the issuer repays the face value of a bond?

Maturity date (A) Signup and view all the answers

What is the term for a bond issued by a company?

Corporate bond (C) Signup and view all the answers

What is the process of hiring advisors and choosing a method to conduct an IPO called?

IPO process (D) Signup and view all the answers

What is the term for the value of a bond when it is first issued?

Face value (C) Signup and view all the answers

What happens to the bond value when the market interest rate falls below the coupon rate?

The bond value will increase (A) Signup and view all the answers

What is the relationship between bond price and interest rate?

An increase in interest rates decreases bond price (B) Signup and view all the answers

What is the effect of an increase in the maturity period of a bond on its interest rate risk?

The interest rate risk increases (D) Signup and view all the answers

What happens to the bond price when the coupon rate is equal to the market interest rate?

The bond price will be equal to par value (A) Signup and view all the answers

What is the relationship between the coupon rate and the market interest rate when the bond is priced at a discount?

The coupon rate is less than the market interest rate (C) Signup and view all the answers

What happens to the bond price when the market interest rate rises above the coupon rate?

The bond price will decrease (A) Signup and view all the answers

What is the effect of a decrease in interest rates on bonds with longer maturities?

The bond price will increase (D) Signup and view all the answers

What is the effect of an increase in the coupon rate on the bond price?

The bond price will increase (B) Signup and view all the answers

What is the primary factor that affects the price of a bond with a lower coupon?

Changes in market interest rates (D) Signup and view all the answers

What is the yield to redemption of a bond?

The return on the bond if you buy it and hold it until maturity (D) Signup and view all the answers

What is the purpose of solving for Y in the bond pricing equation?

To find the bond's yield to redemption (A) Signup and view all the answers

Why is solving for Y more complex when t > 2?

Because the equation becomes a quadratic equation (C) Signup and view all the answers

What is the relationship between the yield and the coupon rate of a bond priced at a discount?

The yield is greater than the coupon rate (B) Signup and view all the answers

What is the formula to solve a quadratic equation?

X = (-b + sqrt(b^2 - 4ac)) / 2a (C) Signup and view all the answers

What is the result of increasing interest rates on bonds with lower coupons?

The bond price decreases more (C) Signup and view all the answers

What is the purpose of solving for the yield of a bond?

To determine the bond's return on investment (A) Signup and view all the answers

What is the formula to calculate the intrinsic value of a share with constant dividend growth?

𝑃𝑜 = 𝑑1 / (𝑟 - 𝑔) (B) Signup and view all the answers

What will be the price of Evergrow plc's share after 4 years, if the current dividend is 20p, and the dividend growth rate is 6% per year, with an investor required return of 16%?

₤267.6 (D) Signup and view all the answers

What is the assumption in the constant dividend growth model?

Dividends grow at a constant rate (A) Signup and view all the answers

What is the formula to calculate the price of a share with supernormal dividend growth?

𝑃𝑜 = 𝑑0 / (𝑟 - 𝑔) + 𝑑0 * (1 + 𝑠) / (𝑟 - 𝑔) (A) Signup and view all the answers

What is the condition for the constant dividend growth model to be valid?

𝑔 < 𝑟 (A) Signup and view all the answers

What is the price of Supergrow plc's share, if the current dividend is 10p, and the dividend growth rate is 35% per year for 5 years, followed by 8% forever, with an investor required return of 20%?

₤234.4 (B) Signup and view all the answers

What is the difference between supernormal dividend growth and constant dividend growth?

Constant dividend growth is a special case of supernormal dividend growth (D) Signup and view all the answers

What is the general formula for valuing shares?

𝑃𝑜 = 𝑑0 * (1 + 𝑔) / (𝑟 + 𝑔) (D) Signup and view all the answers

Capital Raising and Securities Evaluation

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Questions and Answers

What happens to the bond price when the market interest rate rises above the coupon rate?

What is the present value of the bond when the market interest rate is 9%?

What is the relationship between the coupon rate and the market interest rate when the bond is priced at a premium to its par value?

What is the effect of an increase in interest rates on bond prices?

What is the characteristic of bonds with longer maturities in terms of interest rate risk?

What is the impact of a decrease in interest rates on the bond price?

What is the present value of the bond when the market interest rate is 10%?

What is the effect of changes in interest rates on bonds with lower coupons?

What is the yield to redemption of a bond?

What is the formula to solve for Y when t > 2?

What is the value of x in the equation 106x2 + 6x - 98 = 0?

What is the yield of a 6% bond, currently priced at 98, and due for redemption in 2 years?

What is the relationship between the yield and the coupon rate of a bond priced at a discount?

What is the formula to solve a quadratic equation ax2 + bx + c = 0?

What is the face value of the 10% bond in the example?

What is the primary purpose of an Initial Public Offering (IPO)?

What is the face value of a typical UK bond?

What is the purpose of hiring advisors in an IPO?

What is the coupon rate of a bond?

What is the purpose of listing on a stock exchange?

What is the maturity date of a bond?

What is the coupon of a bond?

What is the purpose of venture capital?

What is the PV of bond's future cash flows when the interest rate is 11%?

What is the approximate yield of a 10% bond selling at 95?

What is the effective yield of a bond with a nominal yield of 11.3374%?

What is the interest yield of a gilt price?

What is the classification of a gilt price with a maturity of 7 years?

What is the formula for calculating the PV of bond's future cash flows?

What is the relationship between the nominal yield and the effective yield?

What is the unit of measurement for the interest yield of a gilt price?

What is the yield of the bond in the given example?

Which of the following is NOT a feature of a bond?

What is the formula to calculate the present value of a bond?

What is the name of the model used to value shares?

What is the formula to calculate the intrinsic value of a share?

What is the name of the constant growth model used to value shares?

What is the formula to calculate the present value of a perpetuity?

What is the dividend per share of Nevergrow plc?

If a bond has a yield of 11.659%, what is the interest rate that discounts its future payments to its current value?

What is the present value of a share if the dividend per share is expected to be constant and the return required by investors is 10%?

If a bond pays a coupon more than once a year, what is the relationship between its effective yield and its nominal yield?

What is the value of a bond that sells at a discount to its par value?

What is the formula for calculating the present value of a perpetuity of d?

What is the characteristic of bonds with longer maturities in terms of interest rate risk?

What is the effect of an increase in interest rates on the bond price?

What is the purpose of the dividend discount model in valuing shares?

What is the primary reason companies raise capital?

What is the process called when a firm sells its shares to new investors?

What is the term for the percentage of the face value that a bond pays in interest each year?

What type of financing involves selling shares to new investors through a stock exchange?

What is the term for the date when the issuer repays the face value of a bond?

What is the term for a bond issued by a company?

What is the process of hiring advisors and choosing a method to conduct an IPO called?

What is the term for the value of a bond when it is first issued?

What happens to the bond value when the market interest rate falls below the coupon rate?

What is the relationship between bond price and interest rate?

What is the effect of an increase in the maturity period of a bond on its interest rate risk?

What happens to the bond price when the coupon rate is equal to the market interest rate?

What is the relationship between the coupon rate and the market interest rate when the bond is priced at a discount?

What happens to the bond price when the market interest rate rises above the coupon rate?

What is the effect of a decrease in interest rates on bonds with longer maturities?

What is the effect of an increase in the coupon rate on the bond price?

What is the primary factor that affects the price of a bond with a lower coupon?

What is the yield to redemption of a bond?

What is the purpose of solving for Y in the bond pricing equation?

Why is solving for Y more complex when t > 2?

What is the relationship between the yield and the coupon rate of a bond priced at a discount?

What is the formula to solve a quadratic equation?

What is the result of increasing interest rates on bonds with lower coupons?

What is the purpose of solving for the yield of a bond?

What is the formula to calculate the intrinsic value of a share with constant dividend growth?

What will be the price of Evergrow plc's share after 4 years, if the current dividend is 20p, and the dividend growth rate is 6% per year, with an investor required return of 16%?

What is the assumption in the constant dividend growth model?

What is the formula to calculate the price of a share with supernormal dividend growth?

What is the condition for the constant dividend growth model to be valid?