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Understanding Bond Valuation

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Questions and Answers

What is the primary purpose of bond valuation?

To determine the theoretical fair value of a bond (correct)
To determine the maturity date of a bond
To determine the face value of a bond
To determine the coupon rate of a bond

What is the coupon rate of a bond?

The fixed return that an investor earns periodically until the bond matures (correct)
The market price of a bond
The rate of return required for a bond investment to be worthwhile
The face value of a bond

What happens when a bond matures?

The bond issuer repays the investor the face value of the bond (correct)
The bond is converted into a stock
The bond is redeemed at its current market price
The bond issuer repays the investor the coupon rate

What is the typical face value of a corporate bond?

$1,000 (C) Signup and view all the answers

Why might an investor purchase a bond at a price below its face value?

Because the interest rate in the environment is high (A) Signup and view all the answers

What is the main benefit of a bond to an investor?

A steady income stream in the form of coupon payments (C) Signup and view all the answers

What happens to the value of a bond when interest rates increase?

It decreases (A) Signup and view all the answers

What is the purpose of bond valuation?

To determine the intrinsic value of the bond (B) Signup and view all the answers

What is the yield to maturity used for in bond valuation?

To determine the present value of the bond's expected future coupon payments (C) Signup and view all the answers

What is compounding in the context of time value of money?

The process of determining the future value of an investment made today (B) Signup and view all the answers

What is the purpose of discounting in the context of time value of money?

To determine the present value of money to be received in the future (D) Signup and view all the answers

What is the total number of compounding or discounting periods in the holding period referred to as?

Periods (C) Signup and view all the answers

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