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Finance questions

Financequestions

Financequestions

Question1

a)

Abond is a debt instrument issued by either governments orcorporations for a defined span of time and at a fixed or variableinterest rate.

Treasurybonds are bonds that take more than 10 years to reach maturity.

Corporatebond are issued by corporate entities

Municipalbonds are allotted by municipalities and states, whereas foreignbonds are issued by a foreign organization in a domestic market inthe country’s currency.

b)

ParValue is the amount that appears on the bond certificate

Maturitydate is the date when the bond matures and the investor gets the facevalue of the bond.

CouponPayments are annual or semi-annual payment intervals when the bondissuer makes interest payments.

CouponInterest Rate it is the rate at which the bond issuer pays the facevalue

c)

ZeroCoupon Bonds are bonds that do not provide consistent couponpayments however, they are issued at a discount with their marketprice converging to par value at maturity.

ConvertibleBonds are bonds that have the option of converting their debts intoequity at some point.

Warrantis, “a derivative that gives the investor the right to buy or sella security, equity, at a particular price before expiration”[ CITATION Gil14 l 1033 ].

PremiumBonds are bonds that are issued or trading at an amount higher thanthe par value, whereas discount Bonds are issued or trading at a lessamount than their par value

d)

Bond’sCurrent Yield is the investment’s annual income apportioned on thecurrent security’s price.

Yieldto Maturity (YTM) is the amount of expected returns of a bond,assuming it is held until it matures.

Yieldto Call (YTC) is the bond’s yield if an investor buys and holds thesecurity pending the call date.

e)

CommonStock and Preferred Stock are classes of ownership in a companyhowever, preferred stock has a higher claim over the firm’s assetsand earnings compared to common stockholders, in case of liquidation.

f)

RequiredRate of Return (RRR) is the least annual percentage gained by aninvestment project that induces investors to invest in a particularproject or security.

ExpectedRate of Return (ERR) is the anticipated return on an investmentproject.

Actualor Realized Rate of Return is the real annual return on an investmentproject after adjustments such as inflation.

ExpectedTotal Return is the actual rate of return that is earned on aninvestment project after a given period of time.

g)

Capitalgains yield represents an increase in the security’s price whereasdividend yield exemplifies the firm’s annual dividend payoutrelative to share price.

h)

Capitalbudgeting is an evaluation process determining the potential expensesand investments that a firm could venture.

NetPresent Value (NPV) method takes the variance between the presentvalues of business cash flows and the cash out flows on the otherhand, Internal Rate of Return (IRR) technique utilizes a discountedrate, making the NPV of all cash flows equivalent to zero.

i)

Independentprojects are projects whose acceptance or rejection in a firm doesnot affect other projects, whereas mutually exclusive projects arethe ones whose acceptance has an impact on the acceptance of otherprojects.

Question2

“Explainwhy the NPV of a relatively long-term project, defined as one forwhich a high percentage of its cash flows are expected in the distantfuture, is more sensitive to changes in the cost of capital than isthe NPV of a short-term project?”

Thereason behind is because the discounting process of future cash flowstends to compound the interest rate over a specified time. Therefore,a rise in the discounting rate will have a larger impact on the cashflows in a period of, for instance, 5 years compared to 1 year.

Reference

Gilbertson, C. B., Lehman, M. W., &amp Passalacqua, D. (2014). Century 21 Accounting: Advanced. Stamford: Cengage Learning.