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Financial Management - Assume that you went to Las Vegas and hit the jackpot for $5 million.

1) John and Karen are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is most correct?

A)Because both John and Karen will receive the same cash flows if they each buy a bond, they both must assign the same value to the bond.
B)John may determine a different value for a bond than Karen because each investor may have a different level of risk aversion, and hence a different required return.
C)If John decides to buy the bond, then Karen will also decide to buy the bond, if markets are efficient.
D)John and Karen will only buy the bonds if the bonds are rated BBB or above.

2) Assume that you went to Las Vegas and hit the jackpot for $5 million. Further assume that you were offered a choice to receive the $5 million today, or receive it in two years. According to one of the axioms of finance, which would you take?

A)The $5 million today because it would be worth more than if you would receive it in two years.
B)The $5 million in two years because you would be afraid of spending it all right away.
C)You would be indifferent as to when you would receive the $5 million.
D)The $5 million in two years because it would be worth more than if you would receive it today.

3)29)If Matt deposits $1,000 into a bank account that pays 8% interest compounded semi-annually, what will the account balance be in five years?
A)1,400 B) 1,555 C) 1,480 D) 1,469

4) SWH Corporation issued bonds on January 1, 2004. The bonds had a coupon rate of 4.5% annually, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2014. What is the intrinsic value (to the nearest dollar) of an SWH Corporation bond on January 1, 2006 to an investor with a required return of 6%?

A)$956 B) $906 C) $1,188 D) $877

Solution Preview

Financial Management

1) John and Karen are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is most correct?

A)Because both John and Karen will receive the same cash flows if they each buy a bond, they both must assign the same value to the bond.
B)John may determine a different value for a bond than Karen because each investor may have a different level of risk ...

Solution Summary

This solution is comprised of a detailed explanation to answer the financial management questions.

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