Lecture 2 - Bond valuation

What are bonds in the context of financial management?

• Shares in a company's equity

• Loans from investors to the issuer that must be repaid

• An exchange of goods and services

• A type of digital currency

Why might a company choose to issue bonds?

• To give away ownership of the company

• To raise funds without diluting ownership

• To decrease its market value

• To avoid paying regular interest payments

How does an investor make a profit from a zero coupon bond?

• From the regular interest payments made by the issuer

• From the difference between the purchase price and the face value at maturity

• From the coupon payments paid out by the issuer

• From the increase in the bond's market price

When does an investor receive payment from a zero coupon bond?

• Regularly throughout the bond's life

• Only at the bond's maturity

• None. This a donation to the company

• Whenever the bond's price increases

For coupon bonds, what determines the amount of each coupon payment?

• The bond's maturity date

• The bond's face value

• The bond's coupon rate

• The bond's market value

Why might a company choose to issue convertible bonds instead of a common stock?

• When the company wants to avoid diluting existing shareholders

• When the company wants to offer higher dividends to its shareholders

• When the company wishes to increase its debt-to equity ratio signficantly

• When the company is looking to reduce its market capitalisation

How is the coupon rate of a bond expressed?

• As a daily percentage rate

• As an annual percentage rate

• As a monthly percentage rate

• As a weekly percentage rate

How does credit risk affect a bond's cash flow?

• It increases the bond's cash flows

• It makes the bond's cash flow uncertain

• It does not affect the bond's cash flow

• It reduces the bond's cash flow

Why is the yield to maturity (YTM) regarded as a significant measurement in bond investment?

• It assists in evaluating the annual report of the bond issuer

• It facilitates the analysis of the bond issuer's market share

• It helps investors to estimate the total return expected if the bond is held until maturity

• It allows investors to gauge the volatility of the bond's market price.

What is the primary purpose of a bond rating?

• To determine the bond's market value

• To evaluate the bond issuer's ability to meet financial obligations

• To set the bond's coupon rate

• To assign a maturity date to the bond