Chapter 6: Valuation of Bonds and Stocks

Question 1

It is a security obligating the issuer to make payments to the bondholder over a period of time

Answer 1

Bond

Question 2

Individual or a firm who buys the bond

Answer 2

Bondholder

Question 3

Sometimes called the principal or face value of the bond

Answer 3

Par Value

Question 4

It is the interest rate stated in the bond certificate

Answer 4

Coupon Rate

Question 5

Actual rate received by thd bondholder and is sometimes referred to as the discount rate

Answer 5

Required rate of return

Question 6

Final date on which the repayment of the bond principal is due

Answer 6

Maturity Date

Question 7

Process of determining the amount of the security at the time bond is issued

Answer 7

Valuation of Bonds

Question 8

Selling price of the bonf is less than its par value

Answer 8

Bond Discount

Question 9

Selling price of the bond is greater than its par value

Answer 9

Bond Premium

Question 10

The value of the bond changes over time

Answer 10

Required rate of return and bond price

Question 11

Another factor that affects the value of the bonds

Answer 11

Maturity Date

Question 12

Steps to compute the value of the bond

Answer 12

1. Compute the interest payment based on 6 months.
2. Determine the n periods by multiplying the number of years until the maturity date by 2.
3. Divide the required rate of return by 2.

Question 13

It is the expected rate of return of the bond if it is held by the bondholder from the time purchase until the date of maturity

Answer 13

Yield to maturity

Question 14

It is a provision entitling the issuer to the right to call the bonds before the maturity date

Answer 14

Yield to call

Question 15

Current ratio of the interest received per year divided by the current market price of the bond

Answer 15

Current Yield

Question 16

Measured by a shareholder as the present value of an expected stream of future dividends in addition to the present value of the future price of stock at the time of sale

Answer 16

Value of Common Stock

Question 17

Three kinds of growth

Answer 17

1. No Growth
2. Constant Growth
3. Variable Growth

Question 18

This valuation assumes that the dividends are not growing at all

Answer 18

No Growth

Question 19

A certain percentage of the net income is reinvested in the firm and it is expected that dividends will grow at a constant rate

Answer 19

Constant Growth

Question 20

It is used if the firm is expected to grow at a rapid rate for a few years

Answer 20

Variable Growth Model

Question 21

It is similar to valuing a bond

Answer 21

Valuation of Preferred Stocks

Question 22

It is the rate os estimated income derived from investing a stock

Answer 22

Expected Rate of Return

Question 23

Other Valuation Techniques

Answer 23

1. Price/Earnings Ratio
2. Book-Value Ratio
3. Liquidation Value Per Share

Question 24

Reflects the amount that an investor is willing to pay for each peso earning

Answer 24

Price/Earnings Ratio

Question 25

The price of the share ia determined by dividing the total stockholders equitt less the preferred shares by the common shares outstanding

Answer 25

Book-Value Ratio

Question 26

It is the expected liquidating value of all the assets less the liabilities and the preferred stockholders equity divided by the common shares outstanding

Answer 26

Liquidation Value Per Share

Question 27

It is used as a substitute of the discounted dividend model to determine a firm’s value, especially if the firm has no history of dividend declarations

Answer 27

Corporate Valuation Model