Study Guide: Unit 5

Question 1

• Identify the characteristics of different types of bonds that impact the bond’s valuation

Answer 1

x

Question 2

• Describe the process to determine the value and yield of a bond

Answer 2

The current yield is the interest it pays annually divided by the current price.
-It tells investors what they will earn from buying a bond and holding it for one year. However, her actual return will depend on how long she holds the bond and the price of the bond when she sells it.

Yield to maturity (YTM) is the anticipated return if she holds the bond until it matures. You need to know the market price, par value, coupon interest rate, and time to maturity to calculate YTM. It’s a complex calculation, but very helpful in determining overall value.

Question 3

• Describe the relationship of both time to maturity and bond prices to interest rates

Answer 3

x

Question 4

Identify the components of debt and equity financing (Time, interest rates, taxes, cost of debt)

Answer 4

x

Question 5

• Summarize the role of debt and equity financing in determining organizational growth

Answer 5

x

Question 6

• Contrast components of debt to equity financing

Answer 6

x

Question 7

• Differentiate between Internal vs. External financing

Answer 7

x

Question 8

• Describe the elements/steps of capital budgeting

Answer 8

x

Question 9

• Describe the ideal criteria for evaluation

Answer 9

x

Question 10

• Describe various evaluation methods (payback period, NPV, IRR)

Answer 10

x