A disadvantage of junk bonds is that they do not provide a coupon payment, and o

Question

A disadvantage of junk bonds is that they do not provide a coupon payment, and only make a par value payment at maturity.

true or false

Of the following different types of securities, which is typically considered most risky?

Long term government bonds  Common stocks of large companies U.S. Treasury bills

What is the value of a bond that has a par value of $1,000, a coupon of $80 (annually), and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the nearest $10?

320, 500, 810, 790

A disadvantage of junk bonds is that they do not provide a coupon payment, and only make a par value payment at maturity.

true or false

Of the following different types of securities, which is typically considered most risky?

Long term corporate bonds.

Long term government bonds  Common stocks of large companies U.S. Treasury bills

What is the value of a bond that has a par value of $1,000, a coupon of $80 (annually), and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the nearest $10?

320, 500, 810, 790

Explanation / Answer

1. False. There are many disadvantages of junk bonds, however some of them pay coupon and some are zero coupon. Not paying coupon is not by itself a disadvantage as other factors such as credit quality of the issuer, illiquidity, etc

2. Common stocks of large companies are the most risky among the 3 as there is equity risk, unlike the other 3 securities.

3. Bond value can be calculated in Excel as =PV(11%,11,-80,-1000). This is equal to $ 813.80, or rounding off to the nearest $10, this will be $ 810.

Hope this helped ! Let me know in case of any queries.

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