Question

MULTIPLE CHOICES

(10): The answer is option “a” – when the interest rate rises the present value of the payments to be received by the bondholder falls and bond prices fall.

Explanation: Changes in interest rates affect the present value of the coupon payments but not the payment themselves. There exists an inverse relationship between interest rates and bond prices.

(11): The answer is option “b” – employee motivation.

Explanation: This is because employee motivation is not a part of accountability and supervision. Elements of corporate governance are good board practices, well-defined shareholders rights, board commitment, transparent disclosure etc.

(12): The answer is option “d” - \$216

Explanation: D1 = \$4*(1+8%) = 4.32

Thus current price = D1/r-g = 4.32/10%-8% = 4.32/2% = \$216

(13): The answer is option “a” – Intrinsic value is just the present value of the dividend payments anticipated by the investor in the stock.

Explanation: This is as per the dividend discount model and as per this model the intrinsic value of the stock = sum of all the present values of future expected dividends.

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