Question

4.

Mr. Peanutbutter and Princess Buttercup are both evaluating the same cash flow stream. Princess Buttercup, however, has better outside investment opportunities than Mr. Peanutbutter does and she faces a higher opportunity cost of time as a result. Which of the following will be true?

a) Buttercup and Peanutbutter will have identical willingness to pay for the same cash flow stream

b) Buttercup will be willing to pay more than Peanutbutter for the same cash flow stream

c) Not enough information

d) Peanutbutter will be willing to pay more than Buttercup for the same cash flow stream

5.

If a bond's coupon rate is smaller than the yield to maturity, then

a) Not enough information

b) The face value payment must equal the initial purchase cost

c) The face value payment must exceed the initial purchase cost

d) The face value payment must fall short of the initial purchase cost

6.

Which of the following bonds is different than the others?

a) (-90, 15, 15, 15, 105)

b) (-18, 3, 3, 3, 21)

c) (-45, 7.5, 7.5, 7.5, 50)

d) (-6, 1, 1, 1, 7)

7.

When the central bank raises the interest rates, then generally

a) bond prices decrease and stock prices increase

b) bond prices and stock prices tend to decrease

c) bond prices and stock prices tend to increase

d) bond prices increase and stock prices decrease

8.

Which of the following cash flow streams represent bonds that are trading at par? (select all that apply)

a) (-50, 2, 2, 50)

b) (-100, 5, 5, 105)

c) (-10, 1, 1, 12)

d) (-20, 1, 1, 21)

9.

Which of the following must be true regarding the bond described by the cash flow stream (-100, 5, 105)? (select all that apply)

a) the bond is trading at par

b) it is equivalent to the bond (-50, 3, 53)

c) the coupon rate is 5%

d) the yield on the bond is 5%

10.

If the coupon rate on a bond is greater than the yield on the bond, then which of the following must be true? (select all that apply)

a) The face value exceeds the price of the bond

b) The bond is trading above par

c) The price of the bond exceeds the face value

d) The bond is trading under par

Answer 1

Answer 4

The correct answer is option B i-e Butter cup will be willing to pay more than peanutbutter  for the same cash flow stream .

Reasoning - Basically the cash flow stream is the flow of cash which an entity recieve or disburse in aperiod of time .In this case the cash flow stream is same which they are evaluating But the opportunity cost is higher for the princess Buttercup because she is willing to pay more than the peanut butter .Only then butter cup has better outside investment opportunities than Mr. Peanutbutter .Therefore Option B is correct .

In option a - If both have identical willingess to pay for the same cash flow stream then the opportunity cost of time as a result will be for both and both have same outside investment opportunity which is not in this case .Similarly In option d - if peanut butter will be willing to pay more , he would have the better investemnt opportunities outside which is again not correct as the cash flow stream is same in this case .

Hence option B is correct