Assume That You Are Considering the Purchase of a $1,000

question 27

Multiple Choice

Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years to go before it matures.If you buy this bond,you expect to hold it for 5 years and then to sell it in the market.You (and other investors) currently require a simple annual rate of 16 percent,but you expect the market to require a rate of only 12 percent when you sell the bond due to a general decline in interest rates.How much should you be willing to pay for this bond?

• A) $842.00
• B) $1,115.81
• C) $1,359.26
• D) $966.99
• E) $731.85

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Definitions:

Retention Ratio

A financial metric indicating the percentage of a company's earnings that is retained and not paid out as dividends; it is also known as the plowback ratio.

Dividends Paid

The total amount of money distributed by a corporation to its shareholders from its earnings.

Total Equity

The total value of a company’s assets minus its liabilities, representing the ownership interest of the shareholders.

Net Income

The total amount of profit a company earns after taxes and all expenses have been deducted from revenues, commonly referred to as the bottom line.