İŞLETME FİNANSI I

A Bond is a security that contractually obligates the issuer to make fixed coupon payments at fixed intervals plus it also pays out the face value of the bond at maturity together with the last coupon payment. The correct answer is A.

Even though coupon interest rates are fixed, bond values still fluctuate with the changes in market interest rates. Bonds exhibit interest rate risk, which is the risk that the return from the bond will change according to changes in the interest rates.

If market interest rates increase, the values of bonds decline.

Bonds with longer maturity have a higher sensitivity to changes in market interest rates and have higher interest rate risk. In this problem, 15-year bond has the longest maturity. Thus, it is the most sensitive to changes in the market interest rates

Bonds carry reinvestment rate risk, which is the risk that cash flows received may not be able to be reinvested at the expected rates if market rates have changed.

Coupon Payments, Price Changes and Initial Price do all affects the rate of return of a bond.

Real interest rate includes the expected inflation; nominal interest rate does not.

If the market rate of interest and the bond’s yield-to-maturity does not change over this period, then the bond’s rate of return will be equal to its yield-to-maturity. If there is a decline in interest rates, the rate of return will be higher than the bond’s yield-to-maturity as in the case of the example. If there is an increase in interest rates, the rate of return will be less than the bond’s yield to maturity because of the decline in the value of the bond with the increase in interest rates.

for the given statement the nominal interest rate should be:

(1.05 x 1.15) - 1 = %20.75

The stocks that pay no or very low dividends and still have prices that increase are called growth stocks. Rapidly growing companies require a lot of investments, growth stock companies usually are using their profits and cash flows to support these investments and as a result do not have resources to pay dividends. Therefore, the correct answer is Growth Stocks.

A bond is a type of debt security which means that it represents borrowing by the firm. However, rather than getting a loan from a bank or other financial institution, the bond allows the funds to be obtained from a large number of parties under common standardized terms. Bonds can usually only be issued by governments or large, well known firms. Bonds obligate the issuer to make specified payments to the bondholder on specified dates over a specified time period (maturity). These specified payments are in the form of coupon payments and par value. Par value (also called face value or nominal value) indicates how much the issuer will repay to the bondholder at maturity. Par value of Turkish bonds in general is T100 whereas US bonds typically have a par value of $1.000. The coupon rate of a bond determines the coupon (interest) payments. Coupon payments are the periodic payments received by bondholders until the bond matures. The annual coupon payment is equal to the coupon rate times the par value of the bond. Therefore, the correct option is B.

Yield-to-maturity is the average rate of return that will be earned on a bond if it is bought at the market price and held until it matures. It is the discount rate that makes the present value of its future cash flows equal to its market price. It is like an internal rate of return of a bond. Therefore, the correct option is C.

Yield-to-maturity has two components. The first one is the return you get from coupon payments, called current yield (annual coupon/current bond price). The second one is the return you get from the change in the value of bond, called capital gains yield. Therefore, the correct option is A.

The bond’s price may change over time even if there are no changes in interest rates. At maturity, the value of the bond is equal to its par value. Assuming that there is no change in market interest rates, as we approach to maturity, the value of the bond approaches to its par value. Therefore, the correct option is A.

Yield curve plots the relationship between bond yields and maturity. Therefore, the correct option is D.

Corporations can not print money and it is possible to default if they do not make their payments on time. They hold default risk, i.e., the risk that a bond issuer may default on its obligations. In order to invest in the bonds of corporations with higher default risk, investors require higher returns than the yields on government bonds. The higher the default risk, the higher is the yield on the bonds. The difference between the promised yield on the corporate bond and the yield on government bond with the same coupon rate and maturity is called default premium. The higher the probability of being defaulted, the higher default premium will be. Therefore, the correct option is A.

According to Standard & Poors, AAA rated bonds are the safest, have lowest default risk whereas those that are rated BB or lower are expected to have high default risk and considered as junk bond. Junk bonds are required to provide very high yield in order to attract investors to invest in these bonds. Therefore, the correct option is A.

Stock ownership provides rights to vote, to receive dividends, to share in the residual in case of dissolution and a preemptive right to prevent undesired reduction of ownership share. Therefore, the correct option is D.

The first time the company offers its shares to the public is called initial public offering (IPO). Therefore, the correct option is B.

The cash flows that are associated with stocks are the dividends that the firm may pay and price that the investor receives when she sells the shares. Dividends are paid only after interest and other required payments are made to creditors and they are not fixed amounts; Dividends depend on the profitability, growth prospects, investment requirements and payout decisions of the company. As a result, their timing and quantities are uncertain and they are more risky than debt securities. In order to compensate for this greater risk, they need to offer greater expected returns in order to make them attractive to investors. Therefore, the correct option is A.