D364 Financial Management - Set 1 - Part 3

Correct Answer: Zero-coupon bond

A zero-coupon bond does not pay periodic interest and is sold at a discount to its face value. The investor receives the face value at maturity, which includes the interest.

Correct Answer: Coupon payment / Market price

The current yield of a bond is calculated by dividing the annual coupon payment by the bonds current market price. It provides an estimate of the bonds return based on its price.

Correct Answer: A companys financial leverage

The debt-to-equity ratio measures a companys leverage by comparing its total liabilities to its shareholders' equity. It reflects how much debt a company is using to finance its assets.

Correct Answer: 9.6%

Using CAPM, the expected return is calculated as Risk-Free Rate + Beta (Market Return - Risk-Free Rate). In this case, 3% + 1.2 (8% - 3%) = 9.6%.

Correct Answer: It reduces unsystematic risk

Diversification reduces unsystematic risk, which is specific to individual investments. It does not eliminate market risk or guarantee returns but helps manage overall portfolio risk.

Correct Answer: At a discount

When the market interest rate is higher than the bonds coupon rate, the bond will be priced at a discount because its interest payments are less attractive than newly issued bonds.

Correct Answer: To reduce or eliminate risk

Hedging is a risk management strategy used to reduce or eliminate exposure to adverse price movements in assets. It is not aimed at increasing profits or leverage but rather protecting against losses.

Correct Answer: Common Stock

Common stockholders have a residual claim, meaning they are last in line to receive assets in the event of liquidation, after all debt and preferred stock obligations are met.

Correct Answer: The combination of debt and equity used to finance a company

Capital structure refers to the combination of debt and equity that a company uses to finance its operations and growth. It does not include operating expenses or solely assets and liabilities.

Correct Answer: 4 years

The payback period is calculated by dividing the initial investment by the annual cash inflows. In this case, $200,000 / $50,000 = 4 years.