FINANCE QUIZ
Instructions:
ANSWER the Multiple Question quiz based off the objectives-: Time Value of Money Explain the mechanics of compounding, and bringing the value of money back to the present; Understand annuities; Determine the future or present value of a sum when there are nonannual compounding periods; Determine the present value of an uneven stream of payments and understand perpetuities.Meaning and Measurement of Risk and Return: Define and measure the expected rate of return of an individual investment; Define and measure the riskiness of an individual investment; Compare the historical relationship between risk and rates of return in the capital markets; Explain how diversifying investments affects the riskiness and expected rate of return of a portfolio or combination of assets; Explain the relationship between an investor’s requiredrate of return on an investment and the riskiness of the investment. Valuation and Characteristics of Bonds: Distinguish between different kinds of bonds; Explain the more popular features of bonds; Define the term value as used for several different purposes; Explain the factors that determine value; Describe the basic process for valuing assets; Estimate the value of a bond; Compute a bond’s expected rate of return and its current yield; Explain three important relationships that exist in bond valuation. Valuation and Characteristics of Stock: Identify the basic characteristics of preferred stock; Value preferred stock; Identify the basic characteristics of common stock; Value common stock; Calculate a stock’s expected rate of return
Solution.
FINANCE QUIZ
Compounding is the process of earning interests on loans or other forms of fixed income instruments where interest itself can earn interest that is, interest previously calculated will be used in calculation of the next interest. In this situation, the more often the interest is calculated the higher the yield is expected out of that instrument (Graham & Smart, 2012). Determining the present value of a payment or a stream of payments that is to be received in the future is known as discounting. This is illustrated by the capacity of a currency to be of more value today than it would be tomorrow given its capacity to earn interest. It figures out how much future payments are worth today (Siegel, 2007).
An annuity is the contract between an individual and the insurance company, in which the individual makes lump sum payment or a series of payments and in return obtains regular disbursements beginning either immediately or at some point in the future. Perpetuity is a constant stream of cash flows with no end (Graham & Smart, 2012). Risk is the chance that an investments actual return will be different than that expected. The expected return is calculated as the weighted average of the possible profits of the assets in the portfolio, weighted by the possible profits of the individual asset class (Graham & Smart, 2012).
A risk asset is any asset that carries with it the degree of risk. They are generally assets with a significant degree of price volatility. An asset with a higher risk has higher expected returns than that with a lower risk (Graham & Smart, 2012). The basic features of bonds include the maturity, the par value, the coupon rate and the currency denomination. An asset can either be valued using an appraised value or the book value (Siegel, 2007). The most common stock features include the objectives and risks, the liquidity, the strengths and the weakness. The expected return of a stock is the amount anticipated on an investment that has numerous rates of return (Siegel, 2007).
Bibliography
Graham, J., & Smart, S. B. (2012). Introduction to Corporate Finance: What Companies Do. New york: Cengage Learning.
Siegel, J. J. (2007). stocks for the long run.