Skip to main content
Back

Calculating Bond and Stock Prices quiz

Control buttons has been changed to "navigation" mode.
1/15
  • What is the present value of future cash flows used for in finance?
    It is used to determine the value of investments like bonds and stocks by discounting future payments to their value today.
  • How do you calculate the price of a bond?
    The price of a bond is the sum of the present values of all future coupon payments and the principal repayment at maturity.
  • What formula is used to discount a single future payment to present value?
    The formula is PV = FV / (1 + r)^n, where PV is present value, FV is future value, r is the interest rate, and n is the number of periods.
  • What are the typical cash flows from a bond?
    A bond typically pays periodic coupon interest payments and returns the principal at maturity.
  • How is the present value of multiple future bond payments calculated?
    Each payment is discounted back to the present using the time value of money formula, and then all are summed together.
  • What is a coupon in the context of bonds?
    A coupon is the periodic interest payment made to bondholders during the life of the bond.
  • How does the calculation of stock price differ from that of a bond?
    Stock price is based on the present value of expected future dividends, often accounting for growth, while bond price is based on fixed coupon payments and principal.
  • What is the formula for valuing a stock with growing dividends?
    The formula is P = D / (r - g), where P is price, D is the dividend, r is the discount rate, and g is the growth rate.
  • Why do we subtract the growth rate from the discount rate in the stock valuation formula?
    Subtracting the growth rate accounts for the expected increase in dividends over time, reflecting the company's growth.
  • What are the cash flows received from owning a stock?
    The cash flows are the dividends paid by the company, which may grow over time.
  • Why is the time value of money important in valuing bonds and stocks?
    It ensures that future cash flows are properly discounted to reflect their value in today's terms.
  • What happens to the present value of a future payment as the interest rate increases?
    The present value decreases as the interest rate increases, because future payments are discounted more heavily.
  • In the bond pricing formula, what does 'n' represent?
    'n' represents the number of periods (years) until the payment is received.
  • What must you know to calculate the price of a stock using the dividend growth model?
    You need the expected dividend, the discount rate, and the expected growth rate of dividends.
  • How does market equilibrium relate to bond and stock prices?
    Market equilibrium occurs when the prices of bonds and stocks reflect the present value of their expected future cash flows, given current interest and growth rates.