A $1,000 par value convertible bond is selling at $1,200. If the conversion ratio is 20, what is the conversion price?
Answer(s): C
The conversion price is calculated by duding the par value of the bond by the conversion ratio. Thus, the conversion price is $50 ($1,000 20).
If the interest rate is to be determined in a given transaction in which the present value and future value are known, which formula would be used?
Answer(s): A
The basic formula. PV x (1 + j)fl FVn. can be used to solve any time value of money problem that involves a single future cash flow (FVn). To determine the interest rate, the formula is transformed to the relationship (1 + j)fl FV1PV by dividing each side of the basic formula by PV). Since the TVMF is equal to (1 + one can then look in the future value of $1 table for n periods to find that interest rate for which the table's TVMF is equal to the TVMF calculated from the formula
If the amount to deposit today to be able to replace an asset at a specified time in the future is to be determined, which formula should be used?
The basic formula is .This formula can be used to solve any time value of money problem incoming a single future cash flow (FVn). In this problem, the future amount needed after n time periods and the interest rate are known, The unknown is the value of an amount to be deposited today, i.e., the present value (PV). The formula PV = FV/(1 + j)fl is a transformed version of the basic TVMF formula. The future value of $1 table can be used to find the TVMF equal to (1 + or the present value of $1 table can be used to find the TVMF equal to 11(1 + 1) fl.
Future value is best described as
Answer(s): D
The future value of a dollar is its value at a time in the future given its present value. The future value of a dollar is affected both by the discount rate and the time at which the dollar is received. Hence, both dollars-En and dollars-out in the future maybe adjusted for the discount rate and any compounding that may occur.
Find the required rate of return for equity investors of a firm with a f of 1.2 when the ask- free rate is 6%, the market risk premium is 4%, and the return on the market is 10%.
The capital asset pacing model adds the risk-free rate to the product of the coefficient (a erasure of risk) and the difference between the market return and the risk-free rate. Thus, the required rate of return is 10.8% [6% + 1.2(4%)].
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