|10-1. |How is valuation of any financial asset related to future cash flows? | | | | | |The valuation of a financial asset is equal to the present value of future cash flows. | | | | |10-2. |Why might investors demand a lower rate of return for an investment in Exxon Mobil as compared to United | | |Airlines? | | | | | |Because Exxon Mobil has less risk than United Airlines, Exxon Mobil has relatively high returns and a strong | | |market position; United Airlines has had financial difficulties and emerged from bankruptcy in 2006. | | | | |10-3. |What are the three factors that influence the required rate of return by investors? | | | | | |The three factors that influence the demanded rate of return are: | | | | | |The real rate of return | | |The inflation premium | | |The risk premium | | | | |10-4. |If inflationary expectations increase, what is likely to happen to yield to maturity on bonds in the | | |marketplace? What is also likely to happen to the price of bonds? | | | | | |If inflationary expectations increase, the yield to maturity (required rate of return) will increase. This | | |will mean a lower bond price. | | | | |10-5. |Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to | | |maturity on bond prices? | | | | | |The longer the time period remaining to maturity, the greater the impact of a difference between the rate the | | |bond is paying and the current yield to maturity (required rate of return). For example, a two percent ($20) | | |differential is not very significant for one...
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