LOS b: State the various forms of investment returns.

Q1. An investor buys a 6% coupon 5-year corporate bond priced to yield 7%. If rates remain unchanged when the investor sells the bond in 2 years, the investor will receive a:

A)   capital loss.

B)   total return equal to the coupon yield.

C)   capital gain.

Q2. Which of the following is NOT a return on an investment?

A)   Rate of discount.

B)   Earnings.

C)   Capital gains.

Q3. The returns on an investment are least likely to be measured by:

A)   earnings per share.

B)   coefficient of variation.

C)   capital gains on an asset.

LOS b: State the various forms of investment returns.fficeffice" />

Q1. An investor buys a 6% coupon 5-year corporate bond priced to yield 7%. If rates remain unchanged when the investor sells the bond in 2 years, the investor will receive a:

A)   capital loss.

B)   total return equal to the coupon yield.

C)   capital gain.

Correct answer is C)

Current yield of a bond = coupon payment / market price of bond. Bonds with a coupon lower than the prevailing interest rate will trade at a discount to par. If interest rates remain the same as the bond nears maturity the price will increase towards its par value. Thus, when they are sold, the investor will receive a capital gain.

Q2. Which of the following is NOT a return on an investment?

A)   Rate of discount.

B)   Earnings.

C)   Capital gains.

Correct answer is A)

The return on an investment can take many forms, including earnings, cash flows, dividends, interest payments, or capital gains (increases in value) during a period.

Q3. The returns on an investment are least likely to be measured by:

A)   earnings per share.

B)   coefficient of variation.

C)   capital gains on an asset.

Correct answer is B)

Coefficient of variation is a measure of risk. The various forms of investment returns can be measured in ways that include project cash flows, interest and dividend income, capital gains, or earnings.

thanks

CAB