FIN 3403 EXAM 2 REVIEW QUESTIONS WITH
VERIFIED SOLUTIONS
Issuing bonds
the federal government can raise money from financial markets to finance its deficits by?
What is an interest-only loan?
it's a loan which the borrower pays interest periodically and repays the principle when the bond
matures
Which of the following is true about a multi-year typical bond's coupon?
it is a fixed annuity payment
A firm decides to raise money by issuing 5 million bonds with a par value of 5,000 each for
10 years at a coupon rate of 7 percent. At the time of the issue, the bonds were sold for
5,500 each. What will the par value of the bonds be in year 5?
5,000 per bond
what is the coupon rate on a bond that has a par value of 1,000, a market value of 1,100
and a coupon interest payment of 100 per year?
10% (100/1000)
What is the definition of a bond's time to maturity?
it is the number of years until the face value is due to be repaid
The relationship between bond prices and the market rate of interest is
inverse, if the market rate of interest rises, bond prices will fall
Which of the following variables are required to calculate the value of a bond?
coupon rate, market yield, remaining life of bond
What is a corporate bond's yield to maturity
YTM is the prevailing market interest rate for bonds with similar features
YTM is the expected return for an investor who buys today and holds it to maturity
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face
value is 1,000 per bond. What are the expected cash flows from one these bonds?
60 in interest at the end of each for 10 years and a 1,000 repayment of principle at the end of 10
years.
Which of the following are true about a bond's face value?
, it is also known as the par value
it is the principle amount repaid at maturity
A bond pays annual interest payments of 50, has a par value of 1,000 and a market price of
1,200. How is the coupon rate computed?
50/1000
A corporate bond's yield to maturity
Changes over time
can be greater than, equal to, or less than the bond's coupon rate
A bond has a quoted price of 984.63 a face value of 1,000 a semi-annual of 20 and a
maturity of 10 years. Match its current yield to its YTM below.
YTM = 4.19
Current yield = 4.06
Place the following bonds in order of security as defined in the US.
mortgage bonds
Debentures
What is the nominal rate of return on an investment?
it is the actual percentage change in the dollar value of an investment
What is a real rate of return?
It is a rate of return that has been adjusted for inflation
A market is considered transparent if
Its prices and trading volume at easily observed
Which of these correctly identify differences between U.S. Treasury bonds and corporate
bonds?
They are default-free, they are taxable, and they are highly liquid
All junk bonds typically have which of these features?
Less than investment-grade rating. High probability of default
Cat bond
protects insurance companies form natural disasters
Convertible bond
can be exchanged for shares of stock
Put bond
VERIFIED SOLUTIONS
Issuing bonds
the federal government can raise money from financial markets to finance its deficits by?
What is an interest-only loan?
it's a loan which the borrower pays interest periodically and repays the principle when the bond
matures
Which of the following is true about a multi-year typical bond's coupon?
it is a fixed annuity payment
A firm decides to raise money by issuing 5 million bonds with a par value of 5,000 each for
10 years at a coupon rate of 7 percent. At the time of the issue, the bonds were sold for
5,500 each. What will the par value of the bonds be in year 5?
5,000 per bond
what is the coupon rate on a bond that has a par value of 1,000, a market value of 1,100
and a coupon interest payment of 100 per year?
10% (100/1000)
What is the definition of a bond's time to maturity?
it is the number of years until the face value is due to be repaid
The relationship between bond prices and the market rate of interest is
inverse, if the market rate of interest rises, bond prices will fall
Which of the following variables are required to calculate the value of a bond?
coupon rate, market yield, remaining life of bond
What is a corporate bond's yield to maturity
YTM is the prevailing market interest rate for bonds with similar features
YTM is the expected return for an investor who buys today and holds it to maturity
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face
value is 1,000 per bond. What are the expected cash flows from one these bonds?
60 in interest at the end of each for 10 years and a 1,000 repayment of principle at the end of 10
years.
Which of the following are true about a bond's face value?
, it is also known as the par value
it is the principle amount repaid at maturity
A bond pays annual interest payments of 50, has a par value of 1,000 and a market price of
1,200. How is the coupon rate computed?
50/1000
A corporate bond's yield to maturity
Changes over time
can be greater than, equal to, or less than the bond's coupon rate
A bond has a quoted price of 984.63 a face value of 1,000 a semi-annual of 20 and a
maturity of 10 years. Match its current yield to its YTM below.
YTM = 4.19
Current yield = 4.06
Place the following bonds in order of security as defined in the US.
mortgage bonds
Debentures
What is the nominal rate of return on an investment?
it is the actual percentage change in the dollar value of an investment
What is a real rate of return?
It is a rate of return that has been adjusted for inflation
A market is considered transparent if
Its prices and trading volume at easily observed
Which of these correctly identify differences between U.S. Treasury bonds and corporate
bonds?
They are default-free, they are taxable, and they are highly liquid
All junk bonds typically have which of these features?
Less than investment-grade rating. High probability of default
Cat bond
protects insurance companies form natural disasters
Convertible bond
can be exchanged for shares of stock
Put bond
