FINA 3313 EXAM 2 QUESTIONS AND
ANSWERS 100% PASS 2026/2027
Bond's principal amount is repaid at maturity - ANS TRUE
What are the bond's features? - ANS -Securities that generally make fixed interest payments
for a fixed number of periods
-The principal amount is repaid at maturity
Bonds give no ownership rights to their owners
The term interest rate is usually applied to - ANS Debt instruments such as bank loans or
bonds; the compensation paid by the borrower of funds to the lender; from the borrower's
POV, the cost of borrowing funds
The term required return is usually applied to - ANS Equity instruments such as common
stock; the cost of funds obtained by selling an ownership interest
The real risk-free rate of interest is - ANS The rate that creates equilibrium between the
supply of savings and demand for investment funds in a perfect world, without inflation
Inflation - ANS Measures the growth rate in prices of most goods and services over some
period of time (monthly, quarterly, annually, or longer)
@2026 ALLRIGHTS RESERVED 1
,Real interest rate - ANS When an interest rate is adjusted for inflation
Calculate real rate if you have nominal rate is 18% and inflation rate is 6% - ANS real rate =
(1+nom)/(1+inf)-1
(1+0.18)/(1+0.06)-1
(1.18)/(1.06)-1
1.1132 - 1 = 0.1132 = 11.32%
The nominal rate differs from the real rate of interest, r* as a result of two factors - ANS -
Issuer and issue characteristics such as default risks and contractual provisions as reflected in a
risk premium (RP)
-Inflationary expectations reflected in an inflation premium (IP)
The risk of default for bond means the bond buyer fails to make interest or principal payments -
ANS FALSE
Expectations theory - ANS Theory that the yield curve reflects investor expectations about
future interest rates
Market segmentation theory - ANS Market for loans is segmented on the basis of maturity
and that the supply of and demand for loans within each segment determine its prevailing
interest rates
Liquidity preference theory - ANS Long-term rates are generally higher than short-term rates
because investors perceive short-term investments to be nore liquid and less risky than long-
term investments
@2026 ALLRIGHTS RESERVED 2
, Maturity date - ANS the date on which the principal amount of a bond becomes due.
Coupon Rate - ANS The interest payment based on face value
Face value - ANS Par value, or the principal amount to be paid at maturity
A bond has a coupon rate 8% and matures in 10 years. What are its expected cash flows if this
bond has a principal amount of $1000 and pay interest semi-annually
1) Cash flow CO1 is:
2)Frequency of payment is:
3) Cash flow at maturity (cash flow at CO20) is: - ANS 1) ($1000)(0.08) / 2 = (80) / 2 = 40
2) 10(2) = 20
3) $1000 + 40 = $1040
The yield is what we would consider to be the interest rate if we take the price as the present
value, the coupon payments as the payments, and the face value as the future value -
ANS TRUE
Calculate the bond price if the coupon payment is 10%, yield for the bond is 9%, bond's face
value is 1000 and matures in 14, if paid semi-annually - ANS N= 14(2) = 28
PMT = (.10)(1000) / 2 = -50
FV = -1000
I/Y = 9/2 = 4.5
CPT PV = 1078.71
@2026 ALLRIGHTS RESERVED 3
ANSWERS 100% PASS 2026/2027
Bond's principal amount is repaid at maturity - ANS TRUE
What are the bond's features? - ANS -Securities that generally make fixed interest payments
for a fixed number of periods
-The principal amount is repaid at maturity
Bonds give no ownership rights to their owners
The term interest rate is usually applied to - ANS Debt instruments such as bank loans or
bonds; the compensation paid by the borrower of funds to the lender; from the borrower's
POV, the cost of borrowing funds
The term required return is usually applied to - ANS Equity instruments such as common
stock; the cost of funds obtained by selling an ownership interest
The real risk-free rate of interest is - ANS The rate that creates equilibrium between the
supply of savings and demand for investment funds in a perfect world, without inflation
Inflation - ANS Measures the growth rate in prices of most goods and services over some
period of time (monthly, quarterly, annually, or longer)
@2026 ALLRIGHTS RESERVED 1
,Real interest rate - ANS When an interest rate is adjusted for inflation
Calculate real rate if you have nominal rate is 18% and inflation rate is 6% - ANS real rate =
(1+nom)/(1+inf)-1
(1+0.18)/(1+0.06)-1
(1.18)/(1.06)-1
1.1132 - 1 = 0.1132 = 11.32%
The nominal rate differs from the real rate of interest, r* as a result of two factors - ANS -
Issuer and issue characteristics such as default risks and contractual provisions as reflected in a
risk premium (RP)
-Inflationary expectations reflected in an inflation premium (IP)
The risk of default for bond means the bond buyer fails to make interest or principal payments -
ANS FALSE
Expectations theory - ANS Theory that the yield curve reflects investor expectations about
future interest rates
Market segmentation theory - ANS Market for loans is segmented on the basis of maturity
and that the supply of and demand for loans within each segment determine its prevailing
interest rates
Liquidity preference theory - ANS Long-term rates are generally higher than short-term rates
because investors perceive short-term investments to be nore liquid and less risky than long-
term investments
@2026 ALLRIGHTS RESERVED 2
, Maturity date - ANS the date on which the principal amount of a bond becomes due.
Coupon Rate - ANS The interest payment based on face value
Face value - ANS Par value, or the principal amount to be paid at maturity
A bond has a coupon rate 8% and matures in 10 years. What are its expected cash flows if this
bond has a principal amount of $1000 and pay interest semi-annually
1) Cash flow CO1 is:
2)Frequency of payment is:
3) Cash flow at maturity (cash flow at CO20) is: - ANS 1) ($1000)(0.08) / 2 = (80) / 2 = 40
2) 10(2) = 20
3) $1000 + 40 = $1040
The yield is what we would consider to be the interest rate if we take the price as the present
value, the coupon payments as the payments, and the face value as the future value -
ANS TRUE
Calculate the bond price if the coupon payment is 10%, yield for the bond is 9%, bond's face
value is 1000 and matures in 14, if paid semi-annually - ANS N= 14(2) = 28
PMT = (.10)(1000) / 2 = -50
FV = -1000
I/Y = 9/2 = 4.5
CPT PV = 1078.71
@2026 ALLRIGHTS RESERVED 3
