FINC 341 EXAM 2 THEORY QUESTIONS & ANSWERS
Lagarde succeeded Draghi as the international monetary fund's current leader as
president of the European central bank. Draghi rescued the euro from collapse -
Answers - Who are Christine LaGarde and Mario Draghi, and why are they important?
former fed chairman
1. inflation
2. the government's swelling budget deficit; the spending imbalance is out of hand -
Answers - who is Alan Greenspan, and what are his tow main concerns about our
economy at this time?
annual coupon payment / current price - Answers - current yield =
( P1 - P0 ) / P0 - Answers - capital gains yield =
current yield + capital gains yield - Answers - total yield or yield to maturity =
true - Answers - t/f
three bonds that all have 15 years left to maturity can have different prices, even if they
each have the same credit risk
true - Answers - t/f
zero coupon bonds are more attractive to investors in high tax brackets
true - Answers - t/f
the tax on zero coupon bonds is less than on regular bonds
true - Answers - t/f
floating coupon bonds always have a value equal to par
true - Answers - t/f
if the expected rate of return on a stock is less than the required rate of return,
stockholders will want to sell the stock and there will be a tendency for the stock price to
decrease (thus making the expected rate of return increase toward the required rate of
return)
the prices of bonds will go down because there will be new bonds with higher rates -
Answers - if the fed starts to bring the rate back up this year, what will that do to the
price of existing bonds on the secondary market compared to their prices today? why?
it depends, you would buy it today if you thought the rates would go down in the future
because you would be at a premium - Answers - should you consider purchasing a
, bond today if you think you will need to sell it in a couple of years when your child
begins college? why?
z - pay no coupon payments (get capital gains)
f - interest rate is tied to some rate such as the treasury bond rate, so it moves with
inflation - Answers - what is the difference between a zero coupon bond and a floating
bond?
it would buy a bond on the open market because it would be at a discount - Answers - if
a bond has a sinking fund provision and interest rates have risen since the origin of that
bond, should the company comply with the provision by calling that mount of the bonds
or buying the bonds in the open market?
because they're exempt from federal taxes - Answers - why do municipal bonds carry
lower interest rates?
you can convert into shares of common stock at a fixed price at the option of the
bondholder - Answers - how does a convertible bond work?
the price of that bond goes down because it is less secure
the return rate would have to go up because it is more risky - Answers - if a company
gets downgraded with respect to financial strength, what happens to the price of that
company's existing bonds on the secondary market? why?
yes at a premium - Answers - can you have a current yield of a bond be higher than the
bond's yield to maturity
because you're dividing the annual amount by 2 to get your semi-annual amount -
Answers - when a bond's interest is semi-annually paid, why is the numerator of the
bond's CY its annual amount of interest?
8%
it will still be 8% because your rate is set in stone unless you sell it. it will not be affected
- Answers - if you purchase a bond that has a YTM of 8%, what kind of yield will you get
if you hold it until it actually matures?
what if interest rates have changed during that time?
diversifiable risk - Answers - what is company specific risk (if you get a bunch of
different bonds)
market risk (nondiversifiable) - Answers - what is risk from the pandemic, war, inflation,
etc...
stand alone risk (single stock) - Answers - what is the risk of an asset held by itself
called
Lagarde succeeded Draghi as the international monetary fund's current leader as
president of the European central bank. Draghi rescued the euro from collapse -
Answers - Who are Christine LaGarde and Mario Draghi, and why are they important?
former fed chairman
1. inflation
2. the government's swelling budget deficit; the spending imbalance is out of hand -
Answers - who is Alan Greenspan, and what are his tow main concerns about our
economy at this time?
annual coupon payment / current price - Answers - current yield =
( P1 - P0 ) / P0 - Answers - capital gains yield =
current yield + capital gains yield - Answers - total yield or yield to maturity =
true - Answers - t/f
three bonds that all have 15 years left to maturity can have different prices, even if they
each have the same credit risk
true - Answers - t/f
zero coupon bonds are more attractive to investors in high tax brackets
true - Answers - t/f
the tax on zero coupon bonds is less than on regular bonds
true - Answers - t/f
floating coupon bonds always have a value equal to par
true - Answers - t/f
if the expected rate of return on a stock is less than the required rate of return,
stockholders will want to sell the stock and there will be a tendency for the stock price to
decrease (thus making the expected rate of return increase toward the required rate of
return)
the prices of bonds will go down because there will be new bonds with higher rates -
Answers - if the fed starts to bring the rate back up this year, what will that do to the
price of existing bonds on the secondary market compared to their prices today? why?
it depends, you would buy it today if you thought the rates would go down in the future
because you would be at a premium - Answers - should you consider purchasing a
, bond today if you think you will need to sell it in a couple of years when your child
begins college? why?
z - pay no coupon payments (get capital gains)
f - interest rate is tied to some rate such as the treasury bond rate, so it moves with
inflation - Answers - what is the difference between a zero coupon bond and a floating
bond?
it would buy a bond on the open market because it would be at a discount - Answers - if
a bond has a sinking fund provision and interest rates have risen since the origin of that
bond, should the company comply with the provision by calling that mount of the bonds
or buying the bonds in the open market?
because they're exempt from federal taxes - Answers - why do municipal bonds carry
lower interest rates?
you can convert into shares of common stock at a fixed price at the option of the
bondholder - Answers - how does a convertible bond work?
the price of that bond goes down because it is less secure
the return rate would have to go up because it is more risky - Answers - if a company
gets downgraded with respect to financial strength, what happens to the price of that
company's existing bonds on the secondary market? why?
yes at a premium - Answers - can you have a current yield of a bond be higher than the
bond's yield to maturity
because you're dividing the annual amount by 2 to get your semi-annual amount -
Answers - when a bond's interest is semi-annually paid, why is the numerator of the
bond's CY its annual amount of interest?
8%
it will still be 8% because your rate is set in stone unless you sell it. it will not be affected
- Answers - if you purchase a bond that has a YTM of 8%, what kind of yield will you get
if you hold it until it actually matures?
what if interest rates have changed during that time?
diversifiable risk - Answers - what is company specific risk (if you get a bunch of
different bonds)
market risk (nondiversifiable) - Answers - what is risk from the pandemic, war, inflation,
etc...
stand alone risk (single stock) - Answers - what is the risk of an asset held by itself
called
