Corporate Finance Final Exam Newest 2026
Questions and Correct Detailed Answers
Already Graded A+
How does diversification help with risk? - CORRECT ANSWER-When owning
many stocks, no need to worry and compensate for idiosyncratic risks.
Discount rate for stocks only reflects _____ risk - CORRECT ANSWER-non-
diversifiable
Understand behavior of bond prices/YTMs:
What happens to bond price if "X" happens, where X = change in credit risk,
change in cash flows, etc. - CORRECT ANSWER-Bonds have an inverse
relationship to interest rates. When the cost of borrowing money rises (when
interest rates rise), bond prices usually fall, and vice-versa.
Bonds with longer times to maturity have more sensitivity to changes in interest
rates.
,What is the yield to maturity (YTM)? - CORRECT ANSWER-Yield to Maturity is
the discount rate which sets the present value of the bond equal to today's price
More specifically, it is the required rate of return or cost of capital for a bond—it
is the average annual rate of return that investors expect to receive on a bond if
they hold it to maturity. Also known as the promised yield, meaning that it is the
return we are promised if we buy a bond today and hold it to maturity.
What is the relationship between price, YTM, coupon rate? - CORRECT
ANSWER-Yield to Maturity is the discount rate which sets the present value of
the bond equal to today's price
Universal rule:
YTM < coupon --- bond trades at a premium
YTM = coupon --- bond trades at par
YTM > coupon --- bond trades at a discount
As the coupon rate increases, the bond price will increase. - CORRECT
ANSWER-Bond prices are calculated by taking the present value of the coupons
and face value of bonds. If the coupons are larger, the present value of the
coupons will also be larger. Therefore, price of the bond will be higher.
,How do you calculate bond price? - CORRECT ANSWER-Zero Coupon Bond:
FV / (1 + YTM)^t
Coupon Bond:
Price = C / (1+y)^1 + C / (1+y)^2 + ... + (C + Principal) / (1 + YTM)^t
Bond Prices over Time (zig-zag?) - CORRECT ANSWER-Zig-Zag comes from the
trade-off of future payments closer vs losing right to past coupons
YTM Determinants - Risk of Default & Maturity - CORRECT ANSWER-
YTM/appropriate discount rate reflects
1) risk-free interest rate for a given maturity
2) firm's risk - described by rating
Better rated bonds (AAA) have lower YTM than badly rated bonds (CCC)
YTM depends on risk-free rate for given maturity + risk premium
, YTM v. Expected Return - CORRECT ANSWER-E(r) = YTM - P(default) x Loss
Rate
When you fix bond payments... - CORRECT ANSWER-YTM <--> Bond Price
(i.e. you can determine one based on the other)
Two approaches to valuing equity - CORRECT ANSWER-- Dividend Discount
Model
- Multiples Pricing
What is the Dividend Discount Model? The Gordon Growth Model (growing
perpetuity) - CORRECT ANSWER-PV = D / (r - g)
Dividend = EPS x Payout ratio
What is "g"? - CORRECT ANSWER-g is the growth rate at which dividends grow
How do you calculate "g" for the GG model? - CORRECT ANSWER-g = ROE × (1-
p)
Questions and Correct Detailed Answers
Already Graded A+
How does diversification help with risk? - CORRECT ANSWER-When owning
many stocks, no need to worry and compensate for idiosyncratic risks.
Discount rate for stocks only reflects _____ risk - CORRECT ANSWER-non-
diversifiable
Understand behavior of bond prices/YTMs:
What happens to bond price if "X" happens, where X = change in credit risk,
change in cash flows, etc. - CORRECT ANSWER-Bonds have an inverse
relationship to interest rates. When the cost of borrowing money rises (when
interest rates rise), bond prices usually fall, and vice-versa.
Bonds with longer times to maturity have more sensitivity to changes in interest
rates.
,What is the yield to maturity (YTM)? - CORRECT ANSWER-Yield to Maturity is
the discount rate which sets the present value of the bond equal to today's price
More specifically, it is the required rate of return or cost of capital for a bond—it
is the average annual rate of return that investors expect to receive on a bond if
they hold it to maturity. Also known as the promised yield, meaning that it is the
return we are promised if we buy a bond today and hold it to maturity.
What is the relationship between price, YTM, coupon rate? - CORRECT
ANSWER-Yield to Maturity is the discount rate which sets the present value of
the bond equal to today's price
Universal rule:
YTM < coupon --- bond trades at a premium
YTM = coupon --- bond trades at par
YTM > coupon --- bond trades at a discount
As the coupon rate increases, the bond price will increase. - CORRECT
ANSWER-Bond prices are calculated by taking the present value of the coupons
and face value of bonds. If the coupons are larger, the present value of the
coupons will also be larger. Therefore, price of the bond will be higher.
,How do you calculate bond price? - CORRECT ANSWER-Zero Coupon Bond:
FV / (1 + YTM)^t
Coupon Bond:
Price = C / (1+y)^1 + C / (1+y)^2 + ... + (C + Principal) / (1 + YTM)^t
Bond Prices over Time (zig-zag?) - CORRECT ANSWER-Zig-Zag comes from the
trade-off of future payments closer vs losing right to past coupons
YTM Determinants - Risk of Default & Maturity - CORRECT ANSWER-
YTM/appropriate discount rate reflects
1) risk-free interest rate for a given maturity
2) firm's risk - described by rating
Better rated bonds (AAA) have lower YTM than badly rated bonds (CCC)
YTM depends on risk-free rate for given maturity + risk premium
, YTM v. Expected Return - CORRECT ANSWER-E(r) = YTM - P(default) x Loss
Rate
When you fix bond payments... - CORRECT ANSWER-YTM <--> Bond Price
(i.e. you can determine one based on the other)
Two approaches to valuing equity - CORRECT ANSWER-- Dividend Discount
Model
- Multiples Pricing
What is the Dividend Discount Model? The Gordon Growth Model (growing
perpetuity) - CORRECT ANSWER-PV = D / (r - g)
Dividend = EPS x Payout ratio
What is "g"? - CORRECT ANSWER-g is the growth rate at which dividends grow
How do you calculate "g" for the GG model? - CORRECT ANSWER-g = ROE × (1-
p)
