AFM 121 FINAL REVIEW EXAM QUESTIONS AND
ANSWERS WITH COMPLETE SOLUTIONS GRADED A++
Bonds vs. Debentures risk
- Bonds secured by assets with collateral, debentures have no collateral beyond
income/assets of borrower
Bond terms
- Legal rights of borrower & lender (investor)
- Ex. Dates of coupon & principal payments
What is the income from an increase in bond price called?
- Interest income (not capital gains, due to tax)
Maturity of Bonds (short,medium,long)
- Short (1-5yrs)
- Medium (5-10yrs)
- Long(10+ yrs)
On-the run vs. off the run bonds
- On the run = newly issued in market
- Off the run = older bonds
Callable bonds vs. Retractable
- Called/repurchased by issuer (on issuer terms)
- Retractable: put back to issuer (on investor terms)
Real return bonds
, - Adjusted return for inflation (return - inflation)
Strip bonds
- Separates interest only from principal only (becomes own discount bonds)
Fair/theoretical bond price
- PV of future cash flows
- Discount = required rate of return
Yield to Maturity (YTM)
- All cash flows reinvested at same rate
- PV of coupon doesn't change as it grows and gets discounted at same rate
- MUST CONVERT RATE TO EAR
Coupon payment formula
- Fair value/principal * coupon rate
Calculating when taking over a bond
- Ignore previous years (10 year bond with 2 years passed = PV of 8 years)
How do common shares' value change?
1. Change in company value
2. Change in outstanding shares
Stock split 2:1
- DOESN't AFFECT MARKET CAP
- Price/2, 2x # shares
(Stock price/(2/1)) or 5:2 (5/2) split = (Price/2.5)
Dividend timeline
ANSWERS WITH COMPLETE SOLUTIONS GRADED A++
Bonds vs. Debentures risk
- Bonds secured by assets with collateral, debentures have no collateral beyond
income/assets of borrower
Bond terms
- Legal rights of borrower & lender (investor)
- Ex. Dates of coupon & principal payments
What is the income from an increase in bond price called?
- Interest income (not capital gains, due to tax)
Maturity of Bonds (short,medium,long)
- Short (1-5yrs)
- Medium (5-10yrs)
- Long(10+ yrs)
On-the run vs. off the run bonds
- On the run = newly issued in market
- Off the run = older bonds
Callable bonds vs. Retractable
- Called/repurchased by issuer (on issuer terms)
- Retractable: put back to issuer (on investor terms)
Real return bonds
, - Adjusted return for inflation (return - inflation)
Strip bonds
- Separates interest only from principal only (becomes own discount bonds)
Fair/theoretical bond price
- PV of future cash flows
- Discount = required rate of return
Yield to Maturity (YTM)
- All cash flows reinvested at same rate
- PV of coupon doesn't change as it grows and gets discounted at same rate
- MUST CONVERT RATE TO EAR
Coupon payment formula
- Fair value/principal * coupon rate
Calculating when taking over a bond
- Ignore previous years (10 year bond with 2 years passed = PV of 8 years)
How do common shares' value change?
1. Change in company value
2. Change in outstanding shares
Stock split 2:1
- DOESN't AFFECT MARKET CAP
- Price/2, 2x # shares
(Stock price/(2/1)) or 5:2 (5/2) split = (Price/2.5)
Dividend timeline
