BA 323 SDSU EXAM 2 FINAL SCRIPT 2026
FINANCE PRINCIPLES QUESTIONS
ANSWERS COMPLETE A+
◉ Reinvestment Risk
Answer: The risk that a decline in interest rates will lead to a decline
in income from a bond portfolio.
( the concern that rates will fall, and future CFs will have to be
reinvested at lower rates, hence reducing income)
◉ Price Risk
Answer: the concern that rising interest rates will cause the value of
a bond to fall. Long-term bonds have more!
◉ Do long-term bonds have small or large reinvestment risk? What
about short-term bonds?
Answer: LT: Small! Lock in those rates.
ST: More, because your rates aren't locked in and might change with
interest rates.
, ◉ Risk of high coupon bonds? Low coupon bonds? **
Answer: HC: They'll be called by the corporation!
LC: Low investment risk.
High-coupon / short-term bonds have highest reinvestment risk.
Opposite for Low-coupon / long-term.
◉ convertible bonds
Answer: Bonds that can be converted into common stock at the
bondholder's option
◉ warrant bond
Answer: long-term option to buy a stated number of shares of
common stock at a specified price. (You keep the bond).
◉ Putable Bonds
Answer: bonds with a provision that allows investors to sell them
back to the company prior to maturity at a prearranged price
◉ indexed bond
Answer: a bond that has interest payments based on an inflation
index so as to protect the holder from inflation
FINANCE PRINCIPLES QUESTIONS
ANSWERS COMPLETE A+
◉ Reinvestment Risk
Answer: The risk that a decline in interest rates will lead to a decline
in income from a bond portfolio.
( the concern that rates will fall, and future CFs will have to be
reinvested at lower rates, hence reducing income)
◉ Price Risk
Answer: the concern that rising interest rates will cause the value of
a bond to fall. Long-term bonds have more!
◉ Do long-term bonds have small or large reinvestment risk? What
about short-term bonds?
Answer: LT: Small! Lock in those rates.
ST: More, because your rates aren't locked in and might change with
interest rates.
, ◉ Risk of high coupon bonds? Low coupon bonds? **
Answer: HC: They'll be called by the corporation!
LC: Low investment risk.
High-coupon / short-term bonds have highest reinvestment risk.
Opposite for Low-coupon / long-term.
◉ convertible bonds
Answer: Bonds that can be converted into common stock at the
bondholder's option
◉ warrant bond
Answer: long-term option to buy a stated number of shares of
common stock at a specified price. (You keep the bond).
◉ Putable Bonds
Answer: bonds with a provision that allows investors to sell them
back to the company prior to maturity at a prearranged price
◉ indexed bond
Answer: a bond that has interest payments based on an inflation
index so as to protect the holder from inflation
