BA 323 FUNDAMENTALS OF
FINANCE ULTIMATE EXAM 2 TEST
GUIDE (SDSU NEWEST VERSION)
Master your SDSU BA 323 Exam 2 with this newly updated,
high-yield practice bank featuring comprehensive multiple-
choice questions. Every question is carefully structured with
direct italicized answers and detailed bolded rationales to
streamline complex calculations across WACC, bonds, and
capital budgeting. Ideal for students seeking to quickly
improve their test scores or access an expert-level finance
study guide.
PART 1: BONDS AND BOND VALUATION
(Questions 1–15)
Question 1: Which type of bond gives the investor
the option to sell the bond back to the issuing
corporation prior to maturity at a pre-specified price?
A) Callable bond
B) Putable bond
C) Convertible bond
D) Income bond
Answer: B) Putable bond
Rationale: A putable bond contains an embedded
option that benefits the investor, allowing them
to force the issuer to buy back the bond at par or
,a designated price if interest rates rise or the
firm’s credit risk deteriorates.
Question 2: If a 10-year corporate bond has a
coupon rate of 8% and the market's required rate of
return (Yield to Maturity) is 6%, how will this bond
trade in the secondary market?
A) At a discount
B) At par value
C) At a premium
D) At book value
Answer: C) At a premium
Rationale: When a bond's coupon rate is higher
than the current market interest rate (YTM), the
bond is highly attractive, driving its price above
its face value (par) to trade at a premium.
Question 3: What is the relationship between bond
prices and market interest rates?
A) Direct linear relationship
B) Inverse relationship
C) No correlation
D) Independent exponential relationship
Answer: B) Inverse relationship
Rationale: As market interest rates rise, the
present value of the bond's fixed future cash
flows (coupons and principal) decreases,
,causing the current market price of the bond to
fall.
Question 4: A bond issued with a warrant gives the
bondholder the right to do which of the following?
A) Exchange the bond directly for preferred stock
shares.
B) Sell the bond back to the firm at a premium price.
C) Purchase a specified number of common stock
shares at a fixed price.
D) Defer interest payments until corporate earnings
increase.
Answer: C) Purchase a specified number of common
stock shares at a fixed price.
Rationale: Warrants are long-term call options
attached to a bond issue that permit the holder
to buy common stock at a set exercise price,
acting as an equity sweetener.
Question 5: Which of the following risks represents
the danger that an investor will have to reinvest
periodic coupon cash flows at a lower interest rate
than the bond's original yield?
A) Default risk
B) Reinvestment rate risk
C) Price risk
D) Liquidity risk
, Answer: B) Reinvestment rate risk
Rationale: Reinvestment rate risk is the risk that
cash flows received from an investment will have
to be reinvested in a lower-yielding environment,
a risk that is highest for short-term and high-
coupon bonds when interest rates fall.
Question 6: Under Chapter 7 corporate bankruptcy
rules, which claimant group has the highest priority
of payment out of liquidation proceeds?
A) General unsecured creditors
B) Preferred stockholders
C) Secured creditors
D) Common stockholders
Answer: C) Secured creditors
Rationale: Secured creditors hold direct liens on
specific collateral assets of the firm and are
legally entitled to be satisfied from those specific
assets before any assets flow to administrative
fees or unsecured debts.
Question 7: A zero-coupon corporate bond provides
a return to investors by which mechanical process?
A) Accumulating interest over time and paying it out
as a variable cash dividend.
B) Selling at a steep discount below par value and
maturing at full face value.
FINANCE ULTIMATE EXAM 2 TEST
GUIDE (SDSU NEWEST VERSION)
Master your SDSU BA 323 Exam 2 with this newly updated,
high-yield practice bank featuring comprehensive multiple-
choice questions. Every question is carefully structured with
direct italicized answers and detailed bolded rationales to
streamline complex calculations across WACC, bonds, and
capital budgeting. Ideal for students seeking to quickly
improve their test scores or access an expert-level finance
study guide.
PART 1: BONDS AND BOND VALUATION
(Questions 1–15)
Question 1: Which type of bond gives the investor
the option to sell the bond back to the issuing
corporation prior to maturity at a pre-specified price?
A) Callable bond
B) Putable bond
C) Convertible bond
D) Income bond
Answer: B) Putable bond
Rationale: A putable bond contains an embedded
option that benefits the investor, allowing them
to force the issuer to buy back the bond at par or
,a designated price if interest rates rise or the
firm’s credit risk deteriorates.
Question 2: If a 10-year corporate bond has a
coupon rate of 8% and the market's required rate of
return (Yield to Maturity) is 6%, how will this bond
trade in the secondary market?
A) At a discount
B) At par value
C) At a premium
D) At book value
Answer: C) At a premium
Rationale: When a bond's coupon rate is higher
than the current market interest rate (YTM), the
bond is highly attractive, driving its price above
its face value (par) to trade at a premium.
Question 3: What is the relationship between bond
prices and market interest rates?
A) Direct linear relationship
B) Inverse relationship
C) No correlation
D) Independent exponential relationship
Answer: B) Inverse relationship
Rationale: As market interest rates rise, the
present value of the bond's fixed future cash
flows (coupons and principal) decreases,
,causing the current market price of the bond to
fall.
Question 4: A bond issued with a warrant gives the
bondholder the right to do which of the following?
A) Exchange the bond directly for preferred stock
shares.
B) Sell the bond back to the firm at a premium price.
C) Purchase a specified number of common stock
shares at a fixed price.
D) Defer interest payments until corporate earnings
increase.
Answer: C) Purchase a specified number of common
stock shares at a fixed price.
Rationale: Warrants are long-term call options
attached to a bond issue that permit the holder
to buy common stock at a set exercise price,
acting as an equity sweetener.
Question 5: Which of the following risks represents
the danger that an investor will have to reinvest
periodic coupon cash flows at a lower interest rate
than the bond's original yield?
A) Default risk
B) Reinvestment rate risk
C) Price risk
D) Liquidity risk
, Answer: B) Reinvestment rate risk
Rationale: Reinvestment rate risk is the risk that
cash flows received from an investment will have
to be reinvested in a lower-yielding environment,
a risk that is highest for short-term and high-
coupon bonds when interest rates fall.
Question 6: Under Chapter 7 corporate bankruptcy
rules, which claimant group has the highest priority
of payment out of liquidation proceeds?
A) General unsecured creditors
B) Preferred stockholders
C) Secured creditors
D) Common stockholders
Answer: C) Secured creditors
Rationale: Secured creditors hold direct liens on
specific collateral assets of the firm and are
legally entitled to be satisfied from those specific
assets before any assets flow to administrative
fees or unsecured debts.
Question 7: A zero-coupon corporate bond provides
a return to investors by which mechanical process?
A) Accumulating interest over time and paying it out
as a variable cash dividend.
B) Selling at a steep discount below par value and
maturing at full face value.
