Fin 400 Exam 2 with Complete Solutions
What does the section begin a thorough coverage of? ANSWER Valuing financial claims and
various types of investment strategies (somewhat included)
QWhat is the simplest type of financial claim discussed in chapter 14? What makes it so
simple? ANSWER The bond. Most bond contracts completely describe the promised cash
flows to be paid to the holder. For the bond all the analysts must do is assess its risk, Pick the
discount rate based on this assessment, and find the present value.
What are some exotic features of bonds?* ANSWER Convertible option
Callable option
Puttable bonds
Floating rate bonds
Indexed bonds
Catastrophe bonds
Asset-backed bonds
Inverse Floaters
QWhat are the functions financial calculators regarding bonds? ANSWER N-Years til
maturity
I/Y- Yield or fair return
PMT-Periodic coupon payment (FV x Coupon Rate)
FV- The return of principal
What is the equation in 14.1 * ANSWER
, QWhat four things must happen for an investor to earn the yield to maturity? ANSWER 1.
Investor must hold the bond until it matures.
2. There's no default.
3. All cash flows are invested at the fair rate or I/Y.
4. There's no change in the fair rate.
Q Why won't the fourth condition to earn the yield to maturity never be satisfied? ANSWER
The fair rate depends on the general level of rates and they are constantly changing making it
impossible for the fourth condition to be satisfied.
QWhat are some problems with using CAPM to model the fair bond return. ANSWER 1.
Bonds prices follow systemic relationships and move towards par as maturity approaches.
2. When rates change the reinvestment returns and the immediate capital gain or loss tend to
offset one another.
Single Variable Model (CAPM) doesn't account for this.
What type of model is used to calculate fair bond yields? ANSWER Multivariate model
QWhat are some factors in the multivariate model that might be important in calculating fair
bond yields. ANSWER 1). Default risk
2). Marketability of bonds
3). Covenants
4). Level of rates
5). Maturity
What does the section begin a thorough coverage of? ANSWER Valuing financial claims and
various types of investment strategies (somewhat included)
QWhat is the simplest type of financial claim discussed in chapter 14? What makes it so
simple? ANSWER The bond. Most bond contracts completely describe the promised cash
flows to be paid to the holder. For the bond all the analysts must do is assess its risk, Pick the
discount rate based on this assessment, and find the present value.
What are some exotic features of bonds?* ANSWER Convertible option
Callable option
Puttable bonds
Floating rate bonds
Indexed bonds
Catastrophe bonds
Asset-backed bonds
Inverse Floaters
QWhat are the functions financial calculators regarding bonds? ANSWER N-Years til
maturity
I/Y- Yield or fair return
PMT-Periodic coupon payment (FV x Coupon Rate)
FV- The return of principal
What is the equation in 14.1 * ANSWER
, QWhat four things must happen for an investor to earn the yield to maturity? ANSWER 1.
Investor must hold the bond until it matures.
2. There's no default.
3. All cash flows are invested at the fair rate or I/Y.
4. There's no change in the fair rate.
Q Why won't the fourth condition to earn the yield to maturity never be satisfied? ANSWER
The fair rate depends on the general level of rates and they are constantly changing making it
impossible for the fourth condition to be satisfied.
QWhat are some problems with using CAPM to model the fair bond return. ANSWER 1.
Bonds prices follow systemic relationships and move towards par as maturity approaches.
2. When rates change the reinvestment returns and the immediate capital gain or loss tend to
offset one another.
Single Variable Model (CAPM) doesn't account for this.
What type of model is used to calculate fair bond yields? ANSWER Multivariate model
QWhat are some factors in the multivariate model that might be important in calculating fair
bond yields. ANSWER 1). Default risk
2). Marketability of bonds
3). Covenants
4). Level of rates
5). Maturity
