Finance 301 PSU Final Exam
Questions and Correct Answers.
Debtholders - Answer people who lent the company money
equity investors - Answer own shares of stock in the company
debenture bond - Answer a "standard" bond that is typically unsecured
subordinate bond - Answer ranks lower than other debt the issuer may have
callable bonds - Answer gives the issuer the option to repurchase the bond before the
maturity date
convertible bond - Answer the bondholder has the option to convert the bond into common
stock
bond markets - Answer - globally, bond markets are 3x the size of equity (stock) markets
- over the counter trading = no specific locations in which buying and selling occurs
- bond markets are generally not transparent
coupon rate - Answer the interest paid on a bond, expressed as a percentage of the bond's par
value
annual coupon payment = face value x coupon rate
Yeild to maturity YTM - Answer the discount rate that sets the present value of the promised
bond payments equal to the current market price of the bond
YTM and bond prices have an inverse relationship
when YTM increases, bond prices decrease (vice versa)
fixed rate YTM - Answer the interest rate and coupon payments are fixed for the life of the
bond, which means the amount of interest payed does not change
, fixed rate discount bond - Answer YTM> bond coupon rate
What is a zero coupon bond? - Answer A bond that has a coupon rate of 0%.
Why are zero coupon bonds always sold at a discount? - Answer Because the coupon rate of
0% is always less than the yield to maturity (YTM).
What are the two cash flows associated with a zero coupon bond? - Answer 1. The initial cash
outflow when the bond is purchased. 2. The cash payment received when the bond is paid.
fixed-rate premium bonds - Answer YTM< bond coupon rate
changes in bond value over the life of a bond - Answer discount bonds increase as they
approach maturity
par value bonds keep a constant value of $1000
premium bonds decrease in value as they approach maturity
default risk - Answer a bond is a promise to pay according to the terms laid out in the bond
certificate
if the company cannot pay ots bondholders, it is considered to be a fault
Bond Credit Ratings - Answer provide investors with information regarding the probability of
default on a bond
bonds with higher credit usually have lower coupon rates
- bond yields and credit ratings have an inverse relationship
coupon bonds - Answer bonds that pay regular coupon interest payments up to maturity,
when the face value is also paid
type of interest-only coupon
Semi-Annual Coupon Payments - Answer Interest payments made twice a year on bonds.
to find N = years to maturity x 2
to find I = YTM/2
Questions and Correct Answers.
Debtholders - Answer people who lent the company money
equity investors - Answer own shares of stock in the company
debenture bond - Answer a "standard" bond that is typically unsecured
subordinate bond - Answer ranks lower than other debt the issuer may have
callable bonds - Answer gives the issuer the option to repurchase the bond before the
maturity date
convertible bond - Answer the bondholder has the option to convert the bond into common
stock
bond markets - Answer - globally, bond markets are 3x the size of equity (stock) markets
- over the counter trading = no specific locations in which buying and selling occurs
- bond markets are generally not transparent
coupon rate - Answer the interest paid on a bond, expressed as a percentage of the bond's par
value
annual coupon payment = face value x coupon rate
Yeild to maturity YTM - Answer the discount rate that sets the present value of the promised
bond payments equal to the current market price of the bond
YTM and bond prices have an inverse relationship
when YTM increases, bond prices decrease (vice versa)
fixed rate YTM - Answer the interest rate and coupon payments are fixed for the life of the
bond, which means the amount of interest payed does not change
, fixed rate discount bond - Answer YTM> bond coupon rate
What is a zero coupon bond? - Answer A bond that has a coupon rate of 0%.
Why are zero coupon bonds always sold at a discount? - Answer Because the coupon rate of
0% is always less than the yield to maturity (YTM).
What are the two cash flows associated with a zero coupon bond? - Answer 1. The initial cash
outflow when the bond is purchased. 2. The cash payment received when the bond is paid.
fixed-rate premium bonds - Answer YTM< bond coupon rate
changes in bond value over the life of a bond - Answer discount bonds increase as they
approach maturity
par value bonds keep a constant value of $1000
premium bonds decrease in value as they approach maturity
default risk - Answer a bond is a promise to pay according to the terms laid out in the bond
certificate
if the company cannot pay ots bondholders, it is considered to be a fault
Bond Credit Ratings - Answer provide investors with information regarding the probability of
default on a bond
bonds with higher credit usually have lower coupon rates
- bond yields and credit ratings have an inverse relationship
coupon bonds - Answer bonds that pay regular coupon interest payments up to maturity,
when the face value is also paid
type of interest-only coupon
Semi-Annual Coupon Payments - Answer Interest payments made twice a year on bonds.
to find N = years to maturity x 2
to find I = YTM/2
