FINA 3315 Exam 2 Questions with Correct Answers Latest Update 2025/2026
Bond - Answers A security that obligates the issuer to make specified payments to the holder
over a period of time.
Callable Bonds - Answers Bonds that may be repurchased by the issuer at a specified call price
during the call period.
Collateral - Answers A specific asset pledged against possible default on a bond.
Convertible Bond - Answers A bond with an option allowing the bondholder to exchange the
bond for a specified number of shares of common stock in the firm.
Coupon Rate - Answers A bond's annual interest rate per dollar of par value.
Credit Default Swap (CDS) - Answers An insurance policy on the default risk of a corporate bond
or loan.
Current Yield - Answers Annual coupon divided by bond price.
Debenture - Answers A bond not backed by specific collateral.
Default Premium - Answers The increment to promised yield that compensates the investor for
default risk.
Discount Bonds - Answers Bonds selling below par value.
Expectations Hypothesis - Answers The theory that yields to maturity are determined solely by
expectations of future short-term interest rates.
Face Value (Par Value) - Answers The payment to the bondholder at the maturity of the bond.
Floating-Rate Bonds - Answers Bonds with coupon rates periodically reset according to a
specified market rate.
Forward Rate - Answers The inferred short-term rate of interest for a future period that makes
the expected total return of a long-term bond equal to that of rolling over short-term bonds.
Horizon Analysis - Answers Analysis of bond returns over a multiyear horizon, based on
forecasts of the bond's yield to maturity and the reinvestment rate of coupons./Forecast of
bond returns based largely on a prediction of the yield curve at the end of the investment
horizon.
Indenture - Answers The document of defining the contract between the bond issuer and the
bondholder.
Investment Grade Bonds - Answers A bond rated BBB and above by Standard & Poor's or Baa
and above by Moody's.
, Liquidity Preferance Theory - Answers The theory that investors demand a risk premium on long
-term bonds.
Liquidity Premium - Answers The extra expected return demanded by investors as
compensation for the greater risk of longer-term bonds.
Premium Bonds - Answers Bonds selling above par value.
Put Bond - Answers A bond that the holder may choose either to exchange for par value at some
date or to extend for a given number of years.
Realized Compound Return - Answers Compound rate of return on a bond with all coupons
reinvested until maturity.
Reinvestment Rate Risk - Answers Uncertainty surrounding the cumulative future value of
reinvested bond coupon payments.
Sinking Fund - Answers A bond indenture that calls for the issuer to periodically repurchase
some proportion of the outstanding bonds prior to to maturity.
Speculative Grade Bond (Junk Bond) - Answers A bond rated BB or lower by Standard and
Poor's, Ba or lower by Moody's, or unrated.
Subordination Clauses - Answers Restrictions on additional borrowing that stipulate that senior
bondholders will be paid first in the event of bankruptcy.
Term Structure of interest Rates - Answers The relationship between yields to maturity and
terms to maturity across bonds.
Yield Curve - Answers A graph of yield to maturity as a function of term to maturity.
Yield to Maturity (YTM) - Answers The discount rate that makes the present value of a bond's
payments equal to its price.
Zero-Coupon Bond - Answers A bond paying no coupons that sells at a discount and provides
only a payment of par value at maturity.
Budget Deficit - Answers The amount by which government spending exceeds government
revenues.
Business Cycles - Answers Recurring cycles of recession and recovery.
Cyclical industries - Answers Industries with above-average sensitivity to the state of the
economy.
Defensive Industries - Answers Industries with below-average sensitivity to the state of the
economy.
Bond - Answers A security that obligates the issuer to make specified payments to the holder
over a period of time.
Callable Bonds - Answers Bonds that may be repurchased by the issuer at a specified call price
during the call period.
Collateral - Answers A specific asset pledged against possible default on a bond.
Convertible Bond - Answers A bond with an option allowing the bondholder to exchange the
bond for a specified number of shares of common stock in the firm.
Coupon Rate - Answers A bond's annual interest rate per dollar of par value.
Credit Default Swap (CDS) - Answers An insurance policy on the default risk of a corporate bond
or loan.
Current Yield - Answers Annual coupon divided by bond price.
Debenture - Answers A bond not backed by specific collateral.
Default Premium - Answers The increment to promised yield that compensates the investor for
default risk.
Discount Bonds - Answers Bonds selling below par value.
Expectations Hypothesis - Answers The theory that yields to maturity are determined solely by
expectations of future short-term interest rates.
Face Value (Par Value) - Answers The payment to the bondholder at the maturity of the bond.
Floating-Rate Bonds - Answers Bonds with coupon rates periodically reset according to a
specified market rate.
Forward Rate - Answers The inferred short-term rate of interest for a future period that makes
the expected total return of a long-term bond equal to that of rolling over short-term bonds.
Horizon Analysis - Answers Analysis of bond returns over a multiyear horizon, based on
forecasts of the bond's yield to maturity and the reinvestment rate of coupons./Forecast of
bond returns based largely on a prediction of the yield curve at the end of the investment
horizon.
Indenture - Answers The document of defining the contract between the bond issuer and the
bondholder.
Investment Grade Bonds - Answers A bond rated BBB and above by Standard & Poor's or Baa
and above by Moody's.
, Liquidity Preferance Theory - Answers The theory that investors demand a risk premium on long
-term bonds.
Liquidity Premium - Answers The extra expected return demanded by investors as
compensation for the greater risk of longer-term bonds.
Premium Bonds - Answers Bonds selling above par value.
Put Bond - Answers A bond that the holder may choose either to exchange for par value at some
date or to extend for a given number of years.
Realized Compound Return - Answers Compound rate of return on a bond with all coupons
reinvested until maturity.
Reinvestment Rate Risk - Answers Uncertainty surrounding the cumulative future value of
reinvested bond coupon payments.
Sinking Fund - Answers A bond indenture that calls for the issuer to periodically repurchase
some proportion of the outstanding bonds prior to to maturity.
Speculative Grade Bond (Junk Bond) - Answers A bond rated BB or lower by Standard and
Poor's, Ba or lower by Moody's, or unrated.
Subordination Clauses - Answers Restrictions on additional borrowing that stipulate that senior
bondholders will be paid first in the event of bankruptcy.
Term Structure of interest Rates - Answers The relationship between yields to maturity and
terms to maturity across bonds.
Yield Curve - Answers A graph of yield to maturity as a function of term to maturity.
Yield to Maturity (YTM) - Answers The discount rate that makes the present value of a bond's
payments equal to its price.
Zero-Coupon Bond - Answers A bond paying no coupons that sells at a discount and provides
only a payment of par value at maturity.
Budget Deficit - Answers The amount by which government spending exceeds government
revenues.
Business Cycles - Answers Recurring cycles of recession and recovery.
Cyclical industries - Answers Industries with above-average sensitivity to the state of the
economy.
Defensive Industries - Answers Industries with below-average sensitivity to the state of the
economy.
