Financial Markets and Institutions – Exam #2, 2026 – Study Material
and Practice Questions
Most bonds pay interest how often? - ANS✔✔ Semi-annually
Bond prices are quoted as what? - ANS✔✔ A percentage of their par value, not in dollars.
(ex. A price quote of 98.40 on a $1,000 par value bond would be $984.00)
"Clean Price" means? - ANS✔✔ The price of the bond excluding accrued interest; also known as
the quoted price.
"Dirty price" means? - ANS✔✔ The total price of the bond including accrued interest; the actual
price you would pay for the bond.
Treasuries are figured out of how many days? - ANS✔✔ 365
Agency bonds, corporate bonds, municipal bonds, and mortgage backed securities are figured
out of how many days? - ANS✔✔ 360. A month is considered 30 days
Money market securities are figured out of how many days? - ANS✔✔ 360
Accrued interest = ? - ANS✔✔ (Semiannual coupon amount) x (# of days from last coupon
payment to settlement date / # of days in coupon period)
True or False? It is unlikely that a callable bond will sell at a discount. - ANS✔✔ True, callable
bonds typically sell at a premium.
, Zero-coupon bonds - ANS✔✔ Has no coupon payments; they make a single payment of par
value at maturity.
Coupon yield = ? - ANS✔✔ annual coupon in dollars / par value
Current yield = ? - ANS✔✔ annual coupon in dollars / current market price
Yield to maturity - ANS✔✔ The yield promised the bondholder on the assumptions that:
1) the bond will be held to maturity.
2) all coupon payments will be reinvested at the bond's YTM.
3) all coupon and principal payments will be made.
The higher the yield demanded on a bond, the _______ the bond price. - ANS✔✔ Lower
Interest rate risk of a fixed rate bond - ANS✔✔ When the yield required on a fixed income
security changes, the price of the security will change; the longer the maturity the greater the
price change. Thus, longer maturity bonds have greater price volatility than short term bonds.
Factors that affect yield include: - ANS✔✔ How it's taxed, credit or default risk, marketability,
callable or non-callable, convertible or non-convertible, and put features.
Up-sloping yield curve - ANS✔✔ Yields increase as maturity increases. Usually appears during
"normal" economic times, and when interest rates are expected to increase. This type of yield
curve exists most of the time.
Inverted or down-sloping yield curve - ANS✔✔ Yields decline as maturity increases. Commonly
appears when interest rates are expected to decline, and at or near the beginning of an
economic recession.
and Practice Questions
Most bonds pay interest how often? - ANS✔✔ Semi-annually
Bond prices are quoted as what? - ANS✔✔ A percentage of their par value, not in dollars.
(ex. A price quote of 98.40 on a $1,000 par value bond would be $984.00)
"Clean Price" means? - ANS✔✔ The price of the bond excluding accrued interest; also known as
the quoted price.
"Dirty price" means? - ANS✔✔ The total price of the bond including accrued interest; the actual
price you would pay for the bond.
Treasuries are figured out of how many days? - ANS✔✔ 365
Agency bonds, corporate bonds, municipal bonds, and mortgage backed securities are figured
out of how many days? - ANS✔✔ 360. A month is considered 30 days
Money market securities are figured out of how many days? - ANS✔✔ 360
Accrued interest = ? - ANS✔✔ (Semiannual coupon amount) x (# of days from last coupon
payment to settlement date / # of days in coupon period)
True or False? It is unlikely that a callable bond will sell at a discount. - ANS✔✔ True, callable
bonds typically sell at a premium.
, Zero-coupon bonds - ANS✔✔ Has no coupon payments; they make a single payment of par
value at maturity.
Coupon yield = ? - ANS✔✔ annual coupon in dollars / par value
Current yield = ? - ANS✔✔ annual coupon in dollars / current market price
Yield to maturity - ANS✔✔ The yield promised the bondholder on the assumptions that:
1) the bond will be held to maturity.
2) all coupon payments will be reinvested at the bond's YTM.
3) all coupon and principal payments will be made.
The higher the yield demanded on a bond, the _______ the bond price. - ANS✔✔ Lower
Interest rate risk of a fixed rate bond - ANS✔✔ When the yield required on a fixed income
security changes, the price of the security will change; the longer the maturity the greater the
price change. Thus, longer maturity bonds have greater price volatility than short term bonds.
Factors that affect yield include: - ANS✔✔ How it's taxed, credit or default risk, marketability,
callable or non-callable, convertible or non-convertible, and put features.
Up-sloping yield curve - ANS✔✔ Yields increase as maturity increases. Usually appears during
"normal" economic times, and when interest rates are expected to increase. This type of yield
curve exists most of the time.
Inverted or down-sloping yield curve - ANS✔✔ Yields decline as maturity increases. Commonly
appears when interest rates are expected to decline, and at or near the beginning of an
economic recession.
