FINA 3332 EXAM 2 And 3 REVIEW
Questions and All Correct Answers
2026-2027 Updated.
Convertible Bond - Answer Corporate bonds with a provision that gives the bondholder an
option to convert each bond owned into a fixed number of shares of common stock
Credit Spread/default spread - Answer the difference between the risk free interest rate on
US treasury notes and the interest on all other loans
Discount - Answer a price at which the bond trade that is less than their face value
Investment grade bond - Answer the creditworthy of a bond assessed by bond rating
companies- Aaa, Aa, A, Baa
Junk bond - Answer the creditworthy of a bond assessed by bond rating companies-Ba, B,
Caa, Ca,C
Par value - Answer price equal to the bonds face value
Premium - Answer price greater than bonds face value
Term Structure - Answer the relationship between interest rates and investment rates
Real rate of interest - Answer the rate of growth of purchasing pwr after adjusting for
inflation
Risk-Free Rate of interest - Answer the return available on a short-term investment with no
risk of default
Underwriting - Answer process whereby a group of investment bankers agrees to purchase a
new security issue at a set price and then offers it for sale to investors
Yield curve - Answer a plot of bonds yields as a function of the bonds maturity date
Yield to maturity - Answer rate of return of an investment in a bond that is held to its
maturity date
, Zero coupon bond - Answer a bond that makes only one payment at maturity
Interest rates and bond prices move in opposite directions, so when market rates of interest
move higher, the value of a bond will decrease, all other things held constant. - Answer TRUE
Comparing bonds which are equivalent other than time to maturity, a shorter term bond carries
greater interest rate risk than does a long term bond, and the short term bond will therefore
experience a greater change in value, for a given change in market rates of interest. - Answer
FALSE
Companies with higher bond ratings will pay a higher interest rate when borrowing money by
issuing new bonds - Answer FALSE
Treasury bills are promissory notes issued by the US government which pay risk free rates of
interest on a monthly basis over the life of the bill. - Answer FALSE
If interest rates were 8 percent, and the rate of inflation over the same period was 12 percent,
then the real rate of interest over this period was negative 4 percent. - Answer TRUE
A long term bond is more sensitive to changes in rates of interest and will experience a greater
change in value for a given change in interest rates than will an equivalent short term bond -
Answer TRUE
Unrated debt typically pays a lower interest because investors assume it must be a better
investment - Answer FALSE
Treasury bills are short term US government securities, which pay no interest and whose prices
are quoted as a discount from face value. - Answer TRUE
If interest rates were 8 percent and the rate of inflation over the same period was 12 percent,
then the real rate of interest over this period was about 4 percent - Answer FALSE
Interest rates and bond prices move in the same direction, so when market rates of interest
move higher, bonds become more valuable, all other things held constant - Answer FALSE
Capital Budgeting - Answer process of evaluating and planning for purchases of long term
assets
to increase firm value
Questions and All Correct Answers
2026-2027 Updated.
Convertible Bond - Answer Corporate bonds with a provision that gives the bondholder an
option to convert each bond owned into a fixed number of shares of common stock
Credit Spread/default spread - Answer the difference between the risk free interest rate on
US treasury notes and the interest on all other loans
Discount - Answer a price at which the bond trade that is less than their face value
Investment grade bond - Answer the creditworthy of a bond assessed by bond rating
companies- Aaa, Aa, A, Baa
Junk bond - Answer the creditworthy of a bond assessed by bond rating companies-Ba, B,
Caa, Ca,C
Par value - Answer price equal to the bonds face value
Premium - Answer price greater than bonds face value
Term Structure - Answer the relationship between interest rates and investment rates
Real rate of interest - Answer the rate of growth of purchasing pwr after adjusting for
inflation
Risk-Free Rate of interest - Answer the return available on a short-term investment with no
risk of default
Underwriting - Answer process whereby a group of investment bankers agrees to purchase a
new security issue at a set price and then offers it for sale to investors
Yield curve - Answer a plot of bonds yields as a function of the bonds maturity date
Yield to maturity - Answer rate of return of an investment in a bond that is held to its
maturity date
, Zero coupon bond - Answer a bond that makes only one payment at maturity
Interest rates and bond prices move in opposite directions, so when market rates of interest
move higher, the value of a bond will decrease, all other things held constant. - Answer TRUE
Comparing bonds which are equivalent other than time to maturity, a shorter term bond carries
greater interest rate risk than does a long term bond, and the short term bond will therefore
experience a greater change in value, for a given change in market rates of interest. - Answer
FALSE
Companies with higher bond ratings will pay a higher interest rate when borrowing money by
issuing new bonds - Answer FALSE
Treasury bills are promissory notes issued by the US government which pay risk free rates of
interest on a monthly basis over the life of the bill. - Answer FALSE
If interest rates were 8 percent, and the rate of inflation over the same period was 12 percent,
then the real rate of interest over this period was negative 4 percent. - Answer TRUE
A long term bond is more sensitive to changes in rates of interest and will experience a greater
change in value for a given change in interest rates than will an equivalent short term bond -
Answer TRUE
Unrated debt typically pays a lower interest because investors assume it must be a better
investment - Answer FALSE
Treasury bills are short term US government securities, which pay no interest and whose prices
are quoted as a discount from face value. - Answer TRUE
If interest rates were 8 percent and the rate of inflation over the same period was 12 percent,
then the real rate of interest over this period was about 4 percent - Answer FALSE
Interest rates and bond prices move in the same direction, so when market rates of interest
move higher, bonds become more valuable, all other things held constant - Answer FALSE
Capital Budgeting - Answer process of evaluating and planning for purchases of long term
assets
to increase firm value
