BA 323 EXAM 2 MASTER QUESTION BANK
SOLVED MCQS & RATIONALES SDSU NEWEST
EDITION
This premium BA 323 Exam 2 Study Guide features a master
bank of high-yield multiple-choice questions with verified
answers and detailed analytical rationales. It delivers
comprehensive, exam-aligned practice covering bond
valuation, capital budgeting cash flows, and risk-adjusted
WACC estimation. Perfect for maximizing test scores, this
resource is tailored specifically to mirror the rigorous exam
structure and problem formats utilized at top business
schools.
Section 1: Bond Valuation, Key Characteristics, and Yields
Question 1
A corporate bond has a $1,000 face value, an 8% annual coupon
rate, and 12 years remaining until maturity. If the current market
required rate of return (YTM) is 6%, what is the intrinsic value of
the bond?
A) $849.28
B) $1,000.00
,C) $1,167.68
D) $1,234.56
• Answer: C
• Rationale: The value of a bond is the present value of its
future cash flows. Using a financial calculator or Excel:
N = 12, I/YR = 6%, PMT = 80 (0.08 × 1000), FV = 1000.
Solving for PV yields -$1,167.68. Because the coupon
rate (8%) is greater than the required market rate of
return (6%), the bond must sell at a premium above its
par value.
Question 2
When the market interest rate (YTM) of a bond rises above its
contractual coupon rate, the bond will trade at a:
A) Premium
B) Discount
C) Par value
D) Reinvestment equilibrium
• Answer: B
• Rationale: There is an inverse relationship between
interest rates and bond prices. When market rates
increase, the fixed coupon payments of an existing
bond become less attractive relative to newly issued
bonds. To entice buyers, the bond's price must drop
below its face value, causing it to trade at a discount.
Question 3
An investor purchases a 15-year, 7% annual coupon bond with a
$1,000 par value. If market interest rates suddenly plunge to 5%
,one year after purchase, what happens to the price of the bond?
A) The price decreases because the coupon rate is now fixed.
B) The price increases because its cash flows are discounted at a
lower rate.
C) The price remains unchanged because coupon payments do
not change.
D) The price drops immediately to par value.
• Answer: B
• Rationale: When market interest rates decline, the
denominator in the present value formula decreases for
each future cash flow. Consequently, the present value
(market price) of the bond increases. Investors are
willing to pay a premium for a bond yielding a 7%
contractual coupon when the market norm has dropped
to 5%.
Question 4
Which of the following bonds experiences the highest level of
interest rate risk (price sensitivity to changes in market interest
rates)?
A) A 5-year, 10% coupon bond
B) A 5-year, zero-coupon bond
C) A 20-year, 10% coupon bond
D) A 20-year, zero-coupon bond
• Answer: D
• Rationale: Interest rate risk increases with a longer time
to maturity and a lower coupon rate. A 20-year bond has
cash flows extended far into the future, making its
present value highly volatile when rates fluctuate.
, Furthermore, because a zero-coupon bond pays no
intermediate cash flows, 100% of its weight is
concentrated at the absolute end of its life, maximizing
its duration and price sensitivity.
Question 5
A 10-year, $1,000 par value bond pays a semi-annual coupon of
6% (3% every six months). If the nominal annual yield to maturity
is 8%, what is the correct number of periods (N) and periodic
interest rate (I/YR) to input into a financial calculator?
A) N = 10, I/YR = 8%
B) N = 20, I/YR = 8%
C) N = 20, I/YR = 4%
D) N = 5, I/YR = 3%
• Answer: C
• Rationale: When adjusting standard bond valuation
formulas for semi-annual compounding, you must
multiply the number of years by 2 to determine the total
compounding periods (10 years × 2 = 20 periods) and
divide the nominal annual interest rate by 2 to calculate
the periodic rate (8% / 2 = 4%).
Question 6
If a bond is currently selling at a discount in the secondary
market, which of the following relationships must hold true?
A) Coupon Rate > Current Yield > Yield to Maturity
B) Yield to Maturity > Current Yield > Coupon Rate
C) Current Yield > Yield to Maturity > Coupon Rate
D) Yield to Maturity = Current Yield = Coupon Rate
SOLVED MCQS & RATIONALES SDSU NEWEST
EDITION
This premium BA 323 Exam 2 Study Guide features a master
bank of high-yield multiple-choice questions with verified
answers and detailed analytical rationales. It delivers
comprehensive, exam-aligned practice covering bond
valuation, capital budgeting cash flows, and risk-adjusted
WACC estimation. Perfect for maximizing test scores, this
resource is tailored specifically to mirror the rigorous exam
structure and problem formats utilized at top business
schools.
Section 1: Bond Valuation, Key Characteristics, and Yields
Question 1
A corporate bond has a $1,000 face value, an 8% annual coupon
rate, and 12 years remaining until maturity. If the current market
required rate of return (YTM) is 6%, what is the intrinsic value of
the bond?
A) $849.28
B) $1,000.00
,C) $1,167.68
D) $1,234.56
• Answer: C
• Rationale: The value of a bond is the present value of its
future cash flows. Using a financial calculator or Excel:
N = 12, I/YR = 6%, PMT = 80 (0.08 × 1000), FV = 1000.
Solving for PV yields -$1,167.68. Because the coupon
rate (8%) is greater than the required market rate of
return (6%), the bond must sell at a premium above its
par value.
Question 2
When the market interest rate (YTM) of a bond rises above its
contractual coupon rate, the bond will trade at a:
A) Premium
B) Discount
C) Par value
D) Reinvestment equilibrium
• Answer: B
• Rationale: There is an inverse relationship between
interest rates and bond prices. When market rates
increase, the fixed coupon payments of an existing
bond become less attractive relative to newly issued
bonds. To entice buyers, the bond's price must drop
below its face value, causing it to trade at a discount.
Question 3
An investor purchases a 15-year, 7% annual coupon bond with a
$1,000 par value. If market interest rates suddenly plunge to 5%
,one year after purchase, what happens to the price of the bond?
A) The price decreases because the coupon rate is now fixed.
B) The price increases because its cash flows are discounted at a
lower rate.
C) The price remains unchanged because coupon payments do
not change.
D) The price drops immediately to par value.
• Answer: B
• Rationale: When market interest rates decline, the
denominator in the present value formula decreases for
each future cash flow. Consequently, the present value
(market price) of the bond increases. Investors are
willing to pay a premium for a bond yielding a 7%
contractual coupon when the market norm has dropped
to 5%.
Question 4
Which of the following bonds experiences the highest level of
interest rate risk (price sensitivity to changes in market interest
rates)?
A) A 5-year, 10% coupon bond
B) A 5-year, zero-coupon bond
C) A 20-year, 10% coupon bond
D) A 20-year, zero-coupon bond
• Answer: D
• Rationale: Interest rate risk increases with a longer time
to maturity and a lower coupon rate. A 20-year bond has
cash flows extended far into the future, making its
present value highly volatile when rates fluctuate.
, Furthermore, because a zero-coupon bond pays no
intermediate cash flows, 100% of its weight is
concentrated at the absolute end of its life, maximizing
its duration and price sensitivity.
Question 5
A 10-year, $1,000 par value bond pays a semi-annual coupon of
6% (3% every six months). If the nominal annual yield to maturity
is 8%, what is the correct number of periods (N) and periodic
interest rate (I/YR) to input into a financial calculator?
A) N = 10, I/YR = 8%
B) N = 20, I/YR = 8%
C) N = 20, I/YR = 4%
D) N = 5, I/YR = 3%
• Answer: C
• Rationale: When adjusting standard bond valuation
formulas for semi-annual compounding, you must
multiply the number of years by 2 to determine the total
compounding periods (10 years × 2 = 20 periods) and
divide the nominal annual interest rate by 2 to calculate
the periodic rate (8% / 2 = 4%).
Question 6
If a bond is currently selling at a discount in the secondary
market, which of the following relationships must hold true?
A) Coupon Rate > Current Yield > Yield to Maturity
B) Yield to Maturity > Current Yield > Coupon Rate
C) Current Yield > Yield to Maturity > Coupon Rate
D) Yield to Maturity = Current Yield = Coupon Rate
