FIN 400 Final Exam with Questions and
Answers
Why consider bonds? ANSWER 1. Reduce risk through diversification
2. Produce steady income
3. Can be a safe investment if held to maturity
4. Interest rates decrease= bond prices increase
Why to NOT consider bonds? ANSWER 1. Interest rates increase= bond prices decrease
2. Issuer have financial problems; bondholder's may pay
3. Callable: Interest rates decrease= bond is called
4. May have a problem selling bonds early, unreasonable prices
5. Difficult to find an investment outlet for interest received.
Indenture ANSWER A legal document that provides specific terms of the loan
Indenture includes: ANSWER 1. Bond description
2. Bondholder's rights
3. Issuing firms rights
4. Bond trustee's responsibilities
Treasury & agency bonds are: ANSWER 1. Risk-free
2. Not callable
3. Lower interest rate
4. Interest payment exempt from state and local taxes
,Treasury Inflation-Protected Securities (TIPS) ANSWER Par value of bond increases with
consumer price index to guarantee investor a real rate of return
Muni's (municipal bonds) ANSWER Issued by states, counties, cities, public agencies e.g.
school districts.
Zero Coupon Bonds ANSWER Don't pay interest and are sold at a deep discount from their
par value
Junk Bonds ANSWER High-yield bonds, very risky, low-rated BB or below
Current Yield ANSWER Ratio of annual interest payment to the bond's market price
Yield to Maturity (YTM) ANSWER True yield or return that the bondholder receives if a
bond is held to maturity- measures of expected return
Valuation Principle 3 ANSWER Time value of money
Valuation Principle 8 ANSWER Risk and return go hand-in-hand
Bond Valuation ANSWER Present value of the interest payments plus the present value of
the repayment of the bond's par value at maturity.
Invoice Price ANSWER sum of the quoted or stated price of a bond and the bond's accrued
interest-price of bond on secondary market
Value of Preferred Stock ANSWER = Annual preferred stock dividend/ Required rate of
return
, Preferred Stock ANSWER A security with no fixed maturity date and with dividends that are
generally set in amount and don't fluctuate.
Ginnie Mae ANSWER Pass-through certificates issued by the Government National
Mortgage Association, a.k.a:
Features & Characteristics of Preferred Stock ANSWER 1. Multiple issues
2. Cumulative feature
3. Adjustable rate
4. Convertibility
5. Call-ability
Risks of Preferred Stock ANSWER 1. Interest rates rise= Preferred stock value decrease
2. Interest rates decrease= Preferred stock value increase (Callable bonds)
3. Investor does NOT earn capital gains
4. Investor does NOT have safety of bond interest payments
Bond Valuation of investor if interest rates are expected to go up (bond prices fall).
ANSWER Purchase very short-term bonds
Bond Valuation of investor if interest rates are expected to go down (bond prices rise).
ANSWER Purchase long-term bonds (long maturities) that are NOT callable
The poorer the rating of a bond ANSWER The higher the rate of return demanded by investor
Required rate of return should rise ANSWER If the issuer becomes riskier
Answers
Why consider bonds? ANSWER 1. Reduce risk through diversification
2. Produce steady income
3. Can be a safe investment if held to maturity
4. Interest rates decrease= bond prices increase
Why to NOT consider bonds? ANSWER 1. Interest rates increase= bond prices decrease
2. Issuer have financial problems; bondholder's may pay
3. Callable: Interest rates decrease= bond is called
4. May have a problem selling bonds early, unreasonable prices
5. Difficult to find an investment outlet for interest received.
Indenture ANSWER A legal document that provides specific terms of the loan
Indenture includes: ANSWER 1. Bond description
2. Bondholder's rights
3. Issuing firms rights
4. Bond trustee's responsibilities
Treasury & agency bonds are: ANSWER 1. Risk-free
2. Not callable
3. Lower interest rate
4. Interest payment exempt from state and local taxes
,Treasury Inflation-Protected Securities (TIPS) ANSWER Par value of bond increases with
consumer price index to guarantee investor a real rate of return
Muni's (municipal bonds) ANSWER Issued by states, counties, cities, public agencies e.g.
school districts.
Zero Coupon Bonds ANSWER Don't pay interest and are sold at a deep discount from their
par value
Junk Bonds ANSWER High-yield bonds, very risky, low-rated BB or below
Current Yield ANSWER Ratio of annual interest payment to the bond's market price
Yield to Maturity (YTM) ANSWER True yield or return that the bondholder receives if a
bond is held to maturity- measures of expected return
Valuation Principle 3 ANSWER Time value of money
Valuation Principle 8 ANSWER Risk and return go hand-in-hand
Bond Valuation ANSWER Present value of the interest payments plus the present value of
the repayment of the bond's par value at maturity.
Invoice Price ANSWER sum of the quoted or stated price of a bond and the bond's accrued
interest-price of bond on secondary market
Value of Preferred Stock ANSWER = Annual preferred stock dividend/ Required rate of
return
, Preferred Stock ANSWER A security with no fixed maturity date and with dividends that are
generally set in amount and don't fluctuate.
Ginnie Mae ANSWER Pass-through certificates issued by the Government National
Mortgage Association, a.k.a:
Features & Characteristics of Preferred Stock ANSWER 1. Multiple issues
2. Cumulative feature
3. Adjustable rate
4. Convertibility
5. Call-ability
Risks of Preferred Stock ANSWER 1. Interest rates rise= Preferred stock value decrease
2. Interest rates decrease= Preferred stock value increase (Callable bonds)
3. Investor does NOT earn capital gains
4. Investor does NOT have safety of bond interest payments
Bond Valuation of investor if interest rates are expected to go up (bond prices fall).
ANSWER Purchase very short-term bonds
Bond Valuation of investor if interest rates are expected to go down (bond prices rise).
ANSWER Purchase long-term bonds (long maturities) that are NOT callable
The poorer the rating of a bond ANSWER The higher the rate of return demanded by investor
Required rate of return should rise ANSWER If the issuer becomes riskier
