BA 323 FINAL EXAMINATION QUESTIONS WITH
SOLUTIONS GRADED A+2025/2026
Bond's Coupons - ✔✔stated interest payment made on a bond or regulr interest
payments
*sometimes called level coupon bond
✔✔Face/Par Value - ✔✔-principal amount of a bond repaid a the end of the loan/term
-repaid at maturity/end
✔✔Coupon rate - ✔✔annual coupon divided by the face vale of the bond
set by issuer at time bond is issuesd
*remains constant for life of bond / doesn't change
✔✔Bonds time to maturity - ✔✔number of years until face/par value is paid
✔✔Maturity (N) - ✔✔Specified date on which the principal amount of the bond is paid
✔✔Yield to Maturity (YTM) (I/Y) - ✔✔-the rate required in the market on a bond
-market required rate of return for bonds of similar risk and maturity
-discount rate used to value a bond
-usually = coupon rate at issue
-quoted as an APR
**YTM, required rate of return, and discount/market rate used synonymously**
✔✔Current Yield (Bonds) - ✔✔bond's annual coupon divided by its price
✔✔Coupon Payment - ✔✔PMT = multiply coupon interest rate by par value
✔✔Bond Value - ✔✔=PV of coupons + PV of par/face value
=PV (annuity) = PV (lump sum)
* value of a bond (market price) is the PV of expected CF's discounted at the market
rate of interest (I/Y) *
✔✔Bond Prices & Interest Rates .. - ✔✔as interest rates increase present values
decrease
as interest rates increases bond value decrease and vice versa
,✔✔2 things to keep in mind when looking at a bond (Interest Rate Risk) - ✔✔1. All other
things being equal, the longer the time to maturity, the greater the interest rate risk.
2. All other things being equal, the lower the coupon rate, the greater the interest rate
risk.
✔✔Interest Rate Risk - ✔✔risk from fluctuating interest rates
* 2 dimensions *
1. Interest Rate Price Risk (IRPR)
2. Interest Rate Reinvestment Risk (IRRR)
✔✔Interest Rate Price Risk (IRPR) - ✔✔A. Change in bond price due to change in
interest rates
B. Long term bonds have more price risk than short term bonds
C. Low coupon rate bonds have more price risk than high coupon rate bonds
✔✔Interest Rate Reinvestment Risk (IRRR) - ✔✔A. Uncertainty concerning rates at
wish cash flows can be reinvested
B. Short term bonds have more reinvestment rate risk than long-term bonds ..... the
large cash flow at maturity will be sooner and will need to be reinvested at current
market rates, which may be less than the bond's coupon rate
C. High coupon rate bonds have more reinvestment rate risk than low coupon rate
bonds ..... the coupons make up a large portion of the bond's CF's an must be
reinvested at market rates
✔✔Debt! - ✔✔-Not an ownership interest
-No voting rights
-Interest is tax-deductible
-Creditors have legal recourse if interest or principal payments are missed
-Excess debt can lead to financial distress and bankruptcy
✔✔Equity! - ✔✔-Ownership interest
-Common stockholders vote to elect the board of directors and on other issues
-Dividends are not tax deductible
-Dividends are not a liability of the firm until declared. Stockholders have no legal
recourse if dividends are not declared
-An all-equity firm cannot go bankrupt
✔✔Bond Classifications - ✔✔- Registered vs. Bearer
-Security
, `Collateral
`Mortgage
`Debentures
`Notes
-Seniority
✔✔Which bonds will have the higher coupon, all else equal? - ✔✔-Secured debt
-Subordinated debenture
-A bond with a sinking fund vs. one without
-A callable bond payment stops when bond is called vs. a non-callable bond
✔✔Gov't Bonds - ✔✔Treasury Securities!
T-Bills= Pure discount / Maturity of 1 year or less
T-Notes= Coupon debt / Maturity between 1 -10 years
T-Bonds= Coupon debt / Maturity greater than 10 years
✔✔Quoted Price vs Invoice Price - ✔✔Quoted; "clean" price - net of accrued interest
Invoice; "dirty/full" price - price actually paid, including accrued
✔✔Accrued interest - ✔✔Interest earned since last coupon payment is owed to bond
seller at time of sell
✔✔Inflation and Interest Rates - ✔✔Real rate of interest/return - has been adjusted for
inflation
Nominal rate on interest - that has not been adjusted for inflation but included inflation
expectations
✔✔Fisher effect - ✔✔defined relationship between real rates, nominal rates, and
inflation
✔✔Factors affecting Required Return - ✔✔-Default Risk premium; compensation for the
possibilty of default
-Taxability premium; compensation for unfavorable tax status
-Liquidity premium; compensation for lack of liquidity
-Maturity premium; compensates investors for tying up funds for longer periods of time
✔✔CH 7 Components of Required Return - ✔✔Dividend yield (D1/P0)
Capital Gains Yield (g)
SOLUTIONS GRADED A+2025/2026
Bond's Coupons - ✔✔stated interest payment made on a bond or regulr interest
payments
*sometimes called level coupon bond
✔✔Face/Par Value - ✔✔-principal amount of a bond repaid a the end of the loan/term
-repaid at maturity/end
✔✔Coupon rate - ✔✔annual coupon divided by the face vale of the bond
set by issuer at time bond is issuesd
*remains constant for life of bond / doesn't change
✔✔Bonds time to maturity - ✔✔number of years until face/par value is paid
✔✔Maturity (N) - ✔✔Specified date on which the principal amount of the bond is paid
✔✔Yield to Maturity (YTM) (I/Y) - ✔✔-the rate required in the market on a bond
-market required rate of return for bonds of similar risk and maturity
-discount rate used to value a bond
-usually = coupon rate at issue
-quoted as an APR
**YTM, required rate of return, and discount/market rate used synonymously**
✔✔Current Yield (Bonds) - ✔✔bond's annual coupon divided by its price
✔✔Coupon Payment - ✔✔PMT = multiply coupon interest rate by par value
✔✔Bond Value - ✔✔=PV of coupons + PV of par/face value
=PV (annuity) = PV (lump sum)
* value of a bond (market price) is the PV of expected CF's discounted at the market
rate of interest (I/Y) *
✔✔Bond Prices & Interest Rates .. - ✔✔as interest rates increase present values
decrease
as interest rates increases bond value decrease and vice versa
,✔✔2 things to keep in mind when looking at a bond (Interest Rate Risk) - ✔✔1. All other
things being equal, the longer the time to maturity, the greater the interest rate risk.
2. All other things being equal, the lower the coupon rate, the greater the interest rate
risk.
✔✔Interest Rate Risk - ✔✔risk from fluctuating interest rates
* 2 dimensions *
1. Interest Rate Price Risk (IRPR)
2. Interest Rate Reinvestment Risk (IRRR)
✔✔Interest Rate Price Risk (IRPR) - ✔✔A. Change in bond price due to change in
interest rates
B. Long term bonds have more price risk than short term bonds
C. Low coupon rate bonds have more price risk than high coupon rate bonds
✔✔Interest Rate Reinvestment Risk (IRRR) - ✔✔A. Uncertainty concerning rates at
wish cash flows can be reinvested
B. Short term bonds have more reinvestment rate risk than long-term bonds ..... the
large cash flow at maturity will be sooner and will need to be reinvested at current
market rates, which may be less than the bond's coupon rate
C. High coupon rate bonds have more reinvestment rate risk than low coupon rate
bonds ..... the coupons make up a large portion of the bond's CF's an must be
reinvested at market rates
✔✔Debt! - ✔✔-Not an ownership interest
-No voting rights
-Interest is tax-deductible
-Creditors have legal recourse if interest or principal payments are missed
-Excess debt can lead to financial distress and bankruptcy
✔✔Equity! - ✔✔-Ownership interest
-Common stockholders vote to elect the board of directors and on other issues
-Dividends are not tax deductible
-Dividends are not a liability of the firm until declared. Stockholders have no legal
recourse if dividends are not declared
-An all-equity firm cannot go bankrupt
✔✔Bond Classifications - ✔✔- Registered vs. Bearer
-Security
, `Collateral
`Mortgage
`Debentures
`Notes
-Seniority
✔✔Which bonds will have the higher coupon, all else equal? - ✔✔-Secured debt
-Subordinated debenture
-A bond with a sinking fund vs. one without
-A callable bond payment stops when bond is called vs. a non-callable bond
✔✔Gov't Bonds - ✔✔Treasury Securities!
T-Bills= Pure discount / Maturity of 1 year or less
T-Notes= Coupon debt / Maturity between 1 -10 years
T-Bonds= Coupon debt / Maturity greater than 10 years
✔✔Quoted Price vs Invoice Price - ✔✔Quoted; "clean" price - net of accrued interest
Invoice; "dirty/full" price - price actually paid, including accrued
✔✔Accrued interest - ✔✔Interest earned since last coupon payment is owed to bond
seller at time of sell
✔✔Inflation and Interest Rates - ✔✔Real rate of interest/return - has been adjusted for
inflation
Nominal rate on interest - that has not been adjusted for inflation but included inflation
expectations
✔✔Fisher effect - ✔✔defined relationship between real rates, nominal rates, and
inflation
✔✔Factors affecting Required Return - ✔✔-Default Risk premium; compensation for the
possibilty of default
-Taxability premium; compensation for unfavorable tax status
-Liquidity premium; compensation for lack of liquidity
-Maturity premium; compensates investors for tying up funds for longer periods of time
✔✔CH 7 Components of Required Return - ✔✔Dividend yield (D1/P0)
Capital Gains Yield (g)
