Exam 1 Advanced corporate finance
UPDATED ACTUAL Exam Questions and
CORRECT Answers
What happens to PV as interest rates increase - CORRECT ANSWER - PV decreases
YTM = coupon - CORRECT ANSWER - then bond sells at par value
YTM > Coupon - CORRECT ANSWER - Bond sells at discount
YTM < coupon - CORRECT ANSWER - Bond sells at premium
Interest rate risk - CORRECT ANSWER - the risk that arises for bond owners from
fluctuating interest rates
Price risk - CORRECT ANSWER - change in price due to changes in interest rates
What have more price risk, long term bonds or short term bonds - CORRECT ANSWER -
long term bonds
What has more price risk, high coupon bonds or low coupon rate bonds - CORRECT
ANSWER - low coupon rate bonds
Reinvestment rate risk - CORRECT ANSWER - uncertainty concerning rates at which
cash flows can be reinvested
Which is more reinvestment rate risk, short term or long term bonds - CORRECT
ANSWER - short term
, Which has more reinvestment rate risk, high coupon or low coupon rate bonds - CORRECT
ANSWER - high coupon rate bonds
Current yield formula - CORRECT ANSWER - annual coupon/price
Yield to maturity formula - CORRECT ANSWER - current yield + capital gains yield
Bond indenture - CORRECT ANSWER - contract between the company and the
bondholders that includes, basic terms of bond, total amount of bonds issued, sinking fund
provisions, call provisions, details of protective covenants
Registered form - CORRECT ANSWER - the registrar of a company records who owns
each bond, and bond payments are made directly to the owner of record
Bearer form - CORRECT ANSWER - a bond issued without record of the owner's name;
payment is made to whomever holds the bond
A taxable bond has a yield of 8% and a
municipal bond has a yield of 6%
If you are in a 40% tax bracket, which bond do you prefer? - CORRECT ANSWER - If
you are in the 30% tax bracket, which bond do you prefer?
8%(1-.3)=5.6%
The A.T. return on the corporate bond is 5.6% compared to a 6% return on the municipal
At what tax rate would you be indifferent between the two bonds?
8%(1-T)=6%
T=25%
what can zero coupon bonds sell for - CORRECT ANSWER - cannot sell for more than
par
UPDATED ACTUAL Exam Questions and
CORRECT Answers
What happens to PV as interest rates increase - CORRECT ANSWER - PV decreases
YTM = coupon - CORRECT ANSWER - then bond sells at par value
YTM > Coupon - CORRECT ANSWER - Bond sells at discount
YTM < coupon - CORRECT ANSWER - Bond sells at premium
Interest rate risk - CORRECT ANSWER - the risk that arises for bond owners from
fluctuating interest rates
Price risk - CORRECT ANSWER - change in price due to changes in interest rates
What have more price risk, long term bonds or short term bonds - CORRECT ANSWER -
long term bonds
What has more price risk, high coupon bonds or low coupon rate bonds - CORRECT
ANSWER - low coupon rate bonds
Reinvestment rate risk - CORRECT ANSWER - uncertainty concerning rates at which
cash flows can be reinvested
Which is more reinvestment rate risk, short term or long term bonds - CORRECT
ANSWER - short term
, Which has more reinvestment rate risk, high coupon or low coupon rate bonds - CORRECT
ANSWER - high coupon rate bonds
Current yield formula - CORRECT ANSWER - annual coupon/price
Yield to maturity formula - CORRECT ANSWER - current yield + capital gains yield
Bond indenture - CORRECT ANSWER - contract between the company and the
bondholders that includes, basic terms of bond, total amount of bonds issued, sinking fund
provisions, call provisions, details of protective covenants
Registered form - CORRECT ANSWER - the registrar of a company records who owns
each bond, and bond payments are made directly to the owner of record
Bearer form - CORRECT ANSWER - a bond issued without record of the owner's name;
payment is made to whomever holds the bond
A taxable bond has a yield of 8% and a
municipal bond has a yield of 6%
If you are in a 40% tax bracket, which bond do you prefer? - CORRECT ANSWER - If
you are in the 30% tax bracket, which bond do you prefer?
8%(1-.3)=5.6%
The A.T. return on the corporate bond is 5.6% compared to a 6% return on the municipal
At what tax rate would you be indifferent between the two bonds?
8%(1-T)=6%
T=25%
what can zero coupon bonds sell for - CORRECT ANSWER - cannot sell for more than
par
