HCAD 760 EXAMINATION TEST 2025/2026 QUESTIONS
WITH ANSWERS TAGGED A+
✔✔speculative bonds - ✔✔sometimes called junk bonds, have a higher probability of
default, and thus a higher rate of interest. These bonds would be attractive to investors
who have a high tolerance for risk, but would not be held by companies with fiduciary
obligations, such as pension funds.
✔✔lower bond rating - ✔✔investors will want a higher return on their investment
✔✔required rate of return - ✔✔the interest rate on debt
✔✔real risk-free rate (RRF) - ✔✔rate of return an investor would require if there was
almost no risk and no expectation of inflation
✔✔Inflation Premium (IP) - ✔✔influenced by expectations of inflation that investors
have
✔✔Default Risk Premium (DRP) - ✔✔affected by credit ratings that an organization has
✔✔Liquidity Premium (LP) - ✔✔how quickly the bond can be sold in the market
✔✔Price risk premium (PRP) - ✔✔if interest rates go up, the market value of the bond
may go down
✔✔Call risk premium (CRP) - ✔✔risk of bond being called before it matures, only
applies if the bond has a call provision
✔✔par value - ✔✔stated face value of the bond, generally the amount borrowed and
repaid at maturity
✔✔coupon rate - ✔✔the stated rate of interest on bonds, usually fixed
✔✔maturity date - ✔✔date when the par value will be repaid to investors, declines each
year after issue
✔✔new bond - ✔✔first issued
✔✔Seasoned Bond - ✔✔Bond traded from one investor to another, already in the
market
✔✔General Valuation Model - ✔✔the financial value of any asset stems from the
asset's expected cash flows
, ✔✔General Valuation Model - ✔✔estimate expected cash flows, assess their riskiness,
set the required rate of return, discount the cash flows and sum the present values
✔✔bond value decreases - ✔✔as interest rate increases
✔✔bond value increases - ✔✔if interest rate decreases
✔✔mature bond - ✔✔value must equal its par value (plus final interest payment)
✔✔premium bond - ✔✔value will decrease to par value at maturity
✔✔discount bondy - ✔✔value will increase to par value at maturity
✔✔Par Bond - ✔✔value will remain at par if interest rates remain constant
✔✔yield to maturity - ✔✔the expected rate of return assuming the bond is held to
maturity and no default occurs
✔✔yield to maturity - ✔✔the discount rate that makes the present value of a bond's
payments equal to its price
✔✔Long-term bonds - ✔✔high price risk, low reinvestment risk
✔✔short term bonds - ✔✔Low price risk, high reinvestment rate risk
✔✔informational efficiency - ✔✔relevant information about assets can be easily
obtained at low cost, the market contains many buyers and sellers who act on this
information
✔✔price risk (interest rate risk) - ✔✔the risk of a decline in a bond's price due to an
increase in interest rates
✔✔reinvestment rate risk - ✔✔the risk that a decline in interest rates will lead to lower
income when bonds mature and funds are reinvested
✔✔greater - ✔✔the shorter the maturity, the ___________ greater the reinvestment risk
✔✔dividend valuation model - ✔✔the value of a share stock is the present value of the
expected cash flow stream to shareholders, includes dividends and a future selling price
✔✔constant growth model - ✔✔dividends are expected to grow at a constant rate
forever
WITH ANSWERS TAGGED A+
✔✔speculative bonds - ✔✔sometimes called junk bonds, have a higher probability of
default, and thus a higher rate of interest. These bonds would be attractive to investors
who have a high tolerance for risk, but would not be held by companies with fiduciary
obligations, such as pension funds.
✔✔lower bond rating - ✔✔investors will want a higher return on their investment
✔✔required rate of return - ✔✔the interest rate on debt
✔✔real risk-free rate (RRF) - ✔✔rate of return an investor would require if there was
almost no risk and no expectation of inflation
✔✔Inflation Premium (IP) - ✔✔influenced by expectations of inflation that investors
have
✔✔Default Risk Premium (DRP) - ✔✔affected by credit ratings that an organization has
✔✔Liquidity Premium (LP) - ✔✔how quickly the bond can be sold in the market
✔✔Price risk premium (PRP) - ✔✔if interest rates go up, the market value of the bond
may go down
✔✔Call risk premium (CRP) - ✔✔risk of bond being called before it matures, only
applies if the bond has a call provision
✔✔par value - ✔✔stated face value of the bond, generally the amount borrowed and
repaid at maturity
✔✔coupon rate - ✔✔the stated rate of interest on bonds, usually fixed
✔✔maturity date - ✔✔date when the par value will be repaid to investors, declines each
year after issue
✔✔new bond - ✔✔first issued
✔✔Seasoned Bond - ✔✔Bond traded from one investor to another, already in the
market
✔✔General Valuation Model - ✔✔the financial value of any asset stems from the
asset's expected cash flows
, ✔✔General Valuation Model - ✔✔estimate expected cash flows, assess their riskiness,
set the required rate of return, discount the cash flows and sum the present values
✔✔bond value decreases - ✔✔as interest rate increases
✔✔bond value increases - ✔✔if interest rate decreases
✔✔mature bond - ✔✔value must equal its par value (plus final interest payment)
✔✔premium bond - ✔✔value will decrease to par value at maturity
✔✔discount bondy - ✔✔value will increase to par value at maturity
✔✔Par Bond - ✔✔value will remain at par if interest rates remain constant
✔✔yield to maturity - ✔✔the expected rate of return assuming the bond is held to
maturity and no default occurs
✔✔yield to maturity - ✔✔the discount rate that makes the present value of a bond's
payments equal to its price
✔✔Long-term bonds - ✔✔high price risk, low reinvestment risk
✔✔short term bonds - ✔✔Low price risk, high reinvestment rate risk
✔✔informational efficiency - ✔✔relevant information about assets can be easily
obtained at low cost, the market contains many buyers and sellers who act on this
information
✔✔price risk (interest rate risk) - ✔✔the risk of a decline in a bond's price due to an
increase in interest rates
✔✔reinvestment rate risk - ✔✔the risk that a decline in interest rates will lead to lower
income when bonds mature and funds are reinvested
✔✔greater - ✔✔the shorter the maturity, the ___________ greater the reinvestment risk
✔✔dividend valuation model - ✔✔the value of a share stock is the present value of the
expected cash flow stream to shareholders, includes dividends and a future selling price
✔✔constant growth model - ✔✔dividends are expected to grow at a constant rate
forever
