Exam (elaborations)
Fin 400 Questions And Answers Latest Update
- Course
- FIN 400
- Institution
- University Of Illinois - Urbana-Champaign
Fin 400 Questions And Answers Latest Update
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2024/2025Fin 400 Questions And Answers
Latest Update
What does the section begin a thorough coverage of? ANS✔✔ Valuing financial claims and various
types of investment strategies (somewhat included)
QWhat is the simplest type of financial claim discussed in chapter 14? What makes it so simple?
ANS✔✔ The bond. Most bond contracts completely describe the promised cash flows to be paid to
the holder. For the bond all the analysts must do is assess its risk, Pick the discount rate based on
this assessment, and find the present value.
What are some exotic features of bonds?* ANS✔✔ Convertible option
Callable option
Puttable bonds
Floating rate bonds
Indexed bonds
Catastrophe bonds
Asset-backed bonds
Inverse Floaters
QWhat are the functions financial calculators regarding bonds? ANS✔✔ N-Years til maturity
I/Y- Yield or fair return
PMT-Periodic coupon payment (FV x Coupon Rate)
FV- The return of principal
What is the equation in 14.1 * ANS✔✔
QWhat four things must happen for an investor to earn the yield to maturity? ANS✔✔ 1. Investor
must hold the bond until it matures.
, 2024/2025
2. There's no default.
3. All cash flows are invested at the fair rate or I/Y.
4. There's no change in the fair rate.
Q Why won't the fourth condition to earn the yield to maturity never be satisfied? ANS✔✔ The
fair rate depends on the general level of rates and they are constantly changing making it impossible
for the fourth condition to be satisfied.
QWhat are some problems with using CAPM to model the fair bond return. ANS✔✔ 1. Bonds
prices follow systemic relationships and move towards par as maturity approaches.
2. When rates change the reinvestment returns and the immediate capital gain or loss tend to offset
one another.
Single Variable Model (CAPM) doesn't account for this.
What type of model is used to calculate fair bond yields? ANS✔✔ Multivariate model
QWhat are some factors in the multivariate model that might be important in calculating fair bond
yields. ANS✔✔ 1). Default risk
2). Marketability of bonds
3). Covenants
4). Level of rates
5). Maturity
Q Define default risk and how it affects yield. ANS✔✔ The chance that promised payments will
not follow the schedule, a function of the firm's ability to pay.
QDefine Altman Z score. ANS✔✔ Formula used to predict the probability that a firm will go into
bankruptcy within two years.
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