FIN 301 PSU Final Exam Questions with
100% Correct Answers
The amount that is originally borrowed or the amount that is repaid when the bond
mature is due is known as ___________.
A. Indenture.
B. Par value.
C. Principal amount.
D. Maturity value.
E. B, C, and D are correct. - Answer-E
Which of the following is NOT the amount that is originally borrowed or the amount that
is repaid when the bond mature is due?
A. Indenture.
B. Par value.
C. Principal amount.
D. Maturity value.
E. B, C, and D are correct. - Answer-A
Assume that a 10-year semi-annual, 6% bond is callable after 5 years at 102% of par
value and the discount rate in today's market is 5%. Using the price-to-worst method,
what is the value of this bond?
A. $1,078
B. $1,059
C. $1,020
D. $1,000
E. $1,089 - Answer-B
Assume that a 20-year semi-annual, 9% bond is callable after 10 years at 101% of par
value and the discount rate in today's market is 7%. Using the price-to-worst method,
what is the value of this bond?
A. $1,000
B. $1,100
C. $1,147
D. $1,214
E. $1,010 - Answer-C
Which of the following is NOT true concerning the interest rate risk while investing in
fixed-coupon debt obligations?
A. The lower the coupon on a bond, the higher the volatility of bond prices, the greater
the interest rate risk
B. Interest rate risk is the most difficult risk to assess, among the four types of risks.
C. The longer the maturity of a bond, the lower the volatility of bond prices, the smaller
the risk.
,D. Interest rate risk is the risk that a change in market interest rates will affect the value
of the bond.
E. Fluctuations in market levels of interest rates would affect the price a bond. - Answer-
C
Which of the following is TRUE concerning the interest rate risk while investing in fixed-
coupon debt obligations?
A. The higher the coupon on a bond, the higher the volatility of bond prices, the greater
the interest rate risk
B. Interest rate risk is the easiest risk to assess, among the four types of risks.
C. The longer the maturity of a bond, the lower the volatility of bond prices, the smaller
the risk.
D. Interest rate risk is the risk that a change in market interest rates will affect the
interest payments to the bond holders.
E. Fluctuations in market levels of interest rates would affect the price a bond. - Answer-
E
You own a 10-year bond and a 20-year bond, both of which are non-callable bond and
pay a coupon of 8%. What is true about the change in value of your bonds if interest
rate fall from 12% to 9%?
A. The value of the 20-yr bond will decrease by $46 more than the 10-yr bond
B. The value of the 20-yr bond will decrease by $27 more than the 10-yr bond
C. The value of the 20-yr bond will increase by $46 more than the 10-yr bond
D. The value of the 20-yr bond will increase by $27 more than the 10-yr bond
E. The value of the 20-yr bond will increase by $72 more than the 10-yr bond - Answer-
C
You own a 15-year bond and a 20-year bond, both of which are non-callable bond and
pay a coupon of 10%. What is true about the change in value of your bonds if interest
rate rise from 7% to 9%?
A. The value of the 20-yr bond will decrease by $34 more than the 15-yr bond
B. The value of the 20-yr bond will decrease by $11 more than the 15-yr bond
C. The value of the 20-yr bond will decrease by $45 more than the 15-yr bond
D. The value of the 20-yr bond will increase by $34 more than the 15-yr bond
E. The value of the 20-yr bond will increase by $11 more than the 15-yr bond - Answer-
A
Which of the following is TRUE regarding fixed rate discount bonds?
A. The bond's coupon rate is lower than the yield that it offers.
B. The bond's coupon rate is higher than the yield that it offers.
C. The bond's coupon rate is equal to the yield that it offers.
D. The market value of the bond is higher than par.
E. The market value of the bond is equal to its par value. - Answer-A
Which of the following is TRUE regarding fixed rate premium bonds?
A. The bond's coupon rate is lower than the yield that it offers.
,B. The bond's coupon rate is higher than the yield that it offers.
C. The bond's coupon rate is equal to the yield that it offers.
D. The market value of the bond is less than its par value.
E. The market value of the bond is equal to its par value. - Answer-B
Value a 15-yr semi-annual, non-callable bond that pays coupons of 9% assuming
market interest rates are 6%.
A. $1,274
B. $1,033
C. $1,000
D. $943
E. $1,294 - Answer-E
Value a 20-yr semi-annual, non-callable bond that pays coupons of 8% assuming
market interest rates are 10%.
A. $989
B. $1,000
C. $909
D. $1,455
E. $828 - Answer-E
Which of the following is true about bonds?
A. The bond rating being changed from BBB+ to A would result in a higher required
yield
B. The primary advantage to municipal bonds is lower reinvestment risk
C. Callable bonds require higher yields than non-callable bonds because of higher
default risk
D. Treasury securities are priced once per month while other bond prices fluctuate daily
E. The issuer retains interest rate risk on floating rate bonds - Answer-E
Which of the following is true about bonds?
A. The bond rating being changed from BBB+ to B would result in a lower required yield
B. The primary advantage to municipal bonds is that interest income received is not
taxed by the federal government
C. Interest from mortgage bonds are not taxed by the Federal Government.
D. Spread to treasuries measures the difference between the coupon rate paid by a
bond and the coupon rate paid by risk free security with the comparable maturity
E. Only bonds issued in the primary market are subject to prepayment risk - Answer-B
Which of the below is/are considered type(s) of risk involved when investing in fixed-
coupon debt obligations?
A. Default risk
B. Reinvestment risk
C. Interest rate risk
D. Prepayment risk
E. All of the above - Answer-E
, Which of the below is/are considered the risk(s) that the bond will not pay interest or
principal?
A. Default risk
B. Reinvestment risk
C. Interest rate risk
D. Prepayment risk
E. All of the above - Answer-A
According to the Random Walk Hypothesis, in efficient markets, ________.
A. Stock prices are not random.
B. Stock prices can be predicted solely on the basis of past movements.
C. There is a predictable trend in stock prices.
D. Stock prices are random and cannot be predicted solely on the basis of past
movements.
E. Stock prices are not random and they can be predicted by past movements. -
Answer-D
According to the Random Walk Hypothesis, in efficient markets, ________.
A. There are predictable stock trends in efficient markets based on past performance.
B. Technical Analysis is a valid method to determine future stock prices.
C. Share prices react immediately to news and share price changes are random.
D. Past historical data can be used to predict future share prices.
E. Beta is a risk that can be eliminated through diversification. - Answer-C
Which of the following is the risk that income earned from a bond's coupon payments
will earn a different rate of return?
A. Default risk
B. Reinvestment risk
C. Prepayment risk
D. Interest rate risk
E. Systematic risk - Answer-B
Which of the following is the risk that changes in market rates will affect the value of a
bond?
A. Default risk
B. Reinvestment risk
C. Prepayment risk
D. Interest rate risk
E. Systematic risk - Answer-D
Which of the following is definitely true when interest rates are higher than a bond's
coupon rate?
A. Bond will sell at a premium
B. Bond will sell at a discount
C. Bond will sell at par
