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: Fin 341
Study Guide-Test II (Chapters 5 and 7)
Chapter 5
* It will be all problems-theres no theory. The problems will be multiple choice format as well as written format.
*Get a feel for what you are doing in the problems. Do not memorize them-Understand them! Remember that the calculator will always give you answer so you must understand what you are doing
*Use time lines-this will make it easier for you to visualize what you are doing
* You are responsible for knowing how to use your financial calculator-this is part of the test so make sure that you are comfortable using it in all the problems
*The best way to study for this section is to do the explanation problems (slides and the board problems) and the homework problems and make sure that you UNDERSTAND what you are doing. Do not just memorize. Draw a time line and think about what you are trying to do in each instance
*These are the areas that you must know:
1) Know how to compute basic FV and PV
2) Know how to solve for time and interest rate
3) Know how to compute PV and FV of an annuity
4) Know how to compute the PV of a perpetuity
5) Know how to make adjustments for semiannual, quarterly, monthly and other compounding periods
7) Know how to calculate PV of uneven cash flow stream
6) Know how to compute amortized loans. That is, know how to compute the payment AND know how to construct a small amortization table
Work all the problems assigned to you on the homework.
Be able to work a retirement problem or putting kids through college problem
On each written problem-I will ask you to draw a time line showing what you are doing and will have a small point value to this step
Chapter 7
-This chapter will have both theory and problems. The theory will be all multiple choice and the problems will be multiple choice format as well as written format.
-What is a bond
-What are the basic characteristic of a bond: face value, coupon rate and payments, maturity - -- -Sinking fund, call provisions, zero coupon bonds. Know about these
-Why call provision. Who benefits? How compensate the bondholder?
-What is the concept behind bond valuation. What discount rate do you use? Does it change?
-When do we have a par bond (i.e. what is the relationship between coupon rate and the required rate of return) When do we have a premium bond? When do we have a discount bond? (what is the relationship between coupon and required return on these two?)
-What is the relationship between interest rates and bond prices?
-If you planned on keeping the bond to maturity, would you be concerned about interest rate changes?
-What is the YTM? How is it different from the YTC. How about the current yield. Is it accurate? Why not?
-Know about interest rate risk. What is it? How does the length of the bond play role? What about reinvestment risk. What would interest rates be doing in this case?
-Default risk. What is a mortgage bond. What is a debenture. What is the difference between investment grade and junk bonds
-You dont have to know about the factors that are used to rate bonds nor do you have to memorize the bond ratings. Finish your study of the theory of bonds by reading about the importance of bond ratings and the changes in ratings.
Chapter 7 problems
-Make sure you can value a bond, compute its YTM and/or its YTC and do so assuming either annual or semiannual interest payments
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