Q&A Hero

Q: Which of the following securities is eligible for a cumulative dividend? a. Debenture bonds b. Preferred stock c. Classified stock d. Common stock e. Founders' stock

Q: Which of the following is a feature of a preferred stock? a. Preferred stockholders have priority over debt holders, with regard to the distribution of earnings and assets of the firm. b. Preferred stockholders can elect the members of the board of directors and also vote on corporate issues. c. The firm generally pays different amounts of preferred stock dividends each year. d. Preferred stockholders have the right to receive shares of any new common stock issues in proportion to their current ownership holdings. e. Preferred stockholders have a higher priority claim to distributions made by the firm than common stockholders.

Q: Which of the following types of securities is referred to as a hybrid security? a. Corporate bonds b. Preferred stock c. Founders' shares d. Foreign equity e. Growth stock

Q: Which of the following is true of the call provision found in preferred stocks? a. The call provision gives preferred stockholders the right to both elect the members of the board of directors and call for votes on corporate issues. b. The call provision gives preferred stockholders priority over common stockholders with regard to ownership of the assets of the firm. c. The call provision gives preferred stockholders the right to receive preferred dividends that were not paid in previous years before any common stock dividends can be paid. d. The call provision gives the issuing firm right to redeem its preferred stock by incorporating a maturity option in the issue. e. The call provision gives preferred stock the right to participate with the common stock in a firm's earnings.

Q: The amount in excess of par value that a company must pay when it repurchases a security is known as the _____. a. call premium b. preemptive price c. cumulative dividend d. participating dividend e. growth stock

Q: If a firm wants to be able to redeem some of its preferred stock at some date after issue, it must _____. a. pay accumulated dividends to the common stockholders b. issue the stock at par value at the time of issue c. incorporate a call provision in the preferred stock issue d. provide voting rights to preferred stockholders e. include a preemptive right in the preferred stock issue

Q: Omega Software Corporation's bond with a face value of $1,000 is currently selling at a premium in the financial markets. If the bond's yield to maturity is 11.5 percent, then the bond's: a. coupon rate of interest must be less than 11.5 percent. b. coupon rate of interest must be greater than 11.5 percent. c. coupon rate of interest must be equal to 11.5 percent. d. maturity value must be greater than $1,000. e. maturity value must be less than $1,000.

Q: Which of the following statements about a bond that is selling at a discount is correct? a. Because the coupon rate remains constant, the market value of the bond also remains constant throughout its life. b. The market price of the bond will be greater than the bond's face value. c. The market price of the bond will increase and will approach its face value as the maturity date gets closer. d. Both the market price of the bond and the interest received will increase as the maturity date nears. e. The par value of the bond will increase with every increase in the market price of the bond until the maturity date is reached.

Q: The percentage rate of return that investors earn on a bond consists of a(n): a. interest yield plus a capital gains yield. b. interest yield plus the maturity value of the bond. c. expected interest yield plus the principal value of the bond. d. expected capital gains yield plus the future value of coupon payments. e. market interest rate plus the coupon interest rate.

Q: Which of the following statements about a bond that sells for its par value is correct? a. The yield to maturity is comprised of a capital gains yield equal to the face value of the bond. b. As long as market rates remain constant, the bond's capital gains yield will equal to zero. c. The yield to maturity is comprised of an interest yield equal to the capital yield on the bond. d. The yield to maturity is equal to the present value of interest payments received from the bond. e. The yield to maturity is equal to the future value of interest payments received from the bond.

Q: Which of the following statements is correct? a. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the issuer will purchase bonds in the financial markets because their prices will be less than the par value. b. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond's maturity value would be more than its par value. c. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond will mature in 15 years and not in 10 years. d. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond will sell at a premium. e. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond's coupon rate would decrease from 10 percent to 5 percent.

Q: Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is: a. equal to 12 percent. b. greater than 12 percent. c. less than 12 percent. d. equal to 7.2 percent. e. greater than 16.8 percent.

Q: If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be: a. selling at a discount; i.e., the bond's market price should be less than its face (maturity) value. b. selling at a premium; i.e., the bond's market price should be greater than its face value. c. selling at par; i.e., the bond's market price should be the same as its face value. d. a floating-rate bond yielding market adjusted interest. e. an indexed bond that adjusts interest payments on the basis of an inflation index.

Q: Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at _____ in the financial markets. a. the par value b. a discount c. a premium d. the inflation adjusted interest rate e. a floating interest rate

Q: GP&L sold $1,000,000 of 12 percent, 30-year, semiannual payment bonds with a face value of $1,000, 15 years ago. The bonds are not callable, but they do have a sinking fund, which requires GP&L to redeem 5 percent of the original face value of the issue each year ($50,000), beginning in Year 11. To date, 25 percent of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds in the open market, spending sufficient money to redeem 5 percent of the original face value each year. If the current market yield of the bonds is 14 percent, what is the least amount of money GP&L must put in to satisfy the sinking fund provision for the next redemption? a. $43,858 b. $50,127 c. $37,532 d. $43,796 e. $39,422

Q: Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8 percent, then at what interest rate should Rolling Coast expect to issue new bonds? a. 7.8% b. 8.7% c. 9.2% d. 10.2% e. 12.9%

Q: The _____ of a bond fluctuates continuously during its life. a. principal value b. face value c. maturity value d. coupon rate e. market value

Q: Which of the following statements is true of a bond? a. The maturity value of a bond is always more than the market value of the bond. b. Interest payments on a bond increase throughout the duration of the bond. c. The maturity date of a bond is contractually fixed. d. The call provision of a callable bond is normally exercised in the last year of the bond. e. The market value of a bond is stated in the bond indenture.

Q: Two years ago, Synergy Inc. issued a 15-year callable bond with a $1,000 face value and a 12 percent coupon rate of interest (paid semiannually). The bond cannot be called until five years after issue, at which time the call price will equal $1,120. Currently, the bond is selling for $989.What is the bond's yield to call (YTC). a. 7.88% b. 15.76% c. 12.45% d. 12.17% e. 12.56%

Q: A change in market conditions causes the market price of a bond to change because of changes in the bond's: a. coupon rate. b. current (interest) yield. c. yield to maturity. d. principal value. e. maturity value.

Q: At the time a bond is issued, the coupon rate on the bond is set at a level that will cause: a. the coupon rate to be equal to the yield to call on the bond. b. the market interest rate to be greater than the coupon rate of the bond. c. the yield to maturity to be less than the market yield on the bond. d. the issuing price to be equal the face (par) value of the bond. e. the market value to be greater than the maturity value of the bond.

Q: If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's: a. coupon rate. b. yield to maturity. c. yield to call. d. current yield. e. capital gains yield.

Q: The average rate of return earned on a callable bond if it is held until the first call date is the: a. yield to call. b. yield to market. c. yield to principal price. d. yield to issue price. e. yield to maturity.

Q: The computation for the yield to call (YTC) is the same as that for the yield to maturity (YTM), except that we substitute the _____ of the bond for the maturity (par) value and _____ for the years to maturity. a. market price; the number of years until the bond can be first called b. face value; five years c. call price; the number of years until the bond can be first called d. principal value; 10 years e. issue price; the number of years until the bond can be first called

Q: _____ bonds are often called by the firm prior to maturity. a. Floating rate b. Mortgage c. Callable d. Municipal e. Corporate

Q: A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity. a. 6.05% b. 10.00% c. 10.06% d. 8.59% e. 11.26%

Q: The current market price of Smith Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM), (stated on a simple, or annual, basis) if the bonds mature 10 years from today? a. 8% b. 6% c. 4% d. 2% e. 1%

Q: Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity. These bonds will pay $45 interest every 6 months. Current market conditions are such that the bonds will be sold at net $937.79. What is the yield to maturity (YTM) of the issue as a broker would quote it to an investor? a. 11% b. 10% c. 9% d. 8% e. 7%

Q: Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue of face value $1,000 to be put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for five years. Then, interest payments will be resumed for the next five years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first five years will be paid. However, no interest will be paid on the deferred interest. If the required return is 20 percent, what should the bonds sell for in the market today? a. $242.26 b. $281.69 c. $578.31 d. $362.44 e. $813.69

Q: Devine Divots issued a bond a few years ago. The bond has a face value equal to $1,000 and pays investors $30 interest every six months. The bond has eight years remaining until maturity. If an investor requires a 7 percent rate of return to invest in this bond, what is the maximum price the investor should be willing to pay to purchase the bond? a. $761.15 b. $939.53 c. $940.29 d. $965.63 e. $1,062.81

Q: Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. Assuming the yield on similar risk investments is 14 percent, calculate the current market value (price) of the bond. a. $841.15 b. $1,238.28 c. $904.67 d. $757.26 e. $844.45

Q: The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. From the given information, calculate the annual coupon rate on the bond. a. 10% b. 12% c. 14% d. 17% e. 21%

Q: Cold Boxes Corporation has 100 bonds outstanding with a maturity value of $1,000. The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. Which of the following is the annual coupon interest rate? a. 8% b. 6% c. 4% d. 2% e. 0%

Q: JRJ Corporation issued 10-year bonds at a price of $1,000. These bonds pay $60 interest every six months. Their price has remained the same since they were issued; that is, the bonds still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years and a par value of $1,000 and pay $40 interest every six months. If both bonds have the same yield, how many new bonds must JRJ issue to raise additional capital of $2 million? Fractions of bonds cannot be issued. (Round the number of bonds to the nearest whole number.) a. 2,404 b. 2,596 c. 3,073 d. 5,282 e. 4,275

Q: Emily is contemplating the purchase of a 20-year bond that pays $50 interest every six months. The face value of the bond is $1,000. She plans to hold the bond for 10 years and sell it. She requires a 12 percent annual return but believes that the market will give only an 8 percent return when she sells the bond 10 years from now. Assuming she is a rational investor, how much should she be willing to pay for the bond today? a. $1,126.85 b. $885.30 c. $737.50 d. $927.68 e. $856.91

Q: Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The face value of the bond is $1,000. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond? a. $1,273 b. $554 c. $7,783 d. $550 e. $450

Q: Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If an investor requires a simple annual rate of return of 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond? a. $1,204.33 b. $1,207.57 c. $986.43 d. $1,089.53 e. $438.10

Q: A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If an investor's simple annual required rate of return is 12 percent, how much should the investor be willing to pay for this bond? a. $941.36 b. $1,051.25 c. $1,115.57 d. $1,391.00 e. $1,113.00

Q: Assume that an investor wishes to purchase a 20-year bond with a maturity value of $1,000 and semiannual interest payments of $40. If the investor requires a 10 percent simple yield to maturity on this investment, what is the maximum price she should be willing to pay for the bond? a. $830 b. $674 c. $761 d. $828 e. $902

Q: An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every six months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should the investor pay for it? a. $1,122.87 b. $1,003.42 c. $875.38 d. $950.75 e. $877.11

Q: Per Standard & Poor's Corporation (S&P), a bond whose rating is BBB is considered: a. a junk bond with low investment risk. b. high quality with zero investment risk. c. investment grade with medium investment risk. d. substandard with high investment risk. e. speculative with extremely high investment risk.

Q: If Standard & Poor's ratings of a firm's bonds is below BBB, the _____. a. firm will find it difficult to find potential investors when issuing new bonds b. default risk premium associated with the bonds will be less than the risk premium associated with bonds rated AAA c. firm will easily find investors when issuing new bonds because bonds with high yields have no risk associated with them d. default risk associated with the bonds is less than that of bonds that are rated AAA e. firm will immediately have to exercise the call provision and issue new bonds

Q: Lower-rated bonds offer higher returns than higher-grade bonds because their: a. coupon interest rates steadily increase throughout their lives. b. risks are higher. c. maturity values are higher than their market values. d. returns are attractive to risk-averse investors. e. returns are tax free.

Q: The greater a bond's default risk, the greater the: a. maturity value of the bond. b. chance the firm will exercise the call provision on the bond. c. interest rate stability of the bond in the long run. d. investment in the bond by risk-averse investors. e. default risk premium (DRP) associated with the bond.

Q: Changes in a firm's bond rating affect its ability to: a. claim deductions in tax liability computation. b. procure raw material in sufficient quantity for manufacturing processes. c. increase the coupon rate on bonds issued to investors. d. borrow long-term capital as well as the cost of such funds. e. exercise a call provision on its bonds.

Q: Because a bond's rating serves as an indicator of its default risk, the rating has a direct, measurable influence on the firm's: a. earnings per share and thus the dividends it pays each year. b. cost of using such debt and thus the bond's interest rate. c. ability to procure raw material for production. d. tax liability to the federal government. e. current assets and the bond's maturity value.

Q: The ratings of a firm's bonds are based on: a. the firm's ratio of current liabilities to total assets. b. the dividends paid in the last year by the firm. c. the earnings per share of the shareholders of subsidiary firms. d. exchange rate fluctuations of the U.S Dollar and Euro. e. no precise formula.

Q: The credit rating assigned to a bond reflects the probability that: a. the bond's face value will increase above its market value. b. the bond will go into default. c. the company will earn extremely high returns on its bond's sinking fund investments. d. the bond's maturity value will become lower than its principal value. e. the firm will exercise a call provision on the bond.

Q: Which of the following ratings by Standard & Poor's (S&P) is given to speculative bonds with extremely high credit risk? a. A b. B c. BB d. BBB e. CCC

Q: Which of the following ratings by Moody's is given to the bonds of companies that have the best credit risk? a. Caa b. Aaa c. B d. Ba e. A

Q: A call provision for the redemption of a bond: a. requires an advance payment of all of the interest that would be paid from the call date until the maturity of the bond. b. allows the firm to refinance debt. c. allows the firm to call the bonds for redemption at any time after the bond has been issued. d. requires the redemption of the bonds at their market price. e. requires bondholders to convert their bonds into lower coupon rate bonds.

Q: The conversion ratio is: a. the number of new lower coupon rate bonds that the bondholder receives when old bonds are converted into the newer bonds. b. the ratio of the face value of the bond to its market value. c. the number of shares of stock that the bondholder receives upon conversion of a bond. d. the ratio of the bond's old face value to its new face value. e. the number of bonds in the company's new project received upon expansion.

Q: Which of the following is an advantage of convertible bonds? a. Investors can convert the bonds into higher coupon rate bonds. b. Investors can choose to hold the company's bonds or convert the bonds into its common stock. c. Investors are paid a penalty on the conversion of the bonds. d. Investors are redeemed for the difference between the face value and the market price on redemption of the bonds. e. Investors can claim interest for the remaining life of the bonds on the bonds' early conversion.

Q: The conversion feature of a bond permits a: a. company to convert a high coupon rate bond into a lower coupon rate bond. b. bondholder to exchange his or her bonds for the company's common stock. c. bondholder to redeem a small percentage of the bond every year. d. company to convert the face value of the bond to the market price of the bond. e. company to trade outstanding bonds with a term deposit in a financial institution.

Q: A sinking fund call on a bond: a. requires the company to pay an early-payment penalty to investors. b. does not require the company to pay a call premium. c. requires the company to redeem bonds at market price. d. does not require the company to pay a small percentage of the issue every year. e. requires the company to claim back all the interest payments from the bondholders.

Q: A(n) _____ is a provision that facilitates the orderly retirement of a bond issue. a. amortization fund b. depreciation fund c. redemption fund d. conversion fund e. sinking fund

Q: A bond sinking fund provision requires a firm to: a. issue bonds every year to finance interest payment on bonds. b. retire a portion of the bond issue each year. c. increase the coupon rate by one percent every year. d. use annual interest payments for the repayment of bonds. e. gradually reduce the face value of debt to the level of market value of debt.

Q: The Securities and Exchange Commission is required to verify that: a. the coupon rate of debt is more than the market interest rate. b. all previous indenture provisions have been met before allowing a company to sell new securities to the public. c. the market price of debt is more than the principal value of debt. d. the face value of debt is more than the maturity value of debt. e. the new securities to be sold to the public have a higher coupon rate than all previous security issues.

Q: The indentures for publicly traded bonds are approved by: a. the state government. b. the Securities and Exchange Commission. c. the federal government. d. the Public Company Accounting Oversight Board. e. the local government.

Q: A _____ is assigned to represent the bondholders and to guarantee that the terms of the indenture are carried out. a. federal government agent b. trustee c. liquidator d. negotiator e. rating agency

Q: General obligation bonds are backed by the: a. revenue generated from the project in which the bond proceeds are invested. b. government's ability to tax its citizens. c. penalty collected from the earlier repayment of a certificate of deposit. d. increase in the coupon rate due to inflation adjustment. e. additional principal received from exchange rate fluctuations.

Q: Revenue bonds are used to: a. raise funds to repay loans borrowed from the federal government. b. raise funds for projects that generate revenues that will contribute to payment of interest and the repayment of debt. c. raise funds to pay interest on T-bills issued by the state government. d. raise funds to repay the interest and principal on loans borrowed from the local government. e. raise funds for projects that require additional funding by increasing tax rates.

Q: The two principal types of municipal bonds are: a. general obligation bonds and indexed bonds. b. income bonds and putable bonds. c. revenue bonds and general obligation bonds. d. floating-rate bonds and indexed bonds. e. floating-rate bonds and revenue bonds.

Q: Municipal bonds are issued by: a. financial institutions. b. state and local governments. c. commercial banks. d. the federal government. e. non-governmental organizations.

Q: A(n) _____ certificate of deposit (CD) can be traded to other investors prior to maturity. a. exchangeable b. operating c. negotiable d. mature e. commercial

Q: A certificate of deposit represents: a. a promissory note of payment by a bank that borrows reserves from another bank. b. a deposit in a checking account in a bank. c. a promissory note of payment by the issuing institution to the investor. d. a time deposit of a state government with the federal government. e. a time deposit at a bank or other financial intermediary.

Q: When liquidating a traditional certificate of deposit (CD) prior to maturity, the owner: a. must repay the interest due on the CD. b. must return it to the issuing institution. c. must refund the difference in the face value and market value of the CD to the issuing institution. d. must claim the interest earned by the bank by investing the CD amount. e. must deposit the amount equivalent to the CD amount in a savings account with the same bank.

Q: Which of the following is true of a traditional certificate of deposit (CD)? a. Traditional CDs must be kept at the issuing institution for a specified time period. b. Traditional CDs pay no periodic interest. c. Traditional CDs are repaid in installments by the issuing bank. d. Traditional CDs have a floating rate of interest. e. Traditional CDs are discounted when their market price is more than issue price.

Q: Which of the following statements is true about federal funds? a. Federal funds offer loans at a coupon rate that is two times the market interest rate. b. Federal funds have very long maturities, often three years or more. c. Federal funds offer loans to the state government to meet the reserve requirements of the federal government. d. Federal funds are used to repay the T-bills issued by the federal government. e. Federal funds are used by banks to meet the reserve requirements of the Federal Reserve.

Q: Banks that need additional funds to meet the reserve requirements of the Federal Reserve: a. borrow from the state government of the state where their headquarters are located. b. borrow from banks with excess reserves. c. issue treasury bills to investors. d. decrease the coupon interest rate on the bonds issued to raise funds. e. exercise the call option on the loans extended to small businesses.

Q: Banks generally use the federal funds market to: a. repay loans to investors. b. adjust their reserves. c. make interest payments on loans. d. make security deposits with other banks. e. repay loans to the federal government.

Q: Federal funds represent: a. funds collected from federal tax payment by banks. b. loans from the federal government to banks. c. loans from one bank to another bank. d. funds held at banks for the repayment of loans to the federal government. e. funds collected from investors for investment in federal securities.

Q: The maturity of commercial paper varies from: a. 10 to 15 months. b. two to three years. c. one to nine months. d. 15 to 18 months. e. three to five years.

Q: Commercial paper is issued in denominations of: a. $10 only. b. $100 or less. c. $1,000 only. d. $100,000 or more. e. $1,000,000 only.

Q: Which of the following statements is true about commercial paper? a. Commercial paper always matures in two months. b. Commercial paper is issued by bankrupt firms. c. Commercial paper pays annual interest. d. Commercial paper is issued at a discount. e. Commercial paper is issued in denominations of $100.

Q: Commercial paper is a type of: a. promissory note. b. credit note. c. debit note. d. bond indenture. e. T-bill.

Q: On the maturity date, _____. a. the maturity value of the debt is to be repaid b. the first installment of the installment loan is due c. the interest payment is due d. the market interest rate rises above the coupon rate e. the market price of the bond rises above the face value of the debt

Q: A bond's maturity date is the date on which: a. the market interest rate equals the coupon rate on a bond. b. the principal amount of the debt is due. c. investors make no capital gain or loss on an investment. d. the interest payment is due. e. the market value of the bond is more than its face value.

Q: For installment loans, the maturity date is: a. the date on which the last installment repayment of the principal amount is due. b. the date on which the market interest rate rises above the coupon rate. c. the date on which the coupon rate rises above the market interest rate. d. the date on which the first installment payment is due. e. the date on which the last coupon interest payment is made to the bondholders.

Q: The date on which the principal amount of a debt is due is the: a. maturity date. b. reinvestment date. c. issue date. d. repurchase date. e. priority date.