Exam 2: Financial Assets Instruments

Income bonds pay interest only when the amount of the interest is actually earned by the company.Thus,these securities cannot bankrupt a company and this makes them safer than regular bonds.

Because junk bonds are such high-risk instruments,the returns on such bonds aren't very high and the existence of this market detracts from social welfare.

A real asset is intangible,because it represents a promise that future cash flows will be paid to the owner.

Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5 percent.Long-term risk-free government bonds were yielding 8.7 percent at that time.The current risk premium on BBB bonds versus government bonds is half what it was two years ago.If the risk-free long-term governments are currently yielding 7.8 percent,then at what rate should Rollincoast expect to issue new bonds?

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following are generally considered advantages of term loans over publicly issued bonds?

Preferred stock can provide a financing alternative for some firms when market conditions are such that those firms can issue neither pure debt nor common stock at reasonable cost.

Common equity refers to the sum of which of the following balance sheet accounts?

LIBOR is an acronym for London Interbank Offer Rate,which is an average of interest rates offered by London banks to U.S.corporations.

Many bond indentures allow the company to acquire bonds for a sinking fund either by purchasing bonds in the market or by a lottery administered by the trustee for the purchase of a percentage of the issue through a call at face value.

An investor purchased a call option that allows her to purchase 100 shares of Dell Computer common stock for $45 per share any time during the next six months.The current market price of Dell's stock is $42.50.If the price of Dell increases to $50 and the investor decides to exercise it,what will be the gain or loss that results from the exercise? Ignore taxes and commissions.

Retained earnings are the difference between the value of newly issued stock and its par value.

Companies can have different types of preferred stock,such as Class A or Class B,with each type having different rights and privileges,but by law there can be only one class of common stock.

A firm that issues "no-par" stock will not have a separate common stock and additional paid-in capital account on their balance sheet,it will be consolidated into a single account called common stock.

A proxy fight involves a battle by a shareholder or group of shareholders who seek to change the investment policy of the firm.If the proxy group is successful,current management retains control of the firm but the proxy group dictates what investments the firm makes.

Classified stock is one can be used to meet special needs of a firm,such as when owners of a start-up firm need capital but don't want to relinquish control of the firm.

A convertible debenture cannot be worth more than its conversion value or less than its bond value.

Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers.Such covenants are contained in the bond's indenture.

Which of the following statements is correct?