Exam 2: Financial Assets Instruments

One of the disadvantages to a firm in issuing zero coupon bonds is that the tax shield associated with the bonds' appreciation cannot be claimed until the bond matures.

NOPREM Inc.is a firm whose shareholders don't possess the preemptive right.The firm currently has 1,000 shares of stock outstanding,the price is $100 per share.The firm plans to issue an additional 1,000 shares at $90.00 per share.Since the shares will be offered to the public at large,what is the amount per share that old shareholders will lose if they are excluded from purchasing new shares?

If a firm's stockholders are given the preemptive right,this means that a group of stockholders can call for a meeting to replace the management.Without the preemptive right,dissident stockholders would have to seek to oust management through a proxy fight.

A proxy is a document giving one party the authority to act for another party,typically the power to vote shares of common stock.A proxy can be an important tool relating to control of the firm.

Which of the following statements concerning preferred stock is correct?

The sale of new common stock at a price greater than par value will affect which balance sheet accounts? (Choose the most complete answer. )

A French firm is buying $1,000,000 of optical cable from a firm in the United States.The French firm will pay for the cable in thirty days.To protect itself from changes in the exchange rate between the Euro and dollar,the French firm enters into a futures contract to purchase $1,000,000 at a price of $1.25/€.How many Euros will it cost the French firm to purchase $1,000,000 using the futures contract?

A(n)____ is a bond that pays no annual interest but is sold at a discount below par,thus providing compensation to investors in the form of capital appreciation.

B & O Railroad's convertible debentures were issued at their $1,000 par value in 2008.At any time prior to maturity on February 1,2028,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,P_c?

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 price she paid for the option was $2.50 per share,or $250 total,and 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 option position that was held? Ignore taxes and commissions.

An option which gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)

Which of the following is NOT a type of debt?

"Treasury zeros" are Treasury bonds that have been split or "stripped" into a zero coupon discount Treasury certificate and a series of interest payments (the coupon payments).These bonds are safer than corporate zeros and thus,are very popular with institutional investors such as pension fund managers.

All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par,except a

Corporations issue and purchase a variety of financial securities for all of the following reasons EXCEPT

Retained earnings are a balance sheet account that indicates the total amount of earnings the firm has not paid out as dividends throughout its history.

A financial asset is tangible;it is a physically observable and touchable item.

The income that an investor earns from municipal bonds is

A firm plans to sell $100 million of 20-year bonds to raise capital for expansion.Which of the following provisions,if it were included in the bond's indenture,would tend to raise the coupon interest rate over what it would be if the provision were not included?

Listed below are some provisions that are often contained in bond indentures: 1)Fixed assets may be used as security. 2)The bond may be subordinated to other classes of debt. 3)The bond may be made convertible. 4)The bond may have a sinking fund. 5)The bond may have a call provision. 6)The bond may have restrictive covenants in its indenture. Which of the above provisions,each viewed alone,would tend to reduce the yield to maturity investors would otherwise require on a newly issued bond?