Exam 2: Financial Assets Instruments

There is an inverse relationship between bond ratings and the required return on a bond.The required return is lowest for AAA rated bonds,and required returns increase as the ratings get lower (worse).

Corporations often issue financial instruments such as debt and equity to raise the funds needed to purchase real assets.

Sharon has a convertible bond with a face value of $1,000 that can be converted into 40 shares of common stock of Mountain Ice Corporation.If the current price of the stock is $20,what is the conversion price of the bond?

The "preferred" feature of preferred stock means that it normally will generate a higher total return for the stockholder than common stock.

In the event of bankruptcy,debtholders have a prior or first claim to a firm's income and assets over the claims of both common and preferred stockholders.However,in bankruptcy all debtholders are treated equally as a single class of claimants.

A ____ is an agreement to between two firms where one firm agrees to sell some of its financial assets to another and then buy the financial assets back from that firm at a later time

Preferred stockholders have priority over common stockholders with respect to earnings.Dividends must be paid on preferred stock before they can be paid on common stock.In exchange for this priority to dividends,preferred stockholders give up their priority claims to common stockholders in the event of bankruptcy.

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Which of the following statements is correct?

Which of the following statements is false?

Pure options are instruments that are

A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period.

Your Aunt Agatha purchased a call option a few months ago.Today is the expiration date,so she must decide whether to exercise the option.Which of the following statements is correct? Do not consider brokers' commissions in your answer.

An indexed bond has its value tied to an inflation index.As inflation increases the value of the bond increases and the issuer is responsible for the accumulated value which may become much greater than the original face value.

A publicly owned corporation is simply a company whose shares are held by the investing public,which may include other corporations and institutions.

The owner of a convertible bond owns,in effect,both a bond and a call option.

Which of the following statements is false?

Typically,debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured.

Discounted securities are debt instruments that pay periodic interest payments and sell at par value when issued.The interest payments generate a positive return for the purchaser of discounted securities.

The balance sheet item common equity represents the sum of the firm's common stock,paid-in capital,and retained earnings,which equal the common stockholders' total investment in the firm stated at book value.