Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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.

Accepted Answer

A) True 
 B)False  False

Question 3

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

Accepted Answer

A)  Common stock and retained earnings 
B)  Book value, retained earnings, and common stock 
C)  Common stock, additional paid-in capital, retained earnings 
D)  Either answer a or c above could be correct depending on whether the firm has "par" or "no par" stock. 
E)  Both b and c are correct since additional paid-in capital is equivalent to book value. 
A)  Common stock and retained earnings 
B)  Book value, retained earnings, and common stock 
C)  Common stock, additional paid-in capital, retained earnings 
D)  Either answer a or c above could be correct depending on whether the firm has "par" or "no par" stock. 
E)  Both b and c are correct since additional paid-in capital is equivalent to book value. D

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not an advantage of a term loan over public debt offerings?

Accepted Answer

A)  speed 
B)  low issuance costs 
C)  significantly lower interest rates 
D)  flexibility 
A)  speed 
B)  low issuance costs 
C)  significantly lower interest rates 
D)  flexibility

Question 7

Which of the following is NOT a source of equity on a firm's balance sheet?

Accepted Answer

A)  additional paid-in capital 
B)  retained earnings 
C)  common stock 
D)  property, plant, and equipment 
A)  additional paid-in capital 
B)  retained earnings 
C)  common stock 
D)  property, plant, and equipment

Question 8

Which of the following is NOT an example of a financial asset?

Accepted Answer

A)  convertible bond 
B)  certificate of deposit 
C)  preferred stock 
D)  inventory 
E)  mutual fund 
A)  convertible bond 
B)  certificate of deposit 
C)  preferred stock 
D)  inventory 
E)  mutual fund

Question 9

A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A)  coupon bond 
B)  income bond 
C)  convertible bond 
D)  zero coupon bond 
E)  callable bond 
A)  coupon bond 
B)  income bond 
C)  convertible bond 
D)  zero coupon bond 
E)  callable bond

Question 11

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?

Accepted Answer

A)  7.8% 
B)  8.7% 
C)  9.2% 
D)  10.2% 
E)  12.9% 
A)  7.8% 
B)  8.7% 
C)  9.2% 
D)  10.2% 
E)  12.9%

Question 12

Under a term loan the borrower agrees to make a series of amortized payments on specific dates.Although speed and flexibility are two advantages of term loans, such loans typically have high issuance costs.

Accepted Answer

A) True 
 B)False

Question 13

A zero coupon bond's value increases over time at a compounded (or exponential) rate, not at a constant (or linear) rate.The corporate issuer reports the annual increase as interest expense, and the owner of the bond reports the increase as interest income and pays taxes on it each year.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

The striking price is different from the exercise price and deals with convertibles rather than with warrants.

Accepted Answer

A) True 
 B)False

Question 16

A(n) ____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal.

Accepted Answer

A)  putable bond 
B)  bankers acceptance 
C)  income bond 
D)  term loan 
E)  certificate of deposit 
A)  putable bond 
B)  bankers acceptance 
C)  income bond 
D)  term loan 
E)  certificate of deposit

Question 17

Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be ____ the YTM with it.

Accepted Answer

A)  Higher than 
B)  Lower than 
C)  The same as 
D)  Either higher or lower, depending on the level of call premium, than 
E)  Unrelated to 
A)  Higher than 
B)  Lower than 
C)  The same as 
D)  Either higher or lower, depending on the level of call premium, than 
E)  Unrelated to

Question 18

Issuing zero coupon bonds might appeal to a company that is considering investing in a long-term project that will not generate positive cash flows for several years.

Accepted Answer

A) True 
 B)False

Question 19

Bond ratings of ____ and higher are considered investment grade.

Accepted Answer

A)  AAA 
B)  AA 
C)  A 
D)  BBB 
A)  AAA 
B)  AA 
C)  A 
D)  BBB

Question 20

Which of the following statements is correct?

Accepted Answer

A)  Because bonds can generally be called only at a premium, meaning that the bondholder will enjoy a capital gain, including a call provision (other than a sinking fund call) in the indenture increases the value of the bond and lowers the bond's required rate of return. 
B)  You are considering two bonds.Both are rated double A (A
A) , both mature in 20 years, both have a 10 percent coupon, and both are offered to you at their $1,000 par value.However, Bond X has a sinking fund while Bond Y does not.This probably is not an equilibrium situation, as Bond X, which has the sinking fund, generally would be expected to have a higher yield than Bond Y. 
C)  A sinking fund provides for the orderly retirement of a debt (or preferred stock) issue.Sinking funds generally force the firm to call a percentage of the issue each year.However, the call price for sinking fund purposes is generally higher than the call price for refunding purposes. 
D)  Zero coupon bonds are bought primarily by pension funds and other tax exempt investors because they avoid the tax that non-tax exempt investors must pay on the accrued value each year. 
E)  All of the above statements are false. 
A)  Because bonds can generally be called only at a premium, meaning that the bondholder will enjoy a capital gain, including a call provision (other than a sinking fund call) in the indenture increases the value of the bond and lowers the bond's required rate of return. 
B)  You are considering two bonds.Both are rated double A (A
A) , both mature in 20 years, both have a 10 percent coupon, and both are offered to you at their $1,000 par value.However, Bond X has a sinking fund while Bond Y does not.This probably is not an equilibrium situation, as Bond X, which has the sinking fund, generally would be expected to have a higher yield than Bond Y. 
C)  A sinking fund provides for the orderly retirement of a debt (or preferred stock) issue.Sinking funds generally force the firm to call a percentage of the issue each year.However, the call price for sinking fund purposes is generally higher than the call price for refunding purposes. 
D)  Zero coupon bonds are bought primarily by pension funds and other tax exempt investors because they avoid the tax that non-tax exempt investors must pay on the accrued value each year. 
E)  All of the above statements are false.

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

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.

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

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.

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

Which of the following is not an advantage of a term loan over public debt offerings?

Which of the following is NOT a source of equity on a firm's balance sheet?

Which of the following is NOT an example of a financial asset?

A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength.

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.

Under a term loan the borrower agrees to make a series of amortized payments on specific dates.Although speed and flexibility are two advantages of term loans, such loans typically have high issuance costs.

A zero coupon bond's value increases over time at a compounded (or exponential) rate, not at a constant (or linear) rate.The corporate issuer reports the annual increase as interest expense, and the owner of the bond reports the increase as interest income and pays taxes on it each year.

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.

The striking price is different from the exercise price and deals with convertibles rather than with warrants.

A(n) ____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal.

Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be ____ the YTM with it.

Issuing zero coupon bonds might appeal to a company that is considering investing in a long-term project that will not generate positive cash flows for several years.

Bond ratings of ____ and higher are considered investment grade.

Which of the following statements is correct?

An Overview of Finance

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

Exam 2: Financial Assets Instruments

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

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.

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

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.

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

Which of the following is not an advantage of a term loan over public debt offerings?

Which of the following is NOT a source of equity on a firm's balance sheet?

Which of the following is NOT an example of a financial asset?

A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength.

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.

Under a term loan the borrower agrees to make a series of amortized payments on specific dates.Although speed and flexibility are two advantages of term loans, such loans typically have high issuance costs.

A zero coupon bond's value increases over time at a compounded (or exponential) rate, not at a constant (or linear) rate.The corporate issuer reports the annual increase as interest expense, and the owner of the bond reports the increase as interest income and pays taxes on it each year.

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.

The striking price is different from the exercise price and deals with convertibles rather than with warrants.

A(n) ____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal.

Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be ____ the YTM with it.

Issuing zero coupon bonds might appeal to a company that is considering investing in a long-term project that will not generate positive cash flows for several years.

Bond ratings of ____ and higher are considered investment grade.

Which of the following statements is correct?

An Overview of Finance

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters