Question 1

Par value is not necessarily the actual price at which common stock is issued by the firm, but it does constitute the maximum legal liability per share in the event of bankruptcy.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following types of debt protect a bondholder against an increase in interest rates?

Accepted Answer

A)  Floating rate debt. 
B)  Bonds that are redeemable ("putable") at par at the bondholders' option. 
C)  Bonds with call provisions. 
D)  All of the above. 
E)  Only answers a and b above.

Question 3

The additional paid-in capital account represents the difference between a stock's par value and the funds actually received from the sale of new common stock.

Accepted Answer

A) True 
 B)False

Question 4

"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.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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?

Accepted Answer

A)  A call provision under which the firm may call the bonds for redemption after 5 years. 
B)  Provision for a sinking fund, where a set percentage of the bonds must be called for redemption at par each year. 
C)  A restrictive covenant which states that the firm's current ratio must always exceed 2.0. 
D)  A pledge of real property as security for the bonds. 
E)  A provision under which the bondholders may, at their option, turn the bond in to the company and receive the bond's face value; that is, the bond is redeemable at par at the holder's option.

Question 9

The terms and conditions to which a bond is subject are set forth in its

Accepted Answer

A)  Debenture. 
B)  Underwriting agreement. 
C)  Indenture. 
D)  Restrictive covenants. 
E)  Call provision.

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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).

Accepted Answer

A) True 
 B)False

Exam 2: Financial Assets Instruments

Par value is not necessarily the actual price at which common stock is issued by the firm, but it does constitute the maximum legal liability per share in the event of bankruptcy.

Which of the following types of debt protect a bondholder against an increase in interest rates?

The additional paid-in capital account represents the difference between a stock's par value and the funds actually received from the sale of new common stock.

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.

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

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

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?

The terms and conditions to which a bond is subject are set forth in its

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.

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).