Deck 10: Bonds and Stocks: Characteristics and Valuation

Question 1

Bond covenants are the best way for bondholders to protect themselves against dubious management actions.

Answer 1

True

Question 2

Firms issue more bonds than equities.

Answer 2

True

Question 3

Long term business funds are obtained by issuing commercial paper and corporate bonds.

Answer 3

False

Question 4

A convertible bond can be converted,at the issuing firm's option,into a specific number of shares of the issuer's common stock.

Question 5

Private placements must be approved by the Securities and Exchange Commission (SEC).

Question 6

Preferred stock is an equity security that has a senior claim to the firm's earnings and assets over bonds.

Question 7

A debt holder may force the firm to abide by the terms of the debt contract even if the result is reorganization or dissolution of the firm.

Question 8

During periods of economic expansion,firms usually rely more on internal sources of funds.

Question 9

Bondholders have priority claims over equity holders to a firm's assets and cash flows.

Question 10

The higher the discount rate or yield to maturity,the lower the price of a bond.

Question 11

Mortgage bonds are secured by home mortgages.

Question 12

Callable preferred stock gives the corporation the right to retire the preferred stock at its option.

Question 13

Yankee bonds are U.S.dollar-denominated bonds that are issued in the United States by a foreign issuer.

Question 14

Callable bonds can be redeemed prior to maturity by the firm.

Question 15

Eurodollar bonds are dollar-denominated bonds that are sold outside the United States.

Question 16

Bond issues of a single firm can have different bond ratings if their security provisions differ.

Question 17

Global bonds usually are denominated in U.S.dollars and have offering sizes that typically exceed $1 billion.

Question 18

The bond issuer does not necessarily know who is receiving interest payments on bearer bonds.

Question 19

Most of the annual funds raised from security issues come from corporate bond sales.

Question 20

The claims of collateralized bondholders are junior to the claims of debenture holders.

Question 21

The call price of a callable bond is typically equal to par value plus two years interest.

Question 22

A trustee represents the company to ensure that the covenants of the bond indenture are met.

Question 23

A bond will sell at a premium if its required return or discount rate is greater than its coupon rate.

Question 24

A bond will sell at a discount if its required return or discount rate is greater than its coupon rate.

Question 25

The interest paid on bonds issued by corporations in the United States is tax deductible to the issuing corporation.

Question 26

Governmental agencies may not issue debenture bonds.

Question 27

ADRs,or American Depository Receipts,which are traded on U.S.exchanges,represent shares of common stock that trade on foreign exchanges.

Question 28

Bonds rated higher than BB+ by Standard & Poors and Fitch are considered to be investment grade issues.

Question 29

Most bonds currently issued in the United States today are registered bonds.

Question 30

In general,research has shown that the performance of tracking stocks has exceeded that of parent company stocks.

Question 31

A bond with a coupon rate of 4% and a discount rate of 6% will pay $60 in interest each year.

Question 32

The interest received by individuals on bonds issued by corporations in the United States is not tax deductible to the investor.

Question 33

Most bonds currently issued in the United States today are bearer bonds.

Question 34

Corporate bonds are not as risky as common stocks;as a result,corporate bonds always lower returns to investors than do common stock.

Question 35

Real assets are claims against the income or assets of individuals,businesses,and governments.

Question 36

Zero coupon bonds are not suited for tax-exempt accounts such as IRAs or pension funds.

Question 37

The dividends paid on stock issued by corporations in the United States are tax deductible to the issuing corporation.

Question 38

Financial assets are claims against the income or assets of individuals,businesses,and governments.

Question 39

Inflation-protected Treasury notes have a principal value that changes in accordance with the consumer price index (CPI).

Question 40

Credit risk is another term for default risk.

Question 41

Firms issue more equities than bonds for the following reason(s).

A)it is cheaper to raise equity than to borrow
B)bonds have a maturity date making them pricier
C)both a and b are true
D)none of the above are true

Question 42

The par value of a preferred stock is meaningful in that it is often used to determine the fixed annual dividend.

Question 43

Preferred stock can have the following characteristic_______________?

A)cumulative
B)non-cumulative
C)convertible
D)all of the above

Question 44

Convertible preferred stock has a special provision that makes it possible to convert it to common stock of the corporation,generally at the stockholder's option.

Question 45

Subordinate debentures are bonds whose claims are subordinate or junior to the claims of those holding debenture bonds.

Question 46

A bond that can be changed into a specified number of shares of the issuer's common stock is called a:

A)retractable bond
B)convertible bond
C)callable bond
D)collateralized bond

Question 47

Private placements:

A)are sold to the general public
B)have expedited SEC scrutiny
C)require public disclosure of the firm's financial information
D)none of the above

Question 48

Which type of bond is currently prohibited from being issued in the United States?

A)bearer bonds
B)unregulated debentures
C)tax avoidance bonds
D)income bonds

Question 49

Common stock possesses the highest claim on the assets and cash flow of the firm.

Question 50

The par value of a common stock is an accounting and legal concept that bears no relationship to a firm's stock price or book value.

Question 51

Global bonds are generally denominated in euros and are marketed globally.

Question 52

Many convertible bonds possess a call deferment period which is a specified period of time after the issue during which the bonds cannot be called.

Question 53

Which of the following is not an advantage of owning debt securities?

A)high claim on cash flows of a firm
B)highest return of corporate securities
C)high claim on assets of in liquidation
D)none of the above

Question 54

U.S.firms are continuing to raise more funds overseas include all of the following EXCEPT:

A)it makes sense to raise funds in the county where a firm has a facility
B)financing costs are sometimes lower overseas
C)foreign underwriters often have more experience than U.S.underwriters
D)issuers avoid the costly SEC approval process

Question 55

Many putable bonds possess a call deferment period which is a specified period of time after the issue during which the bonds cannot be called.

Question 56

Many callable bonds possess a call deferment period which is a specified period of time after the issue during which the bonds cannot be called.

Question 57

A document which is administered by a trustee,and includes in great detail the various provisions of the loan agreement is called the:

A)trust indenture
B)debenture
C)bond covenant
D)bearer bond

Question 58

All of the following represent bonds secured by real assets except a (n):

A)closed-end mortgage bond
B)equipment trust certificate
C)debenture
D)more than one of the above

Question 59

Common stock possesses the lowest claim on the assets and cash flow of the firm.

Question 60

The par value of a common stock is meaningful in that it is often used to determine the fixed annual dividend.

Question 61

The last dividend on GTE stock was $4,and the expected growth rate is 10%.If you require a rate of return of 20%,what is the highest price you should be willing to pay for GTE stock?

A)$40
B)$42.50
C)$44
D)none of the above

Question 62

In actual practice,most corporate bonds pay interest:

A)annually
B)semi-annually
C)quarterly
D)monthly

Question 63

You are considering buying a 10-year,$1,000 par value bond issued by IBM.The coupon rate is 8% annually,with interest being paid semiannually.If you expect to earn a 10% rate of return on this bond,what is the maximum price you should be willing to pay for this IBM bond?

A)$189.93
B)$875.39
C)$898.54
D)$911.46

Question 64

According to the Gordon dividend model,which of the following variables would not affect a stock's price?

A)the firm's expected growth rate in dividends
B)the number of shares outstanding
C)the shareholder's required return
D)all the above affect stock price

Question 65

A bond that allows investors to force the issuer to redeem the bond prior to maturity is called a:

A)convertible bond
B)callable bond
C)debenture bond
D)putable bond

Question 66

A firm's stock is expected to pay a $3 annual dividend next year,the current stock price is $60,and the expected growth rate in dividends is 8%.Using the Gordon approach,what is the expected return?

A)5%
B)8%
C)11%
D)13%

Question 67

Ameritech has just issued a $1,000 par value bond that will mature in 10 years.This bond pays interest of $45 every six months.If the annual yield to maturity of this bond is 8%,what is the price of the Ameritech bond if the market is in equilibrium?

A)$991.50
B)$1,067.96
C)$1,112.82
D)none of the above

Question 68

Suppose a firm just issued a $1,000 par value convertible bond.Its conversion ratio is 30 and the stock currently sells for $25 per share.Would it make better financial sense to hold onto the bond or convert it?

A)hold onto the bond
B)convert the bond
C)can't tell from this information
D)none of the above

Question 69

A firm's stock is expected to pay a $2 annual dividend next year,and the current $50 stock price is expected to rise to $53 over the next year.What is the expected return?

A)8%
B)10%
C)12%
D)15%

Question 70

Dollar-denominated bonds that are issued in the United States by a foreign issuer are called:

A)Eurodollar bonds
B)foreign bonds
C)Yankee bonds
D)global bonds

Question 71

Which of the following types of bonds have the lowest risk?

A)closed-end mortgage bond
B)subordinated debenture
C)open-end mortgage bond
D)all the above would have the same risk

Question 72

The constant dividend growth model assumes:

A)a constant annual dividend
B)a constant dividend growth rate for no more than the first 10 years
C)that the discount rate must be greater than the dividend growth rate
D)two of above are true assumptions

Question 73

Mary wants to purchase a 20-year bond that has a par value of $1,000 and makes semiannual interest payments of $40.If her required yield to maturity is 10%,how much should Mary be willing to pay for the bond?

A)$902
B)$925
C)$1000
D)none of the above

Question 74

What is the value of GM which currently has a dividend of $2 and is growing at 7%? The investor's required rate of return is 11%.

A)$46
B)$50
C)$52
D)none of the above

Question 75

Which of the following is considered to be the most risky?

A)U.S.government bonds
B)mortgage bonds
C)corporate bonds
D)common stocks

Question 76

Which of the following bonds may be secured by home mortgages?

A)mortgage bonds
B)collateralized mortgage obligations
C)closed-end mortgage bonds
D)open-end mortgage bonds

Question 77

A bond's value will be below its maturity value of $1,000 if it pays interest of $100 per year and investors require a rate of return of,all other things being equal:

A)less than 10%
B)exactly 10%
C)higher than 10%
D)either less than or greater than 10%

Question 78

To determine risks of nondomestic bonds,a multinational corporation must consider all but which one of the following risks?

A)political and economic risks
B)seizure or expropriation of assets
C)stabilized currencies
D)foreign exchange controls and tax regulations

Question 79

AT&T 10-year,$1,000 par value bond is selling at $1,158.91.Interest on this bond is paid semianually.If the annual yield to maturity is 14%,what is the annual coupon rate of the AT&T bond?

A)11%
B)15%
C)17%
D)none of the above

Question 80

Which of the following types of stocks have the lowest risk to shareholders?

A)common stock
B)cumulative preferred stock
C)non-cumulative preferred stock
D)callable preferred stock