Chapter 10
Bonds and Stocks: Characteristics and Valuation

TRUE-FALSE QUESTIONS

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

Difficulty Level: Easy

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

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

Difficulty Level: Easy

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

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

Difficulty Level: Easy

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

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

Difficulty Level: Easy

Subject Heading: Introduction

L.O. 10.1

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

Difficulty Level: Easy

Subject Heading: Introduction

L.O. 10.1

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

Difficulty Level: Medium

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

7. Over the last 20 years, corporations have been net repurchasers rather than net issuers of new equity.

Difficulty Level: Medium

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

8. Private placements do not require any public disclosure of company information.

Difficulty Level: Medium

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

9. U.S. firms are not allowed to borrow funds overseas.

Difficulty Level: Easy

Subject Heading: Long-Term External Financing Sources for Businesses

L.O. 10.1

10. Corporations raise about half of their publicly held long-term debt funds by selling their bonds through public issues in the United States.

Difficulty Level: Medium

Subject Heading: Long-Term External Financing Sources for Businesses

L.O. 10.1

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

Difficulty Level: Easy

Subject Heading: Bond

L.O. 10.2

12. 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.

Difficulty Level: Medium

Subject Heading: Bond

L.O. 10.2

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

Difficulty Level: Medium

Subject Heading: Bond Characteristics

L.O. 10.2

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

Difficulty Level: Medium

Subject Heading: Bond Covenants

L.O. 10.2

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

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

16. Bonds rated higher than Baa3 by Moody’s are considered to be investment grade issues.

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

17. Bonds rated lower than Ba1 by Moody’s are considered to be high-yield bonds.

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

18. Bonds rated lower than BB+ by Standard & Poors and Fitch are considered to be junk bonds.

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

19. Bonds rated BB+ by Standard & Poors and Fitch are considered to be great investments.

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

20. For all bonds rated by both companies, both Standard & Poors and Fitch assign the same letters, e.g. AAA or BBB+, to the same rankings.

Difficulty Level: Hard

Subject Heading: Bond Ratings

L.O. 10.2

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

Difficulty Level: Easy

Subject Heading: Global Bond Market

L.O. 10.2

22. Eurodollar bonds are highly regulated by the SEC.

Difficulty Level: Easy

Subject Heading: Global Bond Market

L.O. 10.2

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

Difficulty Level: Easy

Subject Heading: Bonds

L.O. 10.2

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

Difficulty Level: Easy

Subject Heading: Different Types of Bonds

L.O. 10.2

25. Issuing bearer bonds is prohibited in the United States.

Difficulty Level: Easy

Subject Heading: Different Types of Bonds

L.O. 10.2

26. Owning bearer bonds is prohibited in the United States.

Difficulty Level: Easy

Subject Heading: Different Types of Bonds

L.O. 10.2

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

Difficulty Level: Easy

Subject Heading: bonds

L.O. 10.2

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

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

29. The United States government rates bonds.

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

30. Coupon rates on newly-issued highly rated bonds are lower than those on lower-rated newly-issued bonds because of the risk–expected return trade-off.

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

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

Difficulty Level: Medium

Subject Heading: Bonds

L.O. 10.2

32. 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.

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.2

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

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.2

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

Difficulty Level: Medium

Subject Heading: Time to Maturity

L.O. 10.2

35. Bond holders have no voting rights.

Difficulty Level: Medium

Subject Heading: Bonds

L.O. 10.2

36. Bonds issued in the United States are known as domestic bonds.

Difficulty Level: Medium

Subject Heading: Bonds

L.O. 10.2

37. With registered bonds, the bonds are registered with a rating agency.

Difficulty Level: Easy

Subject Heading: Bonds

L.O. 10.2

38. With registered bonds, the issuer knows the names of the bondholders and the interest payments are sent directly to the bondholder.

Difficulty Level: Medium

Subject Heading: Bonds

L.O. 10.2

39. You can receive interest from bearer bonds without the issuer knowing your name or address.

Difficulty Level: Medium

Subject Heading: Bonds

L.O. 10.2

40. The trust indenture is an extensive document that details the various provisions and covenants of the loan arrangement.

Difficulty Level: Medium

Subject Heading: Bond Covenants

L.O. 10.2

41. With bond covenants, a bank represents the bondholders to ensure the bond issuer respects the indenture’s provisions.

Difficulty Level: Medium

Subject Heading: Bond Covenants

L.O. 10.2

42. Eurodollar bond interest rates are low relative to U.S. rates.

Difficulty Level: Medium

Subject Heading: Global Bond Market

L.O. 10.2

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

Difficulty Level: Medium

Subject Heading: Global Bond Market

L.O. 10.2

44. Mortgage bonds are secured by home mortgages.

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

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

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

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

Difficulty Level: Medium

Subject Heading: Time to Maturity

L.O. 10.3

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

Difficulty Level: Medium

Subject Heading: Time to Maturity

L.O. 10.3

48. Bonds with junior or unsecured claims receive lower bond ratings, leading investors to demand higher yields to compensate for the higher risk.

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

49. Securitization involves issuing bonds whose coupon and principal payments arise from another existing cash flow stream.

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

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

Difficulty Level: Medium

Subject Heading: Income from Bonds

L.O. 10.3

51. The Internal Revenue Service (IRS) assumes interest is paid over the life of the bond so, with zero-coupon bonds, investors must pay tax on interest they don’t receive.

Difficulty Level: Medium

Subject Heading: Income from Bonds

L.O. 10.3

52. Zero-coupon bonds pay absolutely no interest.

Difficulty Level: Medium

Subject Heading: Income from Bonds

L.O. 10.3

53. Zero-coupon bonds are generally sold at a small discount from their par value.

Difficulty Level: Medium

Subject Heading: Income from Bonds

L.O. 10.3

54. Treasury Inflation Protected Securities have a principal value that changes in accordance with the consumer price index (CPI).

Difficulty Level: Medium

Subject Heading: Income from Bonds

L.O. 10.3

55. Debenture bonds are secured obligations and depend on the specific pledge of property for their security.

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

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

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

57. Subordinate debentures are relatively low risk investments.

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

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

Difficulty Level: Easy

Subject Heading: Bonk Ratings

L.O. 10.3

59. Rolling stock is raw material or finished goods that are on a truck or train while being transported to or from the firm.

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

60. Equipment trust bonds are a type of mortgage bond that gives the bondholder a claim to specific “rolling stock.”

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

61. Open-end mortgage bonds allows the same assets to be used as security in future issues.

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

62. Putable bonds are the same as retractable bonds.

Difficulty Level: Hard

Subject Heading: Time to Maturity

L.O. 10.3

63. Putable bonds allow the investor to force the issuer to redeem the bonds prior to maturity.

Difficulty Level: Medium

Subject Heading: Time to Maturity

L.O. 10.3

64. A sinking fund protects the bond purchaser if the price of the bond drops prior to maturity.

Difficulty Level: Easy

Subject Heading: Time to Maturity

L.O. 10.3

65. Convertible notes have their coupons reset every two or three years to reflect the current interest rate environment and any changes in the firm’s credit quality.

Difficulty Level: Hard

Subject Heading: Time to Maturity

L.O. 10.3

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

Difficulty Level: Medium

Subject Heading: Preferred Stock

L.O. 10.4

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

Difficulty Level: Medium

Subject Heading: Preferred Stock

L.O. 10.4

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

Difficulty Level: Medium

Subject Heading: Corporate Equity Capital

L.O. 10.4

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

Difficulty Level: Medium

Subject Heading: Elements of Common Stock

L.O. 10.4

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

Difficulty Level: Medium

Subject Heading: Elements of Common Stock

L.O. 10.4

71. 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.

Difficulty Level: Medium

Subject Heading: Stock

L.O. 10.4

72. Convertible preferred stock has a special provision that makes it convertible it to common stock if the corporation chooses to.

Difficulty Level: Medium

Subject Heading: Stock

L.O. 10.4

73. 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.

Difficulty Level: Medium

Subject Heading: Elements of Common Stock

L.O. 10.4

74. Many firms have low or no-par stock.

Difficulty Level: Medium

Subject Heading: Elements of Common Stock

L.O. 10.4

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

Difficulty Level: Medium

Subject Heading: Preferred Stock

L.O. 10.4

76. Many investors find it convenient to keep their stock holdings in street name.

Difficulty Level: Hard

Subject Heading: Corporate Equity Capital

L.O. 10.4

77. Common stock holders do not receive voting right.

Difficulty Level: Hard

Subject Heading: Elements of Common Stock

L.O. 10.4

78. Common stock always receives dividends.

Difficulty Level: Hard

Subject Heading: Elements of Common Stock

L.O. 10.4

79. Common stock has a maturity of at least ten years.

Difficulty Level: Hard

Subject Heading: Elements of Common Stock

L.O. 10.4

80. The common stockholders have the lowest standing when a business venture is liquidated or fails.

Difficulty Level: Hard

Subject Heading: Elements of Common Stock

L.O. 10.4

81. Preferred stock does not represent an ownership claim.

Difficulty Level: Medium

Subject Heading: Elements of Preferred Stock

L.O. 10.4

82. Participating preferred stock allows preferred shareholders to participate with common shareholders when larger dividend payouts are available.

Difficulty Level: Medium

Subject Heading: Elements of Preferred Stock

L.O. 10.4

83. DRIPs allow shareholders to purchase additional shares automatically with all or part of the investor’s dividends.

Difficulty Level: Easy

Subject Heading: Dividends and Stock Repurchases

L.O. 10.5

84. Dividend payout ratio = Earnings per share (EPS) / dividends per share.

Difficulty Level: Easy

Subject Heading: How Do Firms Decide on the Dollar Amount of Dividends?

L.O. 10.5

85. Some firms pay little or no dividends unless times are good.

Difficulty Level: Medium

Subject Heading: How Do Firms Decide on the Dollar Amount of Dividends?

L.O. 10.5

86. The residual dividend policy states that dividends will vary based upon how much excess funds the firm has from year to year.

Difficulty Level: Medium

Subject Heading: How Do Firms Decide on the Dollar Amount of Dividends?

L.O. 10.5

87. The residual dividend policy states that dividends will stay the same regardless of the earnings of the firm.

Difficulty Level: Medium

Subject Heading: How Do Firms Decide on the Dollar Amount of Dividends?

L.O. 10.5

88. A stock dividend is what it sounds like: a dividend paid with shares of stock rather than cash.

Difficulty Level: Easy

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.5

89. With a stock split, the investor’s percentage ownership of the firm increases.

Difficulty Level: Medium

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.5

90. Corporate bonds are not as risky as common stocks from the same firm.

Difficulty Level: Medium

Subject Heading: Bonds

L.O. 10.6

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

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

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

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

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

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

94. Intrinsic value is the minimum price we should be willing to pay for an asset.

Difficulty Level: Easy

Subject Heading: Determining a Bond’s Present Value

L.O. 10.7

95. Intrinsic value is the best estimate of the true economic value of an asset based upon a forecast of future cash flows and an estimate of the appropriate discount rate.

Difficulty Level: Easy

Subject Heading: Determining a Bond’s Present Value

L.O. 10.7

96. A discount bond is a bond that is selling below par value.

Difficulty Level: Easy

Subject Heading: Determining a Bond’s Present Value

L.O. 10.7

97. A discount bond is a bond that is selling at a price below its maximum price.

Difficulty Level: Easy

Subject Heading: Determining a Bond’s Present Value

L.O. 10.7

98. Remaining yield is the return on a bond if it is held to maturity.

Difficulty Level: Easy

Subject Heading: Determining a Bond’s Present Value

L.O. 10.7

99. Horizon risk premium is the same as horizon spread.

Difficulty Level: Hard

Subject Heading: Interest Rate Risk

L.O. 10.7

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

Difficulty Level: Medium

Subject Heading: Elements of Common Stock

L.O. 10.8

101. A perpetuity is an annuity that never ends.

Difficulty Level: Hard

Subject Heading: Valuing Stocks with Constant Dividends

L.O. 10.8

102. A perpetuity is an infinite annuity.

Difficulty Level: Hard

Subject Heading: Valuing Stocks with Constant Dividends

L.O. 10.8

103. For foreign firms to issue preferred stock, they must do so in the United States.

Difficulty Level: Medium

Subject Heading: Preferred Stock

L.O. 10.4

MULTIPLE-CHOICE QUESTIONS

104. The largest annual supply of external funds for business corporations comes from issuance of which one of the following sources?

a. privately placed stocks

b. bonds

c. preferred stocks

d. common stocks

Difficulty Level: Easy

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

105. Firms issue more equities than bonds for which of the following reasons?

a. it is cheaper to raise equity than to borrow

b. bonds have a maturity date making them pricier

c. equities are easier to register with the SEC

d. firms do not issue more equities than bonds

Difficulty Level: Medium

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

106. Private placements:

a. are not sold to the general public

b. have expedited SEC scrutiny

c. require public disclosure of the firm’s financial information

d. are only issued by governments

Difficulty Level: Medium

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

107. 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

Difficulty Level: Medium

Subject Heading: Long-Term External Financing Sources of Financing

L.O. 10.1

108. An individual or organization that represents the bondholders to ensure the indenture’s provisions are respected by the bond issuer is called a(n):

a. trust indenture

b. trustee

c. investment banker

d. trust organization

Difficulty Level: Easy

Subject Heading: Bond Covenants

L.O. 10.2

109. Bond ratings are paid for by:

a. the issuing firm

b. the trustee

c. the investment banker

d. the investor

Difficulty Level: Easy

Subject Heading: Bond Ratings

L.O. 10.2

110. A speculative (junk) bond issue as rated under Standard & Poor’s would be rated ______ or below:

a. AA-

b. BB+

c. CCC

d. CC

Difficulty Level: Easy

Subject Heading: Bond Characteristics

L.O. 10.2

111. The terms or covenants of a bond contract are set out in which of the following documents?

a. debenture

b. trust indenture

c. mortgage

d. negative pledge clause

Difficulty Level: Easy

Subject Heading: Bond Covenants

L.O. 10.2

112. Which of the following is not a rating category used when rating bonds?

a. AA+

b. BBB-

c. B+

d. D-

Difficulty Level: Easy

Subject Heading: Bond Characteristics

L.O. 10.2

113. __________________ assess both the collateral and the ability of the issuer to make timely interest and principal payments.

a. Bond covenants

b. Bond indentures

c. Bond ratings

d. Bond trustees

Difficulty Level: Easy

Subject Heading: Bond Ratings

L.O. 10.2

114. 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. may be convertible into equity

Difficulty Level: Medium

Subject Heading: Characteristics of Bonds

L.O. 10.2

115. 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

Difficulty Level: Medium

Subject Heading: Bond Covenants

L.O. 10.2

116. An unrated bond:

a. is perceived as having lower than average risk

b. are termed as “debentures”

c. generally has a lower yield than rated bonds

d. has not been rated by a rating agency

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

117. The following factor may affect a bond rating:

a. security provisions

b. indenture provisions

c. expected trends of industry operations

d. all the above

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

118. Which of the following constitute default on a bond?

a. payment of par value

b. payment of coupon

c. violation of the indenture

d. merger with another company

Difficulty Level: Medium

Subject Heading: Bond Covenants

L.O. 10.2

119. Which of the following is not a bond rating agency?

a. Standard and Poor’s

b. Fitch’s

c. Moody’s

d. Wilkes Bashford

Difficulty Level: Medium

Subject Heading: Bond Ratings

L.O. 10.2

120. A sinking fund:

a. is a special fund set up to pay of the creditors of bankrupt firms

b. requires specific approval by the firm’s the board of directors

c. requires the issuer to retire a bond issue incrementally over time

d. is managed by the trustee

Difficulty Level: Medium

Subject Heading: Time to Maturity

L.O. 10.2

121. Which of the following statements is correct?

a. A closed-end mortgage bond is one that allows the same assets to be used as security in all future bond issues.

b. Covenants in a trust indenture restrict or limit the actions the firm can take.

c. Retractable bonds can be redeemed prior to maturity by the firm.

d. junk bonds are never secured with hard assets

Difficulty Level: Hard

Subject Heading: Multiple Topics

L.O. 10.2

122. Which of the following statements is false?

a. Preferred stock that is both cumulative and convertible is a popular financing choice for investors purchasing shares of stock in small firms with high growth potential.

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

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

d. Eurodollar bonds are denominated in dollars.

Difficulty Level: Hard

Subject Heading: Multiple Topics

L.O. 10.2

123. Most bonds pay coupon interest

a. monthly

b. quarterly

c. semi-annually

d. annually

Difficulty Level: Easy

Subject Heading: Bonds

L.O. 10.2

124. 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

Difficulty Level: Medium

Subject Heading: Bonds

L.O. 10.2

125. 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. open-end mortgage bond

Difficulty Level: Medium

Subject Heading: Mixed

L.O. 10.2

126. 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

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.2

127. 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

Difficulty Level: Medium

Subject Heading: Time to Maturity

L.O. 10.2

128. 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

Difficulty Level: Medium

Subject Heading: Global Bond Market

L.O. 10.2

129. Eurodollar bonds are:

a. denominated in Eurodollars

b. extremely long-term obligations

c. scrutinized by the SEC

d. denominated in U.S. dollars

Difficulty Level: Medium

Subject Heading: Global Bond Market

L.O. 10.2

130. A current yield on a corporate bond is calculated as:

a. coupon interest amount divided by par value

b. coupon interest rate times the par value

c. coupon interest amount divided by the current price

d. coupon interest rate times the current price

Difficulty Level: Easy

Subject Heading: Reading Bond Quotes

L.O. 10.2

131. Bonds that have coupons that are literally clipped and presented, like a check, to the bank for payment, and where the bond issuer does not know who is receiving the coupon payments are called:

a. registered bonds

b. coupon bonds

c. bearer bonds

d. yankee bonds

Difficulty Level: Medium

Subject Heading: Bonds

L.O. 10.2

132. Principal amount that the issuer is obligated to repay at maturity.

a. Face value

b. Coupon payment

c. Carry value

d. Issue value

Difficulty Level: Easy

Subject Heading: Bonds

L.O. 10.2

133. Interest payments on a bond.

a. Face value

b. Coupon payment

c. Carry value

d. Issue value

Difficulty Level: Easy

Subject Heading: Bonds

L.O. 10.2

134. Bonds issued in the United States.

a. Unregistered bonds

b. Domestic bonds

c. Bearer bonds

d. Registered bonds

Difficulty Level: Easy

Subject Heading: Bonds

L.O. 10.2

135. These bonds have coupons that are “clipped” and presented, like a check, to the bank for payment.

a. Unregistered bonds

b. Secret bonds

c. Bearer bonds

d. Registered bonds

Difficulty Level: Easy

Subject Heading: Bonds

L.O. 10.2

136. Dollar-denominated bonds sold outside the United States.

a. Bearer bonds

b. Global bonds

c. Eurodollar bonds

d. Yankee bonds

Difficulty Level: Medium

Subject Heading: Global Bond Market

L.O. 10.2

137. Bonds that are generally denominated in U.S. dollars and marketed globally.

a. Bearer bonds

b. Global bonds

c. Eurodollar bonds

d. Yankee bonds

Difficulty Level: Medium

Subject Heading: Global Bond Market

L.O. 10.2

138. A (n) _____________ gives the bondholder a claim to specific assets (identified through serial numbers) such as railroad cars or airplanes.

a. first mortgage bond

b. equipment trust certificate

c. inventory bond

d. collateralized bond

Difficulty Level: Easy

Subject Heading: Different Types of Bonds

L.O. 10.3

139. Which of the following bonds can be redeemed prior to maturity by the firm?

a. callable bonds

b. convertible bonds

c. putable bonds

d. retractable bonds

Difficulty Level: Easy

Subject Heading: Time to Maturity

L.O. 10.3

140. Which of the following types of bonds have the lowest bondholder security risk?

a. closed-end mortgage bond

b. subordinated debenture

c. open-end mortgage bond

d. all the above would have the same risk

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

141. 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

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

142. An example of asset securitization is:

a. a bond backed by credit card receivables

b. a debenture

c. a subordinated debenture

d. convertible bond

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

143. Putable bonds are sometimes referred to as:

a. retractable bonds

b. callable bonds

c. convertible bonds

d. debentures

Difficulty Level: Medium

Subject Heading: Time to Maturity

L.O. 10.3

144. Which of the following bond types would describe unsecured obligations that depend on the general credit strength of the corporation?

a. collateralized bonds

b. mortgage bonds

c. equipment trust certificates

d. debenture bonds

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

145. A bond that does not permit future bond issues to be secured by any of the assets pledged as security to it is called a(n):

a. first mortgage bond

b. equipment trust certificate

c. closed-end mortgage bond

d. open-end mortgage bond

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

146. A bond that allows the same assets to be used as security in future issues is called a(n):

a. first mortgage bond

b. equipment trust certificate

c. closed-end mortgage bond

d. open-end mortgage bond

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

147. The risk of having a bond issuer request the bond back from the bondholder thus forcing the bondholder to reinvest the proceeds at a lower interest rate is called:

a. call risk

b. reinvestment rate risk

c. interest rate risk

d. indenture risk

Difficulty Level: Medium

Subject Heading: Time to Maturity

L.O. 10.3

148. These bonds have their coupons reset every two or three years to reflect the current interest rate environment and any changes in the firm’s credit quality.

a. Callable bonds

b. Put bonds

c. Treasury Inflation Protected Securities

d. Extendable notes

Difficulty Level: Medium

Subject Heading: Different Types of Bonds

L.O. 10.3

149. Which of the following statements is most correct?

a. The par value of a common stock or preferred stock is not important.

b. A convertible preferred stock gives the corporation the right to retire the preferred stock at its option.

c. The U.S. security markets are the only public financial markets in which preferred stock can be sold.

d. Similar to bonds, the fixed preferred stock dividend is a tax-deductible expense.

Difficulty Level: Hard

Subject Heading: Corporate Equity Capital

L.O. 10.4

150. Common stock can have which of the following characteristics? It can be:

a. cumulative

b. non-cumulative

c. convertible

d. shareholder voting rights

Difficulty Level: Medium

Subject Heading: Common Stock

L.O. 10.4

151. 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

Difficulty Level: Medium

Subject Heading: Preferred Stock

L.O. 10.4

152. __________________ allows stock to be held in the name of a brokerage house.

a. The Federal Reserve

b. Street name

c. The Securities Exchange Act of 1944

d. Private placement

Difficulty Level: Medium

Subject Heading: Common Stock Characteristics

L.O. 10.4

153. ___________________ has the lowest claim on the assets and cash flow of the firm.

a. A bond

b. A subordinated debenture

c. Preferred stock

d. Common stock

Difficulty Level: Medium

Subject Heading: Elements of Common Stock

L.O. 10.4

154. Equity security that has a senior claim to the firm’s earnings and assets over common stock.

a. Common stock

b. Special stock

c. Cumulative preferred stock

d. Preferred stock

Difficulty Level: Easy

Subject Heading: Preferred Stock

L.O. 10.4

155. The stock requires that before dividends on common stock are paid, preferred dividends must be paid for the current period and for all previous periods in which preferred dividends were missed.

a. Common stock

b. Special stock

c. Cumulative preferred stock

d. Preferred stock

Difficulty Level: Easy

Subject Heading: Preferred Stock

L.O. 10.4

156. Represents ownership shares in a corporation.

a. Common stock

b. Bonds

c. Cumulative preferred stock

d. Preferred stock

Difficulty Level: Easy

Subject Heading: Common Stock

L.O. 10.2

157. Reason(s) for stock repurchases include all the following except:

a. to acquire shares used in management stock option incentive programs, in which managers can purchase shares of stock at pre-specified prices.

b. to use in stock-based acquisitions of other firms.

c. the firm has the cash and sees its own stock as one of its most attractive investment alternatives.

d. all of the above

Difficulty Level: Medium

Subject Heading: Dividends and Stock Repurchases

L.O. 10.5

158. Reasons for stock repurchases include all of the following except:

a. to sell off shares used in management stock option incentive programs, in which managers can purchase shares of stock at pre-specified prices.

b. to use in stock-based acquisitions of other firms.

c. the firm has too little cash and sees its own stock as one of its most attractive sales alternatives.

d. The firm cannot issue bonds

Difficulty Level: Medium

Subject Heading: Dividends and Stock Repurchases

L.O. 10.5

159. A (n) ________________ is an extra dividend declared by the firm over and above its regular dividend payout.

a. special dividend

b. supplemental dividend

c. extra-large dividend

d. treasury dividend

Difficulty Level: Hard

Subject Heading: How Do Firms Decide on the Dollar Amount of Dividends?

L.O. 10.5

160. The _____________ policy states that dividends will vary based upon how much excess funds the firm has from year-to-year, whereas under a ________________ policy the firm pays a constant percentage of earnings as dividends, so as earnings rise and fall so does the dollar amount of dividends.

a. constant payout ratio, residual dividend

b. residual dividend, constant payout ratio

c. constant dividend, variable payout ratio

d. variable payout ratio, constant dividend

Difficulty Level: Hard

Subject Heading: How Do Firms Decide on the Dollar Amount of Dividends?

L.O. 10.5

161. Several factors will be considered by the board of directors and management as they consider the level of dividend payout. Some of these factors include:

a. the ability of the firm to generate cash to sustain the level of dividends.

b. legal and contractual considerations

c. growth opportunities

d. all of the above

Difficulty Level: Hard

Subject Heading: How Do Firms Decide on the Dollar Amount of Dividends?

L.O. 10.5

162. The effect of ______________ and _______________ on the value of a firm’s stock and the wealth of shareholders is zero.

a. stock dividends, stock splits

b. cash dividends, stock dividends

c. cash dividends, stock splits

d. bond dividends, stock splits

Difficulty Level: Hard

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.5

163. The effect of ______________ and _______________ on the value of a firm’s stock and the wealth of shareholders is positive.

a. share repurchases, stock splits

b. cash dividends, stock dividends

c. cash dividends, stock splits

d. none of the above

Difficulty Level: Hard

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.5

164. Most firms that issue dividends try to maintain a consistent _________________.

a. dividend per share

b. dividend payout ratio

c. both policies are frequently employed

d. neither policy is frequently employed

Difficulty Level: Medium

Subject Heading: How Do Firms Decide on the Dollar Amount of Dividends?

L.O. 10.5

165. The value of a share of stock, currently selling for $100, after it has a 2 for 1 split is:

a. $50

b. $150

c. $200

d. $250

Difficulty Level: Medium

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.5

166. The types of risk faced by investors in domestic bonds include all of the following except:

a. political risk

b. credit risk

c. interest rate risk

d. reinvestment rate risk

Difficulty Level: Medium

Subject Heading: Risk in Bond Valuation

L.O. 10.7

167. Which of the following risks would not be faced by investors in domestic bonds?

a. credit (or default) risk

b. interest rate risk

c. reinvestment rate (or rollover) risk

d. exchange rate risk

Difficulty Level: Medium

Subject Heading: Interest Rate Risk

L.O. 10.7

168. The _____________ is the difference in return earned by investing in a longer term bond that has the same credit risk as a shorter-term bond.

a. purchasing power spread

b. credit risk premium

c. horizon risk premium

d. reinvestment risk spread

Difficulty Level: Medium

Subject Heading: Interest Rate Risk

L.O. 10.7

169. A bond’s value is the same as its principal amount when the coupon rate is:

a. the same as the required rate of return

b. higher than the required rate of return

c. lower than the required rate of return

d. lower than the inflation rate

Difficulty Level: Easy

Subject Heading: Valuation and the Financial Environment

L.O. 10.7

170. All other things being equal, 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 that is,:

a. less than 10%

b. exactly 10%

c. higher than 10%

d. either less than or greater than 10%

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

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

a. 8.5%

b. 15%

c. 17%

d. 16%

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

172. 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. convert the bond after two more dividend payments

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

173. 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%, which of the following is closest to how much should Mary be willing to pay for the bond?

a. $902

b. $925

c. $1000

d. $828

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

174. 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

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

175. RJR Nabisco recently experienced a market reevaluation due to a number of tobacco lawsuits. The firm has a bond outstanding with 15 years to maturity, and a coupon rate of 8 percent, with interest being paid semiannually. The required yield to maturity has risen to 16%. What is the price of the RJR Nabisco bond?

a. $1,000

b. $804

c. $767

d. $550

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

176. Chrysler has a bond outstanding with eight years remaining to maturity, a coupon rate of 5 percent, and semiannual payments. If the market price of the Chrysler bond is $729.05, what is the yield to maturity?

a. 7 percent

b. 9 percent

c. 10 percent

d. 11 percent

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

177. Which of the following bonds has the greatest interest rate risk?

a. a 5 year, 10 percent coupon bond

b. a 10 year, 10 percent coupon bond

c. a 5 year, 5 percent coupon bond

d. a 10 year, 5 percent coupon bond

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

178. When the market interest rate is the same as the coupon rate for a particular quality of bond, the bond will be priced:

a. below its par value

b. at its par value

c. above its par value

d. The bond price cannot be determined

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

179. When the market interest rate is above the coupon rate for a particular quality of bond, the bond will be priced:

a. below its par value

b. at its par value

c. above its par value

d. The bond price cannot be determined

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

180. When the market interest rate is below the coupon rate for a particular quality of bond, the bond will be priced:

a. below its par value

b. at its par value

c. above its par value

d. The bond price cannot be determined

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

181. When the market interest rate rises for a particular quality of bond, the price of the bond falls, which gives investors a new:

a. coupon rate

b. interest payment amount

c. yield to maturity

d. maturity

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

182. When the market interest rate rises above the coupon rate for a particular quality of bond, the “current yield”:

a. will be below the coupon rate

b. will be the same as the coupon rate

c. will be above the coupon rate

d. cannot be determined

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

183. When the market interest rate falls below the coupon rate for a particular quality of bond, the “current yield”:

a. will be below the coupon rate

b. will be the same as the coupon rate

c. will be above the coupon rate

d. cannot be determined

Difficulty Level: Medium

Subject Heading: Valuation of Bonds

L.O. 10.7

184. 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. $1,141.19

Difficulty Level: Hard

Subject Heading: Valuation of Bonds

L.O. 10.7

185. A bond that is selling below par value.

a. Overpriced bond

b. Underpriced bond

c. Premium bond

d. Discount bond

Difficulty Level: Easy

Subject Heading: Determining a Bond’s Present Value

L.O. 10.7

186. A bond that is selling in over its par value.

a. Overpriced bond

b. Underpriced bond

c. Premium bond

d. Discount bond

Difficulty Level: Easy

Subject Heading: Determining a Bond’s Present Value

L.O. 10.7

187. Fluctuating interest rates lead to varying asset prices.

a. Exchange rate risk

b. Political risk

c. Rollover risk

d. Interest rate risk

Difficulty Level: Easy

Subject Heading: Interest Rate Risk

L.O. 10.7

188. Fluctuating interest rates cause coupon or interest payments to be reinvested at different interest rates over time.

a. Exchange rate risk

b. Political risk

c. Rollover risk

d. Interest rate risk

Difficulty Level: Easy

Subject Heading: Interest Rate Risk

L.O. 10.7

189. Actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investments.

a. Overthrow risk

b. Political risk

c. Sovereign risk

d. Interest rate risk

Difficulty Level: Easy

Subject Heading: Interest Rate Risk

L.O. 10.7

190. Fluctuating rates lead to varying levels of U.S. dollar-denominated cash flows.

a. Exchange rate risk

b. Political risk

c. Rollover risk

d. Interest rate risk

Difficulty Level: Easy

Subject Heading: Interest Rate Risk

L.O. 10.7

191. 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 percent. Using the Gordon approach, what is the expected return?

a. 5%

b. 8%

c. 13.4%

d. 13%

Difficulty Level: Medium

Subject Heading: Valuation of Stocks

L.O. 10.8

192. 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%

Difficulty Level: Medium

Subject Heading: Valuation of Stocks

L.O. 10.8

193. 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

Difficulty Level: Medium

Subject Heading: Valuation of Stocks

L.O. 10.8

194. What is the value of HM stock which currently has a dividend of $2 and is growing at 7 percent? The investor’s required rate of return is 11 percent.

a. $46.25

b. $50.50

c. $52.75

d. 53.50

Difficulty Level: Medium

Subject Heading: Valuation of Stocks

L.O. 10.8

195. 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. next year’s expected dividend

Difficulty Level: Medium

Subject Heading: Valuation of Stocks

L.O. 10.8

196. 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

Difficulty Level: Medium

Subject Heading: Valuation of Stocks

L.O. 10.8

197. Consolidated Edison has just paid an annual dividend of $3 per share. If the expected growth rate for Con Ed is 10%, and your required rate of return is 16%, how much are you willing to pay for this stock?

a. $55

b. $50

c. $46.50

d. $45

Difficulty Level: Medium

Subject Heading: Valuation of Stocks

L.O. 10.8

198. Which of the following is not a component of the Gordon (or constant dividend growth rate) model for valuing stocks?

a. next year’s expected dividend

b. a constant dividend growth rate

c. next year’s expected earnings

d. a discount rate that reflects the riskiness of the stock

Difficulty Level: Medium

Subject Heading: Valuation of Stocks

L.O. 10.8

199. The immediate value of a share of stock, currently selling for $100, after it has a 5 for 1 split is:

a. $20

b. $50

c. $200

d. $500

Difficulty Level: Medium

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.8

200. The value of a share of stock currently selling for $100 after it has a 5 for 1 split is:

a. $20

b. $40

c. $500

d. $1000

Difficulty Level: Medium

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.8

201. The value of a share of stock currently selling for $100 after a 1 for 5 split is:

a. $20

b. $40

c. $500

d. $1000

Difficulty Level: Medium

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.8

202. The value of a share of stock currently selling for $50 after a 1 for 5 split is:

a. $10

b. $200

c. $250

d. $500

Difficulty Level: Medium

Subject Heading: Stock Dividends and Stock Splits

L.O. 10.8

203. You are trying to determine the fair price to pay for a share of Philip Morris. If you buy this stock, you plan to hold it for a year. At the end of the year, you expect to receive a dividend of $5.50 and to sell the stock for $154. The discount rate for Philip Morris stock is 16%. What should be the price of this stock?

a. $99.80

b. $137.50

c. $144.22

d. $151.66

Difficulty Level: Hard

Subject Heading: Valuation of Stocks

L.O. 10.8