Deck 10: Bonds and Stocks: Characteristics and Valuations

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

The United States government rates bonds.

Question 22

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

Question 23

Eurodollar bonds are highly regulated by the SEC.

Question 24

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

Question 25

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

Question 26

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

Question 27

Bond holders have no voting rights.

Question 28

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

Question 29

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

Question 30

Owning bearer bonds is prohibited in the United States.

Question 31

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.

Question 32

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

Question 33

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

Question 34

Issuing bearer bonds is prohibited in the United States.

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

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.

Question 50

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 51

Subordinate debentures are relatively low risk investments.

Question 52

Mortgage bonds are secured by home mortgages.

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

Zero-coupon bonds pay absolutely no interest.

Question 60

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

Question 61

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

Question 62

Many firms have low or no-par stock.

Question 63

Common stock has a maturity of at least ten years.

Question 64

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

Question 65

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

Question 66

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

Question 67

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 68

Common stock always receives dividends.

Question 69

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

Question 70

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.

Question 71

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

Question 72

Common stock holders do not receive voting right.

Question 73

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

Question 74

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 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

Putable bonds are the same as retractable bonds.

Question 80

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