Deck 12: The Features of Long-Term Debt - Bonds

Question 1

The highest credit rating is triple A.​

Answer 1

True

Question 2

Many bonds have a call feature, which permits the firm to retire the bonds prior to maturity.​

Answer 2

True

Question 3

Default is​

A) ​failure to meet any of the terms of the indenture
B) ​failure to make dividend payments
C) ​only failure to make interest payments
D) ​failure to maintain more assets than liabilities

Answer 3

​failure to meet any of the terms of the indenture

Question 4

Equipment trust certificates issued by a firm should be safer than its debentures.​

Question 5

A periodic payment to retire a debt is illustrative of a sinking fund.​

Question 6

Interest is exempt from federal income taxation for

A) ​equipment trust certificates​
B) ​zero coupon bonds
C) ​federal bonds such as savings bonds
D) ​state of Florida bonds

Question 7

The document stating the terms of a bond is the indenture.​

Question 8

Bonds secured by collateral tend to be safer than other bonds issued by the firm.​

Question 9

The interest paid by municipal bonds is not subject to federal income taxation.​

Question 10

If a company defaults on its bonds,​

A) ​subordinated debt is redeemed before senior debt
B) ​equipment trust certificates have an inferior position to income bonds
C) ​interest continues to accrue but may not be paid
D) ​debentures have a superior position to other bonds

Question 11

Which of the following bonds is supported by collateral?

A) ​unsecured bonds
B) income bonds​
C) equipment trust certificates​
D) ​debentures

Question 12

Debt instruments subject their owners to risk from​
1) loss of purchasing power
2) higher credit ratings
3) default

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 13

Treasury bills are short-term debt issued by the federal government.​

Question 14

An investor may anticipate that a bond will be called if interest rates have risen.​

Question 15

Bonds that are in default are given a B rating instead of an A rating.​

Question 16

The interest paid by federal government bonds is not subject to federal income taxation.​

Question 17

Bonds may not be repurchased by the firm prior to maturity.​

Question 18

If a company fails to meet the terms of the indenture, it is​

A) ​bankrupt
B) ​in default
C) ​profitable
D) ​in registration

Question 19

All debentures are bonds but not all bonds are debentures.​

Question 20

A firm may retire bonds by purchasing the debt in the secondary markets.​

Question 21

​Which of the following reduces the investor's risk associated with investing in bonds?
1) a sinking fund
2) a variable interest rate
3) a call feature

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 22

If a company enters bankruptcy court, bondholders should realize​

A) ​subordinated debt is paid off at face value
B) ​convertible debt is superior because it may be converted into common stock
C) ​bondholders may lose their investments
D) ​stockholders have the superior position

Question 23

Which of the following bonds is supported by collateral?​

A) ​zero coupon bond
B) ​mortgage bond
C) ​debenture bond
D) ​income bond

Question 24

Which of the following bonds are exempt from federal income taxation?​

A) ​zero coupon bonds
B) ​debenture bonds
C) ​convertible bonds
D) ​municipal bonds

Question 25

Bonds may be retired prior to maturity by​
1) repurchases
2) a sinking fund
3) a call feature

A)1 and 2​
B)​1 and 3
C)​2 and 3
D)​all three