Question 1

A bond sold with a sinking fund provision requires the firm to allow a stockholder to exchange his/her bond for a specified number of shares of common stock.

Accepted Answer

A sinking fund provision requires the firm to set aside money each year to retire a portion of the bond issue. It does not involve allowing bondholders to exchange their bonds for stock.

Question 2

Raising long-term funds through the sale of bonds requires the firm to make debt repayment when and if the organization has sufficient cash flow.

Accepted Answer

The answer of Raising long-term funds through the sale of...

Question 3

With everything else constant, investors prefer a bond issued with a sinking fund compared to a bond without a sinking fund.

Accepted Answer

A bond issued with a sinking fund is considered less risky than a bond without a sinking fund, as it provides a degree of protection to investors in case of default by the issuer. The sinking fund allows the issuer to set aside money periodically to retire or buy back the bonds before maturity. This reduces the investors' risk of losing their principal investment if the issuer defaults on interest payments or fails to repay the principal amount at maturity. Therefore, investors generally prefer bonds with sinking funds over those without them.

Question 4

A sinking fund provision decreases the risk of repayment in the minds of the investors.

Accepted Answer

A sinking fund provision requires the borrower to set aside a portion of the funds each year to repay the principal amount of the bond. This reduces the risk of default, as it ensures that there will be sufficient funds available to repay the bondholders at maturity. As a result, investors perceive the bond as less risky, which can lower the interest rate that the issuer must pay.

Question 5

A sinking fund is a reserve account where the firm will periodically deposit funds in anticipation of repayment of a bond issue on the maturity date.

Accepted Answer

This statement accurately describes what a sinking fund is.

Question 6

By issuing bonds, a firm's debt level increases, which may adversely affect the firm's image in the financial community.

Accepted Answer

When a firm issues bonds, it increases its debt level. This may cause concern among investors and lenders and could adversely affect the firm's image in the financial community. However, if the firm uses the proceeds from the bond issuance wisely and is able to generate a healthy return on investment, it may actually improve its reputation in the long run.

Question 7

Debenture bonds represent bonds that are not secured by collateral.

Accepted Answer

Debenture bonds are unsecured bonds that rely solely on the borrower's ability to repay them. They are not backed by any collateral or assets.

Question 8

Taking into account the risk/return trade-off, it would stand to reason that a secured bond holds a lower interest rate than an unsecured bond.

Accepted Answer

A secured bond holds lower interest rate than an unsecured bond because it is backed by collateral, which reduces the risk for investors. Therefore, investors are willing to accept a lower return in exchange for the lower risk.

Question 9

As he was approaching retirement, Gabriel began a search for a low-risk investment. He should consider buying a secured bond of a major corporation.

Accepted Answer

Buying a secured bond of a major corporation is typically considered a low-risk investment as the corporation has pledged assets as collateral, providing a level of security for the bondholder.

Question 10

Young investors place more importance on low-risk investments, while elderly investors prefer significant growth in the value of their investments.

Accepted Answer

This statement is generally false. While young investors may have a longer time horizon and can afford to take on more risk, they are also often more willing to take risks in pursuit of higher returns. Elderly investors may prioritize preservation of capital over significant growth, but some may still seek growth opportunities to meet their financial goals. Investment preferences vary greatly among individuals and cannot be generalized solely based on age.

Question 11

A company often exercises the call provision of a bond if it's available when prevailing interest rates fall below the interest rate currently being paid to bondholders.

Accepted Answer

When interest rates fall, companies may want to refinance their debt at a lower rate. If the bond has a call provision, the company can call the bond and issue a new bond at a lower interest rate to save money on interest payments.

Question 12

The high start-up costs of online businesses cause online brokers to charge higher commissions than traditional brokerage firms.

Accepted Answer

Online businesses generally have lower start-up costs compared to traditional brick and mortar businesses. Therefore, online brokers can actually charge lower commissions due to their lower overhead costs.

Question 13

The owner of a convertible bond can exchange the bond for a specified number of shares of common stock in the same corporation.

Accepted Answer

Convertible bonds allow the bondholder to convert the bond into a certain number of shares of the company's common stock at a predetermined conversion ratio. This gives the bondholder the option to trade in their debt security for equity in the same company.

Question 14

Michael is looking for an investment that will pay a little better than what he can get from a government bond. You suggest that he consider a new issue of debenture bonds by Leafy Greens that pay 7.5% annually. You explain that Leafy Greens has been in business a long time, and the debenture feature makes these bonds more secure than others.

Accepted Answer

The answer of Michael is looking for an investment that...

Question 15

A callable bond allows a bondholder to exchange his/her bond for shares of common stock in the same corporation.

Accepted Answer

The answer of A callable bond allows a bondholder to...

Question 16

Online investors expect more expert advice than investors using traditional brokerage firms.

Accepted Answer

The answer of Online investors expect more expert advice than...

Question 17

As a registered representative of a stock brokerage firm, a stockbroker works as an intermediary to buy and sell securities for clients.

Accepted Answer

A stockbroker's main role is to facilitate buying and selling of securities on behalf of clients.

Question 18

Both stocks and bonds represent temporary sources of funding for a firm. Eventually they must be repaid.

Accepted Answer

The answer of Both stocks and bonds represent temporary sources...

Question 19

The U.S. government just announced an increase in the interest rate paid on U.S. government bonds. This will likely cause a decrease in the interest rates paid on corporate bonds.

Accepted Answer

The interest rates on U.S. government bonds and corporate bonds are not directly related. An increase in the interest rate paid on U.S. government bonds could actually cause an increase in the interest rates paid on corporate bonds, as investors may see corporate bonds as a more attractive investment option compared to government bonds.

Question 20

Investors and corporations are on the opposite sides of the interest rate risk scenario. If interest rates go up to 7%, the bondholder holding a bond with a 6% interest rate knows that he could do better. If he is forced to sell his bond on the secondary market before it matures, he will receive less than the face value.

Accepted Answer

When interest rates go up, the value of existing bonds with lower interest rates decreases, as new bonds with higher interest rates become more attractive. This puts bondholders at risk of losing money if they are forced to sell their bonds before maturity, as they will receive a lower price than the face value. On the other hand, corporations may benefit from rising interest rates as they can issue new bonds with higher interest rates to attract investors.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities