Question 1

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

Accepted Answer

A special dividend is an extra dividend declared by the firm over and above its regular dividend payout. A supplemental dividend is a type of extra dividend, but it is typically paid after the regular dividend and only if certain conditions are met. Extra-large dividend and treasury dividend are not commonly used terms and are not specific types of dividends.

Question 2

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

Accepted Answer

All of the listed reasons are valid reasons for stock repurchases.

Question 3

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.

Accepted Answer

Cumulative preferred stock requires that all missed preferred dividends must be paid before any dividends can be paid on common stock.

Question 4

An example of asset securitization is:

Accepted Answer

Asset securitization involves pooling and transferring assets (such as loans or receivables) into a special purpose vehicle, which then issues securities backed by those assets. A bond backed by credit card receivables is a common example of asset securitization. The payments on the bond are derived from the cash flows generated by the credit card receivables. The other choices do not involve asset securitization.

Question 5

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

Accepted Answer

An open-end mortgage bond allows the issuer to borrow additional funds in the future secured by the same assets, unlike a closed-end mortgage bond which does not allow for additional future borrowing on the same assets.

Question 6

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

Accepted Answer

Common stocks are generally considered to be the most risky investment option as their prices can fluctuate significantly and there is no guaranteed return on investment. The other options listed are generally considered to be less risky as they offer more stability and are often backed by collateral or a reliable source of income.

Question 7

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.

Accepted Answer

Extendable notes have their coupons reset periodically to reflect current interest rates and changes in credit quality, allowing investors to benefit from potentially higher yields if rates increase or the issuer's credit improves.

Question 8

Putable bonds are sometimes referred to as:

Accepted Answer

Putable bonds give the holder the option to sell the bond back to the issuer at a predetermined price before maturity. This is similar to retractable bonds, which allow the holder to sell the bond back to the issuer at a predetermined price on a set date. Callable bonds, on the other hand, give the issuer the option to call (or redeem) the bond before maturity. Convertible bonds allow the holder to convert the bond into a predetermined number of common stock shares. Debentures are a type of bond that is not secured by collateral.

Question 9

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.

Accepted Answer

The first part of the statement describes the residual dividend policy, while the second part describes the constant payout ratio policy. Therefore, the correct answer is option B.

Question 10

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 11

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):

Accepted Answer

A closed-end mortgage bond is also sometimes called a "specific lien" bond, which means that it is secured by a specific asset or property. Unlike an open-end mortgage bond, which allows for future bond issues to be secured by the same assets, a closed-end mortgage bond does not permit this. Equipment trust certificates and first mortgage bonds are different types of bonds with their own unique characteristics.

Question 12

Represents ownership shares in a corporation.

Accepted Answer

Common stock represents ownership in a corporation, where shareholders have voting rights and can receive dividends based on the profitability of the company. Bonds are debt securities issued by corporations to raise capital, and do not represent ownership. Cumulative preferred stock and preferred stock do represent ownership, but have different characteristics such as priority in receiving dividends and limited voting rights.

Question 13

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

Accepted Answer

Common stock represents ownership in the company but has the lowest claim on the assets and cash flow of the firm. Bondholders, subordinated debenture holders, and preferred stockholders all have higher priority for receiving payments in case of liquidation or bankruptcy.

Question 14

Reasons for stock repurchases include all of the following except:

Accepted Answer

The answer of Reasons for stock repurchases include all of...

Question 15

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

Accepted Answer

Debenture bonds describe unsecured obligations that depend on the general credit strength of the corporation. Collateralized bonds are secured by specific assets or collateral, mortgage bonds are secured by specific property such as real estate, and equipment trust certificates are secured by specific pieces of equipment.

Question 16

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

Accepted Answer

The answer of Common stock can have which of the...

Question 17

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

Accepted Answer

Preferred stock has a senior claim to the firm's earnings and assets over common stock. Cumulative preferred stock also has a senior claim and accumulates unpaid dividends, but this is not guaranteed for all types of preferred stock. Special stock is not a commonly used term in finance. Common stock has a junior claim to earnings and assets compared to preferred stock.

Question 18

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

Accepted Answer

Cumulative preferred stock has the lowest risk among the options because it guarantees the payment of dividends in arrears before any dividends can be distributed to common stockholders. This feature provides a layer of financial security to the shareholders.

Question 19

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

Accepted Answer

Holding stock in street name means the brokerage house holds the stock on behalf of its clients, and the stock is registered in the name of the brokerage rather than the individual investor. This allows for more efficient trading and easier record-keeping for both the investor and the brokerage. The Federal Reserve is responsible for monetary policy, while the Securities Exchange Act of 1944 regulates securities markets and private placement refers to the sale of securities directly to institutional investors or accredited individuals.

Question 20

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:

Accepted Answer

Call risk refers to the risk of the bond issuer calling back the bond before its maturity date, which forces the bondholder to reinvest the proceeds at a lower interest rate. This can result in the bondholder losing out on potential interest payments and possibly even losing money if the new investment has a lower yield than the original bond. Reinvestment rate risk and interest rate risk are related to changes in interest rates, but do not specifically refer to the risk of an issuer calling back a bond. Indenture risk refers to the risk of the issuer defaulting on the bond.

Quiz 10: Bonds and Stocks: Characteristics and Valuations