Question 1

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

Accepted Answer

The statement is false. Web-based businesses often have lower start-up costs compared to traditional brick-and-mortar firms. As a result, online brokers can afford to charge lower commissions to attract more clients.

Question 2

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

Accepted Answer

The answer of Young investors place more importance on low-risk...

Question 3

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 funds periodically to retire a portion of the principal before maturity. This reduces the risk of default and increases the likelihood of repayment, making the investment less risky for investors.

Question 4

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 job is to buy and sell securities on behalf of their clients as an intermediary between them and the stock market.

Question 5

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

An increase in the interest rate paid on U.S. government bonds would make them more attractive to investors, causing the demand for these bonds to increase and the price to rise. As a result, the interest rates paid on corporate bonds would also have to increase to remain competitive. Therefore, there is no direct correlation between the increase in interest rates on government bonds and the decrease in interest rates on corporate bonds.

Question 6

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 is backed by collateral, which reduces the risk for the investor. Therefore, the interest rate offered on a secured bond is typically lower than the interest rate offered on an unsecured bond, which carries more risk for the investor. This demonstrates the risk/return trade-off principle, where higher returns are generally associated with higher levels of risk.

Question 7

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

This is true. Convertible bonds give the owner the option to convert the bond into a predetermined number of shares of common stock in the issuing corporation.

Question 8

After retirement, Hector began a search for a low-risk investment. He should consider buying a secured bond of a major corporation.

Accepted Answer

Secured bonds are generally considered to be a low-risk investment as they offer a guaranteed repayment of the principal amount along with interest. Major corporations typically have a proven track record and a strong financial position, making their secured bonds a good option for low-risk investments.

Question 9

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

A call provision on a bond allows the company to redeem the bond before its scheduled maturity date if certain conditions are met, such as prevailing interest rates falling below the current interest rate being paid to bondholders. This is done in order for the company to issue new bonds at a lower interest rate and lower their overall cost of borrowing.

Question 10

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 11

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

Accepted Answer

A sinking fund adds an extra layer of security for investors as it requires the issuer to make periodic payments to reduce the principal amount of the bond. This reduces the risk of default for investors and makes the bond more attractive.

Question 12

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 13

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 level of debt, which can be seen as a negative factor by the financial community as it may imply that the firm is at a higher risk of default. This can affect the firm's image and creditworthiness.

Question 14

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 periodically to retire a portion of the bond issue before maturity, but it does not involve allowing stockholders to exchange their bonds for common stock.

Question 15

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 increase, the market value of existing bonds with lower interest rates decreases as they become less attractive to investors compared to new bonds with higher interest rates. This means that the bondholder may have to sell their bond at a lower price than its face value, resulting in a loss. On the other hand, corporations that are borrowing money through bonds benefit from higher interest rates as they can offer new bonds with higher interest rates, increasing their profitability.

Question 16

Debenture bonds represent bonds that are not secured by collateral.

Accepted Answer

Debenture bonds are not backed by collateral, so they are also known as unsecured bonds. This means that if the bond issuer defaults on the bond, there are no assets or property that can be seized to repay investors. Instead, debenture holders rely on the creditworthiness and financial stability of the issuer to ensure the bond is repaid.

Question 17

Tyler 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 Very Vegetarian that pay 8.5% annually. You explain that Very Vegetarian has operated for a long time, and the debenture feature makes these bonds more secure than others.

Accepted Answer

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

Question 18

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

A sinking fund is used to ensure that there is enough money to repay a bond issue on its maturity date. The firm will periodically deposit funds into the sinking fund in order to build up the necessary funds.

Question 19

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 20

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...

Quiz 19: Using Securities Markets for Financing and Investing Opportunities