Question 1

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

Secured bonds are a relatively safe investment in that the risk of default is reduced by the value of the pledged collateral.

Question 2

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. Similarly, online brokerage firms have lower overhead costs than traditional brokerage firms, which should ideally result in lower commissions. However, some online brokers may charge higher commissions due to factors such as offering additional services or features.

Question 3

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

Secured bonds are backed by collateral, thus are a less risky investment than an unsecured bond. In order for corporations to attract investors to unsecured bonds, they generally must pay a higher interest rate.

Question 4

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 bond requires the issuing organization to regularly set aside funds in a reserve account in order that the firm has sufficient cash with which to repay the principal.

Question 5

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

Accepted Answer

Stocks represent ownership in a company and do not have to be repaid. Bonds are debt instruments and do represent a loan to the company that must be repaid.

Question 6

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 primary role is to act as a middleman between clients and the stock market. They execute orders to buy or sell securities on behalf of their clients and provide advice and guidance on investment decisions. As a registered representative of a brokerage firm, they must follow rules and regulations set forth by government agencies such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Question 7

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 rate being paid by U.S. government bonds impacts the interest rate a firm must agree to pay since government bonds are considered to be very safe investments. Corporate bonds would be considered riskier. The risk/return trade-off states that investors demand higher interest rates in order to accept higher risk levels.

Question 8

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

Accepted Answer

Online investors typically seek more autonomy and control over their investments and may not prioritize expert advice as highly as those using traditional brokerage firms, who might prefer a more guided approach.

Question 9

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

Accepted Answer

A sinking fund provision can be attractive for firms and investors because it provides for an orderly retirement of a bond issue, thereby reducing the risk associated with the bond.

Question 10

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

Accepted Answer

A callable bond allows the issuer, not the bondholder, to repurchase the bond at a predetermined price before its maturity date. The feature described in the question refers to a convertible bond, not a callable bond.

Question 11

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 there may be some individuals who fit these categories, it is not accurate to generalize an entire age group in terms of investment preferences. There are many factors that contribute to individual investment decisions, such as financial goals, risk tolerance, and available resources.

Question 12

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 organization issuing bonds has a contractual obligation to make regular interest payments and to repay the principal.

Question 13

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

Debenture bonds are unsecured bonds. Unsecured bonds usually carry a higher interest rate to compensate for the added risk that the investor is taking.

Question 14

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

In an effort to reduce the cost of their debt capital, it would benefit a firm to call in higher interest rate bonds and reissue new bonds at lower interest rates.

Question 15

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, which may be perceived negatively by investors and creditors. This could harm the firm's image in the financial community and make it more difficult to obtain financing in the future. However, issuing bonds can also have benefits, such as providing the firm with access to capital to fund its operations or expansion.

Question 16

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 a feature of convertible bonds, they can be exchanged for a certain number of shares of common stock in the same corporation.

Question 17

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 is the correct definition of a sinking fund.

Question 18

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

Investors and corporations are on the opposite side of the interest rate risk scenario. If corporations issued a bond carrying an interest rate of 7%, and interest rates go down, they are paying more in interest rates than they would be if they waited for interest rates to drop. Investors are thrilled because they made a good investment. Other investors who invest in a similar investment will make less.

Question 19

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