Deck 6: Fixed Income Securities: Bonds and Preferred Stock

Question 1

Which of the following is not a restrictive covenant?

A)call feature
B)limitations on additional debt
C)dividend payment limitations
D)restrictions on firm activities

Answer 1

A

Question 2

The consequences to a corporation for failure to pay preferred dividends are more serious than for failure to pay interest on a bond.

Answer 2

False

Question 3

Conceptually, the value of any investment security is the future value of the security's expected future cash flows earnings the investor's required rate of return until termination.

Answer 3

False

Question 4

Which of the following is not considered a fixed income security?

A)bond
B)common stock
C)preferred stock
D)all of the above

Question 5

The cumulative feature on preferred stock allows investors to accumulate more preferred stock at reduced prices.

Question 6

Which of the following requires the issuing corporation to retire a portion of their bonds prior to maturity?

A)cumulative feature
B)call feature
C)put feature
D)sinking fund feature

Question 7

A call feature allows the issuing corporation to repay the bond prior to maturity if it so wishes.

Question 8

Interest on a bond is a tax-deductible cost for the paying corporation.

Question 9

Which one of the following securities is collateralized secured)by specific assets?

A)debenture
B)common stock
C)referred stock
D)mortgage bond

Question 10

Common stock has seniority relative to preferred stock.

Question 11

What is a bond's market price when the required rate of return on the bond is less than the coupon rate?

A)The bond's price is less than the par value.
B)The bond's price is the same as the par value.
C)The bond's price is greater than the par value.
D)None of the above.

Question 12

Which of the following has the highest seniority ranking?

A)junior, subordinated debenture
B)junior, unsubordinated debenture
C)senior subordinated debenture
D)senior, unsubordinated debenture

Question 13

Corporate bonds are generally considered perpetual.

Question 14

Bonds and common stock are generally both classified as fixed income securities.

Question 15

The annual interest paid by a bond is equal to the bond's coupon rate times its par value.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Question 16

The term "preferred" in preferred stock refers to which of the following?

A)Preferred stock has a claim on the firm's assets prior to suppliers.
B)Preferred stock has a claim on the firm's assets prior to debt bonds).
C)Preferred stock has a claim on the firm's assets prior to common stock.
D)Preferred stock has a claim on the firm's assets prior to employees.

Question 17

Which of the following is the credit contract governing the investor and issuing corporation of a bond?

A)debenture
B)indenture
C)collateral
D)sinking fund

Question 18

The Gizaw Corporation has a bond outstanding that matures in the year 2018. But the corporation can pay the bond back early at the corporation's option. What kind of feature is this option?

A)put feature
B)equity conversion feature
C)call feature
D)adjustable coupon rate feature

Question 19

If a bond is not secured by collateral, it is called a debenture.

Question 20

Which of the following allows the investor to demand repayment for a bond prior to maturity?

A)put feature
B)call feature
C)sinking fund feature
D)cumulative feature

Question 21

What is the value of a $1,000 par value zero-coupon bond maturing in 10 years to an investor requiring a 7% rate of return?

A)$622.75
B)$508.35
C)$385.54
D)$513.16

Question 22

What is the yield to maturity on a $1,000 par value 93/4% bond purchased for $1,125? Assume the coupon is paid annually and the maturity is 12 years.

A)8.16%
B)8.16%
C)8.08%
D)7.90%

Question 23

A 101/2% bond matures in 11 years. Assuming the coupon is paid semiannually and the par value is $1,000, what is the value of this bond to an investor requiring a 10% rate of return?

A)$1,020.77
B)$1,032.48
C)$1,032.91
D)$583.35

Question 24

What is the yield to maturity on a share of Hospitality Properties A $2.38 preferred stock to an investor who buys the preferred stock at $28.50? Assume dividends are paid annually.

A)8.35%
B)8.50%
C)8.21%
D)8.70%

Question 25

What is the yield to maturity on a $1,000 par value 81/4% bond purchased for $850? Assume the coupon is paid annually and the maturity is 13 years.

A)10.41%
B)10.51%
C)10.32%
D)10.63%

Question 26

What is the value of a share of Innskeepers A $2.16 preferred stock to an investor requiring a 9% rate of return? Assume dividends are paid annually.

A)$25.50
B)$21.60
C)$27.00
D)$24.00

Question 27

A 73/8% bond matures in 10 years. Assuming the coupon is paid annually and the par value is $1,000, what is the value of this bond to an investor requiring a 9% rate of return?

A)$895.71
B)$887.69
C)$903.74
D)$848.83

Question 28

A 12% bond matures in 14 years. Assuming the coupon is paid semiannually and the par value is $1,000, what is the value of this bond to an investor requiring a 15% rate of return?

A)$828.27
B)$872.66
C)$411.98
D)$826.40

Question 29

A 95/8% bond matures in 12 years. Assuming the coupon is paid annually and the par value is $1,000, what is the value of this bond to an investor requiring a 7% rate of return?

A)$885.91
B)$1,208.50
C)$891.61
D)$1,198.57

Question 30

What is the yield to maturity for an investor buying a $1,000 par value zero-coupon bond maturing in 8 years for $500?

A)7.18%
B)10.41%
C)8.01%
D)9.05%