Question 1

Which of the following is not an advantage of a term loan over public debt offerings?
A) speed
B) low issuance costs
C) significantly lower interest rates
D) flexibility

Accepted Answer

Term loans typically have higher interest rates than public debt offerings due to the lower credit risk and longer maturity of public debt offerings. Therefore, "significantly lower interest rates" is not an advantage of term loans over public debt offerings.

Question 2

A(n)____ is a bond that pays no annual interest but is sold at a discount below par,thus providing compensation to investors in the form of capital appreciation.
A) coupon bond
B) income bond
C) convertible bond
D) zero coupon bond
E) callable bond

Accepted Answer

A zero coupon bond is a bond that is sold at a discount below par and pays no annual interest. This type of bond provides compensation to investors in the form of capital appreciation as it is sold at a discount but redeemed at full face value at maturity.

Question 3

Under a term loan the borrower agrees to make a series of amortized payments on specific dates.Although speed and flexibility are two advantages of term loans,such loans typically have high issuance costs.

Accepted Answer

Term loans often have lower issuance costs compared to bonds or equity financing, making them a more cost-effective option for many borrowers.

Question 4

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A call provision gives the issuer of the bond the right, not the bondholder, to repay the bond before its maturity date, typically when interest rates fall, allowing the issuer to refinance at a lower cost.

Question 5

Which of the following is NOT an example of a financial asset?
A) convertible bond
B) certificate of deposit
C) preferred stock
D) inventory
E) mutual fund

Accepted Answer

Inventory is a physical asset, while the other options (convertible bond, certificate of deposit, preferred stock, and mutual fund) are financial assets.

Question 6

The income that an investor earns from municipal bonds is
A) exempt from federal,state,and local taxes.
B) generally exempt from federal taxes,but most states impose local taxes.
C) generally exempt from state and local taxes,but taxed federally.
D) fully taxed by federal,state,and local authorities.

Accepted Answer

Municipal bonds are generally exempt from federal taxes, but the interest earned may be subject to state and local taxes, depending on the investor's state of residence and where the bond was issued.

Question 7

A(n)____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal.
A) putable bond
B) bankers acceptance
C) income bond
D) term loan
E) certificate of deposit

Accepted Answer

A term loan is a loan that is obtained from a bank or insurance company, and the borrower agrees to make a series of payments consisting of interest and principal. This type of loan has a fixed repayment schedule and a specified end date, as opposed to a revolving line of credit. The other options listed (putable bond, bankers acceptance, income bond, and certificate of deposit) are all types of financial instruments, but they are not the same as a term loan.

Question 8

Stock repurchases might be undertaken when
A) the firm has excess cash but no "good" investment opportunities
B) the price of the firm's stock is undervalued
C) the firm wants to increase the proportion of its assets that are financed with debt
D) management wants to gain more ownership control of the firm-by repurchasing the stock of other investors
E) All of the above are reasons stock repurchases might be undertaken

Accepted Answer

Stock repurchases can be motivated by various reasons including having excess cash with no good investment opportunities, believing the company's stock is undervalued, desiring to change the capital structure by increasing debt proportion, or management wanting to increase their ownership stake in the company.

Question 9

Which of the following is NOT a type of debt?
A) commercial paper
B) certificate of deposit
C) term loan
D) preferred stock

Accepted Answer

Preferred stock is not a type of debt, it is a type of equity. The other options (commercial paper, certificate of deposit, and term loan) are all types of debt.

Question 10

A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what?
A) cumulative dividends
B) callable dividends
C) putable dividends
D) historical dividends
E) paid dividends

Accepted Answer

Cumulative dividends are a protective feature on preferred stock where if the company fails to pay a dividend in a particular year, the dividend accumulates and must be paid before any dividends can be paid to common stockholders. This ensures that preferred stockholders receive their dividends before any dividends are paid to common stockholders.

Question 11

Which of the following is NOT a source of equity on a firm's balance sheet?
A) additional paid-in capital
B) retained earnings
C) common stock
D) property,plant,and equipment

Accepted Answer

Property, plant, and equipment is a source of assets on a firm's balance sheet, not equity. Additional paid-in capital, retained earnings, and common stock are all sources of equity.

Question 12

Many bond indentures allow the company to acquire bonds for a sinking fund either by purchasing bonds in the market or by a lottery administered by the trustee for the purchase of a percentage of the issue through a call at face value.

Accepted Answer

Many bond indentures do include provisions for a sinking fund, which can be used to retire bonds. The sinking fund can be funded by the company purchasing bonds on the open market or by a percentage of the issue being called at face value through a lottery administered by the trustee.

Question 13

Preferred stockholders generally are given the right to vote for directors if
A) the preferred stock is participating preferred stock.
B) the directors are elected under the cumulative method.
C) the common stockholders do not vote in new directors with a clear majority.
D) the company cannot pay its interest payments.
E) the company has not paid the preferred dividend for a specified period.

Accepted Answer

Preferred stockholders are typically given the right to vote for directors if the company has not paid the preferred dividend for a specified period. This is known as a "cumulative" or "non-cumulative" dividend requirement, and the length of the specified period will vary depending on the specific terms of the preferred stock. If the company fails to pay the preferred dividend for this period, the preferred stockholders will often be given the right to elect some or all of the company's directors.

Question 14

Sharon has a convertible bond with a face value of $1,000 that can be converted into 40 shares of common stock of Mountain Ice Corporation.If the current price of the stock is $20,what is the conversion price of the bond?
A) $20
B) $50
C) $800
D) $500
E) None of the above.

Accepted Answer

The answer of Sharon has a convertible bond with a...

Question 15

Bond ratings of ____ and higher are considered investment grade.
A) AAA
B) AA
C) A
D) BBB

Accepted Answer

Bond ratings of BBB and higher are considered investment grade, indicating a relatively low risk of default.

Question 16

A French firm is buying $1,000,000 of optical cable from a firm in the United States.The French firm will pay for the cable in thirty days.To protect itself from changes in the exchange rate between the Euro and dollar,the French firm enters into a futures contract to purchase $1,000,000 at a price of $1.25/€.How many Euros will it cost the French firm to purchase $1,000,000 using the futures contract?
A) €125,000,000
B) €2,500,000
C) €1,250,000
D) €1,000,000
E) €800,000

Accepted Answer

To calculate the cost in Euros for the French firm to purchase $1,000,000 using the futures contract at a price of $1.25/€, you divide the total dollar amount by the exchange rate: $1,000,000 / $1.25/€ = €800,000.

Question 17

A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period.
A) convertible security
B) call option
C) warrant
D) put option
E) callable security

Accepted Answer

A put option is a type of financial instrument that gives the owner the right, but not the obligation, to sell shares of stock at a specified price during a particular time period. This is different from a call option, which gives the owner the right to buy shares of stock at a specified price. Convertible securities, warrants, and callable securities are all different types of financial instruments, but they do not relate to the specific definition in the question.

Question 18

Corporations issue and purchase a variety of financial securities for all of the following reasons EXCEPT
A) raise capital
B) hedge against risk
C) alter the capital structure of the firm
D) all of the above are reasons to issue or purchase financial securities

Accepted Answer

Corporations issue and purchase financial securities for all of the reasons listed in choices A, B, and C. Therefore, choice D is the correct answer.

Question 19

Typically,debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured.

Accepted Answer

This is because mortgage bonds have collateral in the form of assets, providing added security to bondholders, while debentures are not secured by specific assets and therefore carry a higher risk for investors, resulting in a higher interest rate.

Question 20

A ____ is an agreement to between two firms where one firm agrees to sell some of its financial assets to another and then buy the financial assets back from that firm at a later time
A) buy back
B) call option
C) repurchase agreement
D) put option

Accepted Answer

A repurchase agreement, also known as a repo, is a common type of short-term borrowing in the financial markets. It involves one firm (the seller) selling some of its financial assets, such as stocks or bonds, to another firm (the buyer) for cash with an agreement to repurchase the assets at a later date for a slightly higher price. This transaction is essentially a collateralized loan, where the financial assets serve as collateral for the cash borrowed. The seller is essentially borrowing cash in exchange for collateral, with an agreement to repay the cash plus interest at a later date. The buyer benefits from earning interest on the cash lent, as well as having the security of the financial assets as collateral.

Quiz 2: Financial Assets Instruments

Which of the following is not an advantage of a term loan over public debt offerings?

A(n) ____ is a bond that pays no annual interest but is sold at a discount below par,thus providing compensation to investors in the form of capital appreciation.

Under a term loan the borrower agrees to make a series of amortized payments on specific dates.Although speed and flexibility are two advantages of term loans,such loans typically have high issuance costs.

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Which of the following is NOT an example of a financial asset?

The income that an investor earns from municipal bonds is

A(n) ____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal.

Stock repurchases might be undertaken when

Which of the following is NOT a type of debt?

A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what?

Which of the following is NOT a source of equity on a firm's balance sheet?

Many bond indentures allow the company to acquire bonds for a sinking fund either by purchasing bonds in the market or by a lottery administered by the trustee for the purchase of a percentage of the issue through a call at face value.

Preferred stockholders generally are given the right to vote for directors if

Sharon has a convertible bond with a face value of $1,000 that can be converted into 40 shares of common stock of Mountain Ice Corporation.If the current price of the stock is $20,what is the conversion price of the bond?

Bond ratings of ____ and higher are considered investment grade.

A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period.

Corporations issue and purchase a variety of financial securities for all of the following reasons EXCEPT

Typically,debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured.

A ____ is an agreement to between two firms where one firm agrees to sell some of its financial assets to another and then buy the financial assets back from that firm at a later time