Flashcards in Ch 10 Deck (45):
During periods of economic expansion, firms usually rely more on internal sources of funds.
Most of the annual funds raised from security issues come from corporate bond sales
Long term business funds are obtained by issuing commercial paper and corporate bonds
Private placements must be approved by the Securities and Exchange Commission (SEC).
Firms issue more bonds than equities.
A debt holder may force the firm to abide by the terms of the debt contract even if the result is
reorganization or dissolution of the firm.
Bondholders have priority claims over equity holders to a firm’s assets and cash flows
Bond covenants are the best way for bondholders to protect themselves against dubious management
Bond issues of a single firm can have different bond ratings if their security provisions differ
Mortgage bonds are secured by home mortgages
The claims of subordinated debenture bondholders are junior to the claims of debenture holders.
A convertible bond can be converted, at the issuing firm’s option, into a specific number of shares of the
issuer’s common stock.
Callable bonds can be redeemed prior to maturity by the firm
Eurodollar bonds are dollar-denominated bonds that are sold outside the United States.
Yankee bonds are U.S. dollar-denominated bonds that are issued in the United States by a foreign issuer
Global bonds usually are denominated in U.S. dollars and have offering sizes that typically exceed $1
Preferred stock is an equity security that has a senior claim to the firm’s earnings and assets over bonds.
Callable preferred stock gives the corporation the right to retire the preferred stock at its option.
The higher the discount rate or yield to maturity, the lower the price of a bond
The bond issuer does not necessarily know who is receiving interest payments on bearer bonds.
A bond with a coupon rate of 4% and a discount rate of 6% will pay $60 in interest each year
A trustee represents the company to ensure that the covenants of the bond indenture are met.
The call price of a callable bond is typically equal to par value plus two years interest
Zero coupon bonds are not suited for tax-exempt accounts such as IRAs or pension funds
Inflation-protected Treasury notes have a principal value that changes in accordance with the consumer
price index (CPI).
A bond will sell at a discount if its required return or discount rate is greater than its coupon rate
A bond will sell at a premium if its required return or discount rate is greater than its coupon rate
Credit risk is another term for default risk.
Financial assets are claims against the income or assets of individuals, businesses, and governments
Real assets are claims against the income or assets of individuals, businesses, and governments.
Most bonds currently issued in the United States today are registered bonds
Most bonds currently issued in the United States today are bearer bonds
Subordinate debentures are bonds whose claims are junior to the claims of those holding debenture bonds
Many callable bonds possess a call deferment period which is a specified period of time after the issue
during which the bonds cannot be called.
Global bonds are generally denominated in euros and are marketed globally.
Common stock possesses the highest claim on the assets and cash flow of the firm
Common stock possesses the lowest claim on the assets and cash flow of the firm.
The par value of a common stock is an accounting and legal concept that bears little relationship to a firm’s
stock price or book value.
The par value of a common stock is meaningful in that it is often used to determine the fixed annual
The par value of a preferred stock is meaningful in that it may be used to determine the fixed annual
Convertible preferred stock has a special provision that makes it possible to convert it to common stock of
the corporation, generally at the stockholder’s option
Preferred stock pays a dividend that is equal to its par value
There is an inverse relation between debt instrument prices and nominal interest rates in the marketplace
The shorter the maturity of a fixed-rate debt instrument, the greater the reduction in its value to a given
interest rate increase.