Ch 10 Flashcards Preview

FINC 409 > Ch 10 > Flashcards

Flashcards in Ch 10 Deck (45):
1

During periods of economic expansion, firms usually rely more on internal sources of funds.

F

2

Most of the annual funds raised from security issues come from corporate bond sales

T

3

Long term business funds are obtained by issuing commercial paper and corporate bonds

F

4

Private placements must be approved by the Securities and Exchange Commission (SEC).

F

5

Firms issue more bonds than equities.

T

6

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.

T

7

Bondholders have priority claims over equity holders to a firm’s assets and cash flows

T

8

Bond covenants are the best way for bondholders to protect themselves against dubious management
actions.

T

9

Bond issues of a single firm can have different bond ratings if their security provisions differ

T

10

Mortgage bonds are secured by home mortgages

F

11

The claims of subordinated debenture bondholders are junior to the claims of debenture holders.

T

12

A convertible bond can be converted, at the issuing firm’s option, into a specific number of shares of the
issuer’s common stock.

F

13

Callable bonds can be redeemed prior to maturity by the firm

T

14

Eurodollar bonds are dollar-denominated bonds that are sold outside the United States.

T

15

Yankee bonds are U.S. dollar-denominated bonds that are issued in the United States by a foreign issuer

T

16

Global bonds usually are denominated in U.S. dollars and have offering sizes that typically exceed $1
billion.

T

17

Preferred stock is an equity security that has a senior claim to the firm’s earnings and assets over bonds.

F

18

Callable preferred stock gives the corporation the right to retire the preferred stock at its option.

T

19

The higher the discount rate or yield to maturity, the lower the price of a bond

T

20

The bond issuer does not necessarily know who is receiving interest payments on bearer bonds.

T

21

A bond with a coupon rate of 4% and a discount rate of 6% will pay $60 in interest each year

F

22

A trustee represents the company to ensure that the covenants of the bond indenture are met.

F

23

The call price of a callable bond is typically equal to par value plus two years interest

F

24

Zero coupon bonds are not suited for tax-exempt accounts such as IRAs or pension funds

F

25

Inflation-protected Treasury notes have a principal value that changes in accordance with the consumer
price index (CPI).

T

26

A bond will sell at a discount if its required return or discount rate is greater than its coupon rate

T

27

A bond will sell at a premium if its required return or discount rate is greater than its coupon rate

F

28

Credit risk is another term for default risk.

T

29

Financial assets are claims against the income or assets of individuals, businesses, and governments

T

30

Real assets are claims against the income or assets of individuals, businesses, and governments.

F

31

Most bonds currently issued in the United States today are registered bonds

T

32

Most bonds currently issued in the United States today are bearer bonds

F

33

Subordinate debentures are bonds whose claims are junior to the claims of those holding debenture bonds

T

34

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.

T

35

Global bonds are generally denominated in euros and are marketed globally.

F

36

Common stock possesses the highest claim on the assets and cash flow of the firm

F

37

Common stock possesses the lowest claim on the assets and cash flow of the firm.

T

38

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.

T

39

The par value of a common stock is meaningful in that it is often used to determine the fixed annual
dividend.

F

40

The par value of a preferred stock is meaningful in that it may be used to determine the fixed annual
dividend.

T

41

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

T

42

Preferred stock pays a dividend that is equal to its par value

F

43

There is an inverse relation between debt instrument prices and nominal interest rates in the marketplace

T

44

The shorter the maturity of a fixed-rate debt instrument, the greater the reduction in its value to a given
interest rate increase.

F

45

The values of stocks and bonds are not affected by time value of money concepts

F