Financial Management

Question 1

any long term promissory note issued by the firm

Answer 1

bond

Question 2

purchase the bonds through competitive bidding

Answer 2

competitive sale

Question 3

obtains the exclusive right to originate, underwrite and distribute the new bonds through a one-on-one negotiation process

Answer 3

negotiated sale

Question 4

the underwriter does not guarantee a firm price to the issuer

Answer 4

best efforts underwriting basis

Question 5

face value of the bond

Answer 5

par value

Question 6

the percentage of a bond’s par value that will be paid annually in the form of interest

Answer 6

coupon interest rate

Question 7

length of time until the bond issuer returns the par value to the bondholder and terminates the bond

Answer 7

maturity

Question 8

agreement between the firm issuing the bonds and the bond trustee who represents the bondholders

Answer 8

indenture

Question 9

refers to the ratio of the annual interest payment to the bond’s market price

Answer 9

current yield

Question 10

refers to the bond’s internal rate of return

Answer 10

yield to maturity

Question 11

chance that the bond issuer will not be able to make timely payments

Answer 11

credit quality risk

Question 12

involve a judgment about the future risk potential of the bond

Answer 12

bond ratings

Question 13

unsecured long term debt and backed only by the reputation and financial stability of the corporation

Answer 13

debenture

Question 14

requires interest payments only if earned and non payment of interest does not lead to bankruptcy

Answer 14

income bonds

Question 15

bond secured by a lien on real property

Answer 15

mortgage bonds

Question 16

the interest payment changes with market conditions

Answer 16

floating rate bond

Question 17

bonds rated BB or below

Answer 17

junk or low rated bonds

Question 18

bonds payable or denominated in the borrower’s currency but sold outside the country of the borrower

Answer 18

Eurobonds

Question 19

carry the full faith and credit backing of the government

Answer 19

Treasury Bond

Question 20

paid off in installments over the life of the issue

Answer 20

serial payments

Question 21

a more subtle method of reducing debt outstanding

Answer 21

conversion

Question 22

allows the corporation to retire or force in the debt issue before maturity

Answer 22

call provision

Question 23

process of retiring an old bond issue before maturity and replacing it with a new issue

Answer 23

bond refunding

Question 24

class of equity shares which has preference over ordinary equity shares

Answer 24

preferred shares

Question 25

preferred share features

Answer 25

1. par value 2. dividends 3. cumulative and noncumulative dividends 4. no definite maturity date 5. convertible preferred share 6. voting rights 7. participating features 8. protective features 9. call provision 10. maturity

Question 26

a form of long term equity that represents ownership interest of the firm

Answer 26

ordinary equity share

Question 27

maximum number of shares that a corporation may issue

Answer 27

authorized shares

Question 28

number of authorized shares that have been sold

Answer 28

issued shares

Question 29

shares held by the public

Answer 29

outstanding shares

Question 30

a formal offer to purchase shares of a corporation

Answer 30

tender offer