Ch 10

Question 1

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

Answer 1

F

Question 2

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

Answer 2

T

Question 3

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

Answer 3

F

Question 4

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

Answer 4

F

Question 5

Firms issue more bonds than equities.

Answer 5

T

Question 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.

Answer 6

T

Question 7

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

Answer 7

T

Question 8

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

Answer 8

T

Question 9

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

Answer 9

T

Question 10

Mortgage bonds are secured by home mortgages

Answer 10

F

Question 11

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

Answer 11

T

Question 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.

Answer 12

F

Question 13

Callable bonds can be redeemed prior to maturity by the firm

Answer 13

T

Question 14

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

Answer 14

T

Question 15

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

Answer 15

T

Question 16

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

Answer 16

T

Question 17

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

Answer 17

F

Question 18

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

Answer 18

T

Question 19

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

Answer 19

T

Question 20

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

Answer 20

T

Question 21

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

Answer 21

F

Question 22

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

Answer 22

F

Question 23

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

Answer 23

F

Question 24

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

Answer 24

F

Question 25

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

Answer 25

T

Question 26

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

Answer 26

T

Question 27

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

Answer 27

F

Question 28

Credit risk is another term for default risk.

Answer 28

T

Question 29

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

Answer 29

T

Question 30

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

Answer 30

F

Question 31

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

Answer 31

T

Question 32

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

Answer 32

F

Question 33

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

Answer 33

T

Question 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.

Answer 34

T

Question 35

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

Answer 35

F

Question 36

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

Answer 36

F

Question 37

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

Answer 37

T

Question 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.

Answer 38

T

Question 39

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

Answer 39

F

Question 40

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

Answer 40

T

Question 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

Answer 41

T

Question 42

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

Answer 42

F

Question 43

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

Answer 43

T

Question 44

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

Answer 44

F

Question 45

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

Answer 45

F