Semester Test 2

Question 1

What are bond ratings?

Answer 1

-Bond ratings are purchased by a firm issuing bonds to have a 3rd party evaluate the credit risk of the bond
-These ratings inform the market of the bond’s safety.

Question 2

What are the major sources of long-term funds available to business corporations? Indicate
their relative importance

Answer 2

-Internal funds
>Retained earnings
>Depreciation
-External funds
>Debt markets (eg Bonds)
>Equity markets (eg stocks)
-Businesses raise more funds from debt than equity
-Banks loans are an important source of intermediate-term funds

Question 3

Why would firms raise capital in markets other than their domestic or home market

Answer 3

1. If the firm has overseas facilities it may make good financial sense to raise funds in the country in which the facility exists.
2. Financing rates may be lower outside the home market
3. Size of some issues suggests going outside the home market in order to find a sufficient number of buyers

Question 4

Describe convertible bonds, callable bonds, putable bonds, and Eurodollar bonds

Answer 4

1. Convertible Bonds
   > Can be converted, at the investor’s option, into a specified number of common shares
2. Callable Bonds
   >Can be redeemed prior to maturity at par value plus a call premium at the issuer’s option
3. Putable Bonds
   >Allow investor to force the issuer to redeem the bonds prior to maturity.
4. Eurodollar Bonds
   >Dollar-denominated bonds that are sold outside the U.S

Question 5

What are investment grade bonds and “junk bonds:?

Answer 5

-Investment grade bonds are ones with a ratting of BBB or higher
-Junk-bonds are ones lower than investment grade

Question 6

Why do firms issue more debt (bonds) over equity

Answer 6

1. Borrowing is cheaper than raising equity financing
2. Bonds have a maturing date and equity never matures

Question 7

How can bonds be sold and explain each option

Answer 7

1. Thru public issues
   >Bonds offered to all investors
   >Must be approved by Securities Exchange Commission (SEC)
2. Thru private placements
   >Sold to specific qualifying members
   >Don’t go thru SEC scrutiny
   .Don’t require public disclosure of Co’s info

Question 8

List and explain the types of interest rates

Answer 8

1. Money market rate
   >Int rate on an obligation w/ a maturity of less than 1yr
   >Currently 11.75%
2. Call money rates
3. Capital market rates
4. London InterBank Offered Rate (LIBOR)
   >Currently 5.43%
5. Repo rate
   >The rate@ which the central bank of a country lends money to commercial banks in the event of a shortfall of funds
   >Currently 8.25%
6. Prime int rate
   >Lowest rate @ which a clearing bank will lend to its clients on overdraft
   >Currently 9%

Question 9

Describe some of the characteristics of common stock

Answer 9

• Can vote for the firm’s BoD and other major issues as allowed by the firm’s charter
  -Have a residual claim on the firm’s assets and earnings in case of bankruptcy
  -Have claim to a dividend (if declared)

Question 10

List and briefly explain the special features usually associated with preferred stock

Answer 10

-They carry a fixed dividend
-They have a preference over common shareholders
-Have no voting rights, except in certain circumstances
-Preferred stock may be cumulative or non-cumulative

Question 11

How are int rates determined in SA

Answer 11

-They are set by the SARB in response to what is happening and what is expected to happen in the economy

Question 12

Characteristics of Bonds

Answer 12

-Have no voting right
-Bonds have a fixed maturity
-Bondholders have a senior claim on Co’ assets