Types of Securities

Question 1

what is a bond

Answer 1

a formal contractual obligation to pay an amount of money to the holder at a certain date, plus, a series of cash interest payments based on a specified percentage of the face amount at specified intervals

Question 2

what does the annual cash interest equal on a bond

Answer 2

the bond’ face amount times the stated rate

Question 3

what is an indenture?

Answer 3

a document that contains all of the terms of the agreement for a bond

Question 4

What may be included in an indenture

Answer 4

• whether the issuer can sell property purchased with bond proceeds
• the extent of maintenance the issuer must provide
• that purchased property must be insurance
• that purchased property cannot be pledged as security for another loan

Question 5

what are debt covenants?

Answer 5

restrictions or protective clauses that are imposed on a borrower by the creditor in a formal debt agreement or an indenture

Question 6

examples of debt covenants

Answer 6

• limitations on issuing long-term or short-term debt
• limitations on dividend payments
• maintaining certain financial ratios
• maintaining specific collateral that backs the debt

Question 7

types of bonds

Answer 7

Maturity pattern
- term bond
- serial bond
Characteristics of interest rate
- variable rate bonds
- zero-coupon or deep-discount bonds
- commodity-back bonds
Redemption provisions
- callable bonds
- convertible bonds
Securitization
- mortgage bonds
- debentures
- equipment trust bonds
Repayment provisions
- income bonds
- revenue bonds

Question 8

Bond ratings

Answer 8

Question 9

Bond valuation

Answer 9

Question 10

factors influencing a company’s dividend policy

Answer 10

• legal restrictions
• Stability of earnings
• rate of growth
• cash position
• restrictions in debt agreements
• tax position of shareholders

Question 11

what is the date of declaration?

Answer 11

the date the directors meet and formally vote to declare a dividend

the dividend becomes a liability

Question 12

what is the date of record?

Answer 12

the date as of which the corporation determines the shareholders who will receive the declared dividend

typically falls from 2-6 weeks after the declaration date

Question 13

what is the date of distribution?

Answer 13

the date on which the dividend is actually paid.

usually 2-4 weeks after the date of record

Question 14

what is a stock dividend?

Answer 14

an issuance of stock and entails the transfer of a sum from the retained earnings account to a paid-in capital account.

Question 15

what is a stock split?

Answer 15

the existing shares are divided into more shares so that the market price per share will be reduced.

does not involve any accounting entries

Question 16

Advantages of issuing stock splits and dividends

Answer 16

• the price per share will be lower which may increase demand
• can be a publicity gesture
• larger number of shareholders who are usually good customers

Question 17

what are reduce stock splits

Answer 17

reduce the shares outstanding, thereby increasing the market price per share

Question 18

Motives of share repurchases (treasury stock)

Answer 18

• mergers
• share options
• stock dividends
• tax advantages to shareholders
• to increase earnings per share and other ratios
• to prevent hostile takeovers
• to eliminate a particular ownership interest

Question 19

If a company has cumulative preferred stock

Answer 19

All preferred dividends for the current any any unpaid prior years must be paid before any dividends can be paid on commons stock

Question 20

if a company uses the residual dividend policy, it will pay

Answer 20

dividends only if earnings exceed the amount needed to support an optimal capital budget

Question 21

The following excerpt was taken from a company’s financial statements: “ . . . 10% convertible participating . . . $10,000,000.” What is most likely being referred to?

Answer 21

preferred stock

Question 22

if a bond sells at a premium, the

Answer 22

stated coupon rate must be more than the required market rate

Question 23

What characteristics distinguish income bonds from other bonds

Answer 23

-pay interest only if the issuing company has earned the interest
-riskier than normal bonds