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Quiz 1 Ch 7,8,12,5,6 Concepts Review and Critical Thinking Qs ,100- SURE ANSWERS_.pdf
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8/9/24, 6:45 AMQuiz 1 Ch 7,8,12,5,6 Concepts Review and Critical Thinking
Qs
Jeremiah
Terms in this set (46)
is it true that a US treasury security is risk- No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term
free? Treasury securities have substantial interest rate risk
An example of a negative covenant that b
might be found in a bond indenture is a
statement that the company:
a. shall maintain a current ratio of 1.1 or
higher.
b. cannot lease any major assets without
bondholder approval.
c. must maintain the loan collateral in good
working order.
d. shall provide audited financial statements
in a timely manner.
e. shall maintain a cash surplus of $100,000 at
all times.
A ___ is a bond covenant preventing certain negative covenant
activities unless agreed to by the
bondholders. Negative covenants are
written directly into the trust indenture
creating the bond issue, are legally binding
on the issuer, and exist to protect the best
interests of the bondholders.
An agent who arranges a transaction broker
between a buyer and a seller of equity
securities is called a:
1/9
, 8/9/24, 6:45 AM
Which one of these statements related to a. preferred shareholders normally receive more than one vote per share o stock
preferred stock is correct? owned
a. Preferred shareholders normally receive b. they dont determine the outcome o any election w a proxy vote
one vote per share of stock owned.
b. Preferred shareholders determine the c. common shareholders are considered the residual owners o a corp
outcome of any election that involves a
proxy fight. d. they do receive preferential treatment w dividends and bankruptcy proceedings
c. Preferred shareholders are considered to
be the residual owners of a corporation. e. correct! cumulative preferred shares are more valuable than noncumulative
d. Preferred stocks receive no preferential preferred shares
treatment in respect to either dividends or
bankruptcy proceedings. With cumulative preferred stock, the company must keep track of the dividends it
e. Cumulative preferred shares are more chooses not to pay to its preferred shareholders. ...... By contrast, if a company issues
valuable than comparable noncumulative noncumulative preferred stock, its preferred shareholders have no future right to
shares. receive dividends that the company chooses not to pay
A ___ facilitates security trades on behalf of broker
investors
A ___ facilitates trades on behalf of itself. The dealer
terms “principal” and “___” can be used
interchangeably .... By bidding on Treasury
bonds and other securities, these __ s
facilitate trading by creating and maintaining
liquid markets.
A call provision is a stipulation on the contract for a bond—or other fixed-income
instruments—that allows the issuer to repurchase and retire the debt security ..... If the
bond is called, investors are paid any accrued interest defined within the provision up
to the date of recall.
a co is contemplating a long-term bond 2 benefits o a call provision:
issue. it is debating whether to include a call 1. the co can take advantage of interest rate declines by calling in an issue and
provision. replacing it with a lower coupon issue.
1. what are the benefits to the co frm 2. a company might wish to eliminate a covenant for some reason. Calling the issue
including a call provision? eliminates the covenant.
2. what are the costs?
3. how do these change for a put provision? The cost to the company is a higher coupon.
A put provision is desirable from an investor’s standpoint bc the co may have to buy
back the bond at an unattractive price.
It helps the co by reducing the coupon rate on the bond.
cos pay rating agencies such as moody's and Companies pay to have their bonds rated because unrated bonds can be difficult to
S&P to rate their bonds, and the costs can be sell; many large investors are prohibited from investing in unrated issues.
substantial. however, cos arent required to
have their bonds rated; doing so is voluntary.
why do u think they do it?
Junk bonds often are not rated because there would be no point in an issuer paying a
often , junk bonds arent rated. why?
rating agency to assign its bonds a low rating (it's like paying someone to kick you!)
what does the lack o transparency in the Lack of transparency means that a buyer or seller can't see recent transactions, so it is
bond mkt imply for bond investors? much harder to determine what the best bid and ask prices are at any point in time.
Quiz 1 Ch 7,8,12,5,6 Concepts Review and Critical Thinking Qs
2/9
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