Answer Choices:
a. True
b. False
Answer:
a. True
Question: The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity. Many indentures allow the company to acquire bonds for sinking fund purposes by either (1) purchasing bonds on the open market at the going market price or (2) selecting the bonds to be called by a lottery administered by the trustee, in which case the price paid is the bond’s face value.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: The problem of dilution of stockholders’ earnings never results from the sale of call options, but it can arise if warrants are used.
Answer:
Options:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.
b. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.
c. One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.
d. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor.
e. Potential conflicts between stockholders and bondholders are increased if a firm’s bonds are convertible into its common stock.
Answer:
b
Question: Managers should under no conditions take actions that increase their firm’s risk relative to the market, regardless of how much those actions would increase the firm’s expected rate of return.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts price risk to companies, it offers no advantages to corporate issuers.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Which of the following events would make it more likely that a company would call its outstanding callable bonds?
Answer Choices:
a. The company’s bonds are downgraded.
b. Market
interest rates rise sharply.
Answer:
b. Market interest rates rise sharply.
Question: Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?
Answer Choices:
a. Adding additional restrictive covenants that limit management’s actions.
b. Adding a call provision.
c. The rating agencies change the bond’s rating from Baa to Aaa.
d. Making the bond a first mortgage bond rather than a debenture.
e. Adding a sinking fund.
Answer:
b. Adding a call provision.
Question: Which of the following statements is most correct?
Answer Choices:
a. Corporations are allowed to exclude 70% of their interest income from corporate taxes.
b. Corporations are allowed to exclude 70% of their dividend income from corporate taxes.
c. Individuals pay taxes on only 30% of the income realized from municipal bonds.
d. Individuals are allowed to exclude 70% of their interest income from their taxes.
e. Individuals are allowed to exclude 70% of their dividend income from their taxes.
Answer:
b. Corporations are allowed to exclude 70% of their dividend income from corporate taxes.