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SAngell3
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2013-07-17 13:34:05
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  1. The level of interest rates in the economy normally has only a minor effect on the level of business borrowing in the financial markets.

    a) True
    b) False
    b) False

    The level of business borrowing in the financial markets is very sensitive to interest rate levels and credit conditions. Rising rates and tightening credit tend to choke business borrowing.
  2. A bond indenture is a contract that lists the rights, privileges, and obligations of the bondholder and the corporation that issues the bond.

    a) True
    b) False
    a) True  

    • Indentures are designed to protect bondholders against actions taken by the borrower that might weaken the value of the bonds.
    •  
  3. There was a marked trend in the 1970s and 1980s in the United States toward longer and longer original maturities for corporate bonds.
    a) True
    b) False
    b) False

    • Because of inflation, rapid changes in technology, and increased uncertainty about future interest rates, the trend in the 1970s and 1980s was toward shorter original maturities. There were a few exceptions in the early 1990s that resulted from lower inflation and lower market rates.
    •  
  4. If a bond was issued at a discount from its face (par) value, its coupon rate might understate the true cost of the bond to the issuing corporation.

    a) True
    b) False
    a) True

    If a $1,000 par bond paying 6.5 percent ($65 a year interest) is issued at a discount, $950, the true cost to the issuer is more than 6.5 percent on the money ($950) actually raised.
  5. At the time of a firm's liquidation, the holder of a subordinated debenture will be paid only after all secured and unsecured senior creditors receive the funds to which they are entitled.

    a) True
    b) False
    a) True  

    These junior securities (subordinated debentures) place the owner behind the secured and unsecured senior creditors in liquidation.
  6. A mortgage bond represents a general claim against a company's assets.

    a) True
    b) False
    b) False

    A mortgage bond is one that represents a claim against specific assets (normally plant and equipment) owned by a corporation. A second mortgage bond is one that is subordinated to a first mortgage bond with the same collateral.
  7. An income bond pays interest only when income is actually earned.

    a) True
    b) False
    a) True  

    Interest is paid only when the corporation earns enough income.
  8. Equipment trust certificates are most often used to finance the purchase of industrial equipment or rolling stock.

    a) True
    b) False
    a) True

    Equipment trust certificates are similar to a lease where title to the assets passes to the borrowing company after all obligations under the certificates are satisfied.
  9. Zero-coupon bonds are a special type of discount bond.

    a) True
    b) False
    a) True

    Zero-coupon bonds, while issued below par like other discount bonds, have no periodic interest payments; their return is based solely on price appreciation.
  10. Securitization has served to reduce the growth of asset-backed securities.

    a) True
    b) False
    b) False

    It is the securitization process that has fueled the explosive growth in asset-backed securities.
  11. Today, the largest category of investors in corporate bonds is households and foreign investors.

    a) True
    b) False
    b) False

    Life insurance companies and foreign investors are the major investors in corporate bonds.
  12. The secondary market for corporate bonds is more limited than the secondary market for corporate stock.

    a) True
    b) False
    a) True

    The resale market for corporate bonds is much less liquid than the market for corporate stock.
  13. The principal purchasers of privately placed corporate bonds in the United States are commercial banks.

    a) True
    b) False
    b) False

    Life insurance companies, finance companies, and pension funds are far more important than commercial banks in the field of privately placed bonds.
  14. While leveraged buyouts make headlines, they are not a significant portion of recent corporate takeovers.

    a) True
    b) False
    b) False

    Leveraged buyouts, financed through junk bonds, account for a substantial proportion of recent takeovers.
  15. If a loan by a bank to a business firm is issued at prime and with a 20 percent compensating balance requirement, the true cost of the loan is higher than prime.

    a) True
    b) False
    a) True  

    The borrower must borrow more money than needed to maintain a non-interest-earning compensating balance with the bank. This effectively raises the true interest cost of the loan above the nominal rate stated in the agreement.
  16. Commercial banks are important lenders of short-term commercial mortgage loans in the United States.

    a) True
    b) False
    a) True

    Commercial banks typically dominate the short-term segment of the commercial mortgage loan market; the long-term segment is dominated by insurance companies, thrift institutions, and pension funds.
  17. Households are the dominant owners of corporate stock in the United States.

    a) True
    b) False
    a) True

    Households directly own over 36 percent of the corporate stock outstanding.
  18. Regional stock exchanges are prohibited from trading in securities that are listed on either the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX).

    a) True
    b) False
    b) False

    The NYSE, AMEX, and regional exchanges overlap in the trading of many securities.
  19. A major advantage of listing on an exchange is that it improves the liquidity of a corporation's stock.

    a) True
    b) False
    a) True

    The improved liquidity provided by listing corporate stock on an organized exchange is most important to institutional investors who are able to buy and sell large amounts of stock without causing significant price changes.
  20. The third market is the name given to the market for securities that are listed on an organized exchange but are traded over the counter.

    a) True
    b) False
    a) True

    Listed stocks are traded off the exchanges in order to lower trading costs on large transactions.
  21. The growth in ADRs has added to the trend in global equity trading.

    a) True
    b) False
    a) True

    These dollar-denominated claims on foreign shares held in safekeeping by U.S. institutions have reduced the risks of trading in foreign securities and increased their use.
  22. Which of the following is a bond whose return consists solely of appreciation in market price as it approaches maturity? 

    A) a mortgage bond   
    B) a zero coupon bond   
    C) a convertible bond
    D) a warrant bond   
    B) a zero coupon bond 

    The others are incorrect because these types of bonds typically pay a stated amount of interest to the investor every 6 months. Also, a convertible bond may appreciate because of an increase in the price of the security into which the bond may be converted.
    (this multiple choice question has been scrambled)
  23. Which of the following correctly describes a debenture?

    A) a bond secured only by the earning power of the issuer and not by any specific collateral 
    B) a contract that lists the rights and obligations of the borrower and the investors in a bond issue
    C) a restrictive covenant attached to a bond issue
    D) a revenue bond
    (A) a bond secured only by the earning power of the issuer and not by any specific collateral 

    (b) is incorrect because it defines an indenture.
    (c) is incorrect because it is a type of provision within a bond indenture.
    (d) is incorrect because it is a type of municipal bond
    (this multiple choice question has been scrambled)
  24. Which of the following is a member of an organized stock exchange who buys and sells only for his or her own account?

    A) a floor trader
    B) a floor broker 
    C) an odd-lot trader 
    D) a specialist 
    A) a floor trader

    An odd-lot trader handles small purchases and sales of securities for investors in less than round lots.
    A specialist makes a market in certain securities both by buying and selling for brokers and by serving as a dealer in those securities.
    A floor broker carries out buy-and-sell orders from other brokers not present on the exchange floor.
    (this multiple choice question has been scrambled)
  25. Which of the following statements concerning private placements is (are) correct?

    I. Private placements lower costs of distribution to borrowers because of reduced registration fees.

    II. Sec. Rule144A has added many restrictions to trading of private placements.

    A) I only
    B) II only
    C) Both I and II
    D) Neither I nor II
    A) I only

    II is incorrect because Rule 144A eliminated many restrictions on secondary trading of private placements which in effect help establish a secondary market for them.
    (this multiple choice question has been scrambled)
  26. Common stock normally provides the investor with which of the following rights?

    I. the right to receive dividends before preferred stockholders receive any dividends

    II. the preemptive right to purchase additional shares

    A) Both I and II
    B) I only
    C) II only
    D) Neither I nor II
    C) II only

    I is incorrect because preferred stockholders have the right to receive dividends before common stockholders receive dividends.
    (this multiple choice question has been scrambled)
  27. The sale of new issues of corporate bonds in the open market is a major function of which of the following?

    I. mortgage bankers
    II. investment bankers

    A) II only   
    B) Neither I nor II
    C) I only   
    D) Both I and II   
    A) II only   

    I is incorrect because mortgage bankers are involved with selling newly issued real estate mortgages to long-term lenders, not with marketing corporate bonds.
     
    (this multiple choice question has been scrambled)
  28. Which of the following statements concerning the sinking fund feature in a corporate bond issue is (are) correct?

    I. The sinking fund provision gives the issuing corporation the option to retire portions of the bond issue periodically if it chooses to do so.

    II. Payments into the sinking fund usually are made on a fixed schedule.

    A) Both I and II   
    B) I only   
    C) II only   
    D) Neither I nor II
    C) II only  

    I is incorrect because the sinking fund provision imposes an obligation, not an option, for the issuer to retire portions of the bond issue periodically.
     
    (this multiple choice question has been scrambled)
  29. All the following are among the principal investors in U.S. corporate bonds EXCEPT

    A) government pension funds
    B) private pension funds 
    C) mutual savings banks 
    D) life insurance companies 
    C) mutual savings banks 

    Mutual savings banks, for example, held less than one percent of the outstanding corporate bonds.
     
    (this multiple choice question has been scrambled)

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