Exam 1 (35 points in total, one point each question) his e 1. A( ) is the right
ID: 2614813 • Letter: E
Question
Exam 1 (35 points in total, one point each question) his e 1. A( ) is the right authorized by a stockholder to allow other individuals to vote her own shares. a. Sinking fund provision b. Indenture c. Preemptive right d. Protective provision e. Proxy 2. When coupon interest rate is above required rate of return, the bond must be a a. Premium bond b. Discount bond c. Zero coupon bond d. Junk Bond e. Sukuk 3. Which of the following investors will get paid first when the issuing company is going bankrupt a. Mortgage bond holders b. Subordinated debenture holders c. Common stock holders d. Debenture bond holders e. Preferred stock holders 4.() ) is the annual interest payment divided by the face value of a bond. a. coupon interest rate b. current yield c. real interest rate d. required rate of return 5. requires the firm to set aside an amount of money to trust periodically for the retirement of its preferred stock or the maturity of its bond. a. protective provision b. sinking fund provision c. Sarbanes Oxley Act d. callable provision e. convertibility (entitles the current common shareholder to maintain a proportionate share of ownership in the firm. a. Cumulative voting b. Protective provision c. Convertibility d. Preemptive RightExplanation / Answer
1. "E" is the correct answer.
Sinking Fund Provision is a provision in some bond indentures requiring the issuer to put money aside to repay bondholders at maturity.
An indenture is a legal contract that reflects or covers a debt or purchase obligation.
A pre-emption right, or right of pre-emption, is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity.
Protective provisions let preferred shareholders veto certain actions, such as selling the company or raising capital.
Proxy is a grant of authority by shareholder allowing another individual to vote his or her shares.
2. "A" is the correct answer.
If a bond's coupon rate is less than its YTM, then the bond is selling at a discount.
If a bond's coupon rate is more than its YTM, then the bond is selling at a premium.
Zero coupon bond has no coupon payments
Junk bond is a high-yielding high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover.
Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity.
3. "A" is the correct answer.
Bondholders are paid off before the stockholders and out of the these bondholders, mortgage bond holders are paid first as Debentures are unsecured debt. They are backed only by the issuing company's ability to pay timely interest payments and, at maturity, return the principal. If the company fails to do this, debenture holders must wait in line to receive the proceeds of liquidation of the company's assets. Debentures are next in line after all mortgage bondholders have been paid. Senior debentures rank highest, followed by debentures, senior subordinated debentures and subordinated debentures.
4. "A" is the correct answer.
Coupon interest rate is a bond's annual return based on its annual coupon payments and face value.
Current yield is a bond's annual return based on its annual coupon payments and current price.
The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation.
The required rate of return (RRR) is the minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project.
5. "B" is the correct answer.
Protective provisions let preferred shareholders veto certain actions, such as selling the company or raising capital.
Sinking Fund Provision is a provision in some bond indentures requiring the issuer to put money aside to repay bondholders at maturity.
The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is legislation passed by the U.S. Congress to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise, as well as improve the accuracy of corporate disclosures.
A call provision is a clause in a bond's indenture granting the issuer the right tocall, or buy back, all or part of an issue prior to the maturity date.
Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value.
6. "D" is the correct answer.
Cumulative voting is a system of voting in an election in which each voter is allowed a number of votes, and may give them all to one candidate or divide them among several.
Protective provisions let preferred shareholders veto certain actions, such as selling the company or raising capital.
Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value.
A pre-emption right, or right of pre-emption, is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity.
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