1. A bond issue may be retired by: calling the bonds if there is a call feature.

converting the bonds (if convertible) into common stock. making a single-sum payment at final maturity. all of the above. 2. Protective covenants are: to protect employees. to protect the interests of the company. to protect shareholders. to protect bondholders.

markets are inefficient. 6. Treasury stock is: common stock issued by the &.". government. preferred stock issued by the &.". government. common stock that has been repurchased and is being held by the issuing company. a corporation's common stock outstanding.

7. A call provision( a sinking fund( and)or conversion are used to retire bonds and preferred stock. 3. Which of the following bonds offer the investor the most bonds and common stock. protection preferred stock and common stock. First-mortgage bonds only common stock. !ebentures "ubordinated debentures 8. Preferred shareholders' claims on assets and income of #ncome bonds a firm come those of creditors those of common shareholders. 4. A company refunds its bonds for any of the following before* and also before reasons EXCEPT for: after but before to eliminate restrictive covenants. after* and also after to reduce interest costs. e+ual to* and e+ual to to show higher reported profits. to issue new bonds at higher rate of interest. 9. !ual classes of are common in new ventures where promotional usually goes to the founders. 5. $he call-option value of a callable bond is likely to be bonds* bonds high when preferred stock* preferred stock interest rates are volatile. common stock common stock interest rates are low and e%pected to remain low. warrants* warrants interest rate are high and e%pected to remain high. 1. An indenture is an unsecured bond. ,A-". 2. A sinking fund is a poorly performing mutual fund whose net asset value is declining. ,A-". 3. A call provision allows the purchaser of a security to demand repayment of the principal. ,A-". 4. A bond callable at /01 means that a 1 percent call premium will be paid on the face value if the bond is ever called. $2&. 5. !ual-class common stock can enable company founders or management to have voting control of the corporation. $2&. 6. ,rom an investor's standpoint( a debenture issued by the Acme Aglet 3ompany will appear 4riskier4 than a share of preferred stock issued by the Acme Aglet 3ompany. ,A-". 7. #f you were a common shareholder with minority interests( you would prefer a ma5ority-rule rather than a cumulative voting system. ,A-". 8. 6ost preferred stocks have a noncumulative feature. ,A-". 9. $he book value and the market value of common stock are usually the same. ,A-". 10. $he participating feature allows preferred shareholders to share in increasing dividends with the common shareholders. $2&. 11. Preferred stockholders have a prior claim on the assets of the firm as compared to the claims of the lenders. ,A-". !. Correct What is a legal agreement( also called the deed of trust( between the corporation issuing bonds and the bondholders that establish the terms of the bond issue "our answer# #ndenture. 7777777777 is a high-risk( high-yield bond rated below investment grade* while a)(an) 7777777777 bond has its interest payment contingent on sufficient earnings of the firm. "our answer# A 5unk bond* income $o ac+uire rail engines or similar e+uipment( a railroad might issue 7777777777( which is a

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lease type of financing. "our answer# e+uipment trust certificates &. Correct $he sinking fund retirement of a bond issue takes 7777777777. "our answer# two forms -- (/) the corporation purchases bonds in the open market and delivers a given number of bonds to the trustee* or (8) the corporation pays cash to the trustee( who in turn calls the bonds for redemption. Which of the following statements is correct in distinguishing between serial bonds and sinking-fund bonds "our answer# "erial bonds mature at a variety of dates( but sinking-fund bonds mature at a single date. A /89 coupon rate( :/(000 par bond currently trades at ;0 one year after issuance. Which of the following is the most likely call price "our answer# //8 An issue of preferred stock has 7777777777 feature that re+uires all cumulative unpaid dividends on preferred stock to be paid prior to paying any dividends on common stock. "our answer# a cumulative dividends What type of long-term financing most likely has the following features: /) it has an infinite life( 8) it pays dividends( and <) its cash flows are e%pected to be a constant annuity stream "our answer# Preferred stock What type of long-term financing most likely has the following features: /) it has a finite life( 8) failure to pay the cash flows could lead to bankruptcy( and <) its cash flows are e%pected to be a constant annuity stream "our answer# -ong-term debt What is the book value of common e+uity per share of common e+uity outstanding for the following firm $he firm has 80(000 common shares authori=ed of which /1(000 are outstanding at a par value of :/. Additional paid-in-capital represents :<00(000 and retained earnings are an additional :<00(000. "our answer# :>/ $he firm has 80(000 common shares authori=ed( /1(000 shares outstanding( and <(000 shares of treasury stock. ?ow many common e+uity shares are issued "our answer# /@(000 Which of the following statements is correct regarding common stock and its features "our answer# ,irms usually prefer to have more shares authori=ed than are currently issued. Which of the following statements concerning the rights of common shareholders is correct( or most accurate "our answer# -oting by common shareholders can be done either in person at the shareholders. annual meeting or by pro/y.

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!&. 0ncorrect What is the ma%imum number of directors can you guarantee electing under the following conditions Aou own 100(00/ voting shares and the firm has /(000(000 voting shares and will be electing ; directors under a ma5ority voting system "our answer# 1

The correct answer# ; #ncorrect. Aou own over 109 of the voting shares and can elect all ; directors. !'. Correct A pro%y is 7777777777. "our answer# a legal document giving one entity or person the authority to vote for another. A firm has two classes of common stock outstanding. $he first class is nonvoting* while the second class( owned by the original founders( has voting rights. $his is usually referred to as 7777777777. "our answer# dual-class common stock. What is the main reason for a firm to engage in a refunding of an e%isting <0-year bond issue that still has 81 years until maturity when it has no sinking fund re+uirements "our answer# $o lower the interest cost of long-term debt. Who or what is a person or institution designated by a bond issuer as the official representative of the bondholders "our answer# Bond trustee. 7777777777 is a long-term( unsecured debt instrument with a lower claim on assets and income than other classes of debt* while a)(an) 7777777777 bond issue is secured by the issuer's property. "our answer# A subordinated debenture* mortgage A special purpose vehicle ("PC) raises money by selling 7777777777 where interest and principal payments are provided by cash flows from a discrete pool of assets. "our answer# asset-backed securities

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!. Correct $he option of delivering either cash or bonds to the trustee is a valuable option for the firm having a sinking fund. "our answer# $2&. $. Correct $he cost of the call option is generally measured at the time of issuance as the difference in yield between a callable and noncallable bond with identical features otherwise. "our answer# $2&. %. Correct Preferred stock has a finite life( but it is still often retired early by either calling the shares or converting them into common stock. "our answer# ,A-". &. Correct 6oney market preferred (66P) stock is a form of convertible preferred stock. "our answer# ,A-". '. Correct $he shares of newly issued firms usually trade in the over-the-counter market. "our answer# $2&.