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A debenture is ________.

A. a secured bond that is secured by unspecified assets

B. an unsecured bond that only creditworthy firms can issue

C. a bond secured by specific assets that any firm can issue

D. a secured bond issued by startup firms

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Related questions

The (-Select- A. discount B. premium C. par) value of a bond is its stated face value or maturity value, and its coupon interest rate is the stated annual interest rate on the bond. The maturity date is the date on which the par value must be repaid. A (-Select- A. call B. redemption C. sinking) provision gives the issuer the right to redeem the bonds under specified terms prior to their normal maturity date, although not all bonds have this provision. Some bonds have (-Select- A. redemption fund B. sinking fund C. call fund) provisions which require the issuer to systematically retire a portion of the bond issue each year. Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being (-Select-A. riskier B. safer C. equivalent) so they will have (-Select- A. lower B. equivalent C. higher) coupon rates than similar bonds without these provisions.

Bonds can be (-Select- A. floating B. zero C. fixed) -rate bonds with a constant coupon rate over the life of the bond, or they can be (-Select- A. floating B. zero C. fixed) -rate bonds with a coupon rate that varies over time depending on the level of interest rates. (-Select- A. Annual coupon B. Zero coupon C. Fixed coupon) bonds pay no annual interest but are sold at a (-Select- A. premium above B. price at C. discount below) par, thus compensating investors in the form of capital appreciation. An original issue discount (OID) bond is any bond originally offered at a price (-Select- A. above its B. below its C. equal to) par value.

(-Select- A. Convertible B. Perpetual C. Putable) bonds are exchangeable at the option of the holder for the issuing firm's common stock. Bonds can be issued with warrants giving the holder the option to purchase the firm's stock for a stated price, thereby providing a capital gain if the stock's price rises. (-Select- A. Income B. Convertible C. Putable) bonds contain a provision that allows holders to sell them back to the company prior to maturity at a prearranged price. (-Select- A. Income B. Default C. Preferred) bonds pay interest only if the firm has earnings, while an indexed (purchasing power) bond bases interest payments on an inflation index to protect the holder from inflation.

Mortgage bonds are backed by (-Select- A. current assets B. fixed assets C. marketable securities) . First mortgage bonds are senior in priority to claims of second mortgage bonds. Debentures are long-term bonds that are not secured by a mortgage. Subordinated debentures are bonds having claims on assets only after senior debt has been paid in full in the event of liquidation. (-Select- A. Secured-debenture B. Investment-grade) bonds are rated triple B or higher, and many banks and other institutional investors are legally limited to only holding these bonds. In contrast, junk bonds are high-risk, high-yield bonds.

1. Suppose you purchased a bond with a 5% annual coupon payment that expires in 10. Two years later the risk-free rate is 7%. Have you been exposed to interest rate risk? Have you been exposed reinvestment risk? Briefly explain why and what interest and reinvestment risk are.

2. Assuming all other bond characteristics are identical which bond would pay a higher coupon payment? Very briefly explain why.

a. A callable bond or a convertible bond

b. A bond with negative covenants vs a bond without negative covenants

c. A Treasury Strip or a regular Treasury bond

d. A secured vs unsecured bond

3. A coupon bond pays interest semi-annually, matures in 30 years, has coupon rate of 4% and is currently selling for $700. What is the annual YTM? Show your work.

4. A semi-annual step-up bond matures in 11 years and pays zero coupon payments for the first 5 years. During the remaining life of the bond it pays a 5% coupon payment. If the bond has a YTM of 8% what is the current price of the bond? Show your work.

5. Why are money markets needed in addition to banks? What cost advantages do the money markets provide?

6. Briefly describe the main differences between the following money market securities:

a. Repurchase agreements and federal funds

b. Commercial paper and treasury bills

1. In the event that a corporation files for bankruptcy, bond trustees have the power to

a. change the interest rate on outstanding bonds.

b. sell the corporations secured assets and use the proceeds to pay the bondholders.

c. recall outstanding bonds.

d. issue new bonds

2. Alice recently bought dozens of collectable Barbie dolls. What ultimately will determine the investment value of Alice's Barbies when she goes to resell them?

a. Its return

b. Its cost

c. Book value

d. Supply and demand

e. None of these

3. What are the disadvantages associated with investing directly in real estate?

a. Increasing property taxes and insurance costs

b. Large investment of time and energy required

c. Illiquidity

d. All of these are correct

e. Only Increasing property taxes and insurance costs and Illiquidity are correct.

4. Because junk bonds carry a much higher risk of default, they also carry an interest rate ________ percent above the AAA grade long-term bonds.

a. 10-12

b. 7-9

c. 1-2

d. 3-6

e. 20-25

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