24 Questions
What is the primary purpose of a bond certificate?
To provide a fixed income stream to investors
What is the coupon rate of a bond?
The percentage of the face value paid as a coupon
What is a convertible bond?
A type of bond that can be converted into equity
What is the face value of a bond?
The amount paid at maturity
What determines the frequency of coupon payments?
The frequency of coupon payments
What is the relationship between bond rating and bond valuation?
A lower bond rating decreases bond valuation
What is the main difference between a coupon bond and a zero-coupon bond?
The presence of coupon payments
What is the primary risk associated with bonds?
Credit risk
What is the primary reason why a bond with credit risk has a higher yield than a similar default-free bond?
Investors demand a higher return due to the uncertainty of returns
What is the relationship between a bond's rating and its yield?
A lower bond rating results in a higher yield
What is the main benefit of understanding the yield to maturity for finance managers?
To manage the cost of borrowing
What is unique about convertible bonds?
They combine features of both debt and equity
Why do investors pay less for bonds with credit risk than for an identical default-free bond?
Because the cash flows expected by the bondholder are lower
What can be inferred from a bond's rating being B-?
The bond is considered speculative and has a high credit risk
What determines the demand for a bond and its resulting price?
The market demand and supply
What is the reason why a highly rated bond may not always be traded at a higher price?
The demand and supply of the bond in the market affect its price
What is the primary benefit of convertible bonds to investors?
Participation in the company's potential upside through the conversion option
What is the main reason for the lower coupon rates of convertible bonds compared to conventional bonds?
The conversion option provides additional value to the investor
How do convertible bonds exhibit characteristics of both fixed income and equity securities?
They offer fixed coupon payments and principal repayments at maturity, and upside potential through the conversion option
What is the primary impact of the underlying stock price on the price behavior of convertible bonds?
The bond's value may increase as the stock price increases due to the potential gains from converting the bonds into shares
What is the primary benefit of convertible bonds to the issuing company?
Lower borrowing cost due to the conversion option
Why did Tesla Inc. issue convertible bonds in 2014?
To provide flexibility for investors to participate in the company's potential upside
What is the unique characteristic of convertible bonds that distinguishes them from conventional bonds?
Embedded conversion option
What is the primary advantage of convertible bonds in terms of risk profile?
They provide downside protection through their fixed income features and upside potential through the conversion option
This quiz covers the characteristics of convertible bonds, including their debt and equity aspects, conversion options, and risk profile.
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