chap 2

What is the primary purpose of a bond certificate?

To issue stock options to employees
To raise equity for a company
To provide a loan to the government
To provide a fixed income stream to investors (correct)

What is the coupon rate of a bond?

The maturity date of the bond
The face value of the bond
The frequency of coupon payments
The percentage of the face value paid as a coupon (correct)

What is a convertible bond?

A type of bond that pays a fixed coupon rate
A type of bond with a floating interest rate
A type of bond that can be converted into equity (correct)
A type of bond with a zero coupon rate

What is the face value of a bond?

The amount paid at maturity (A) Signup and view all the answers

What determines the frequency of coupon payments?

The frequency of coupon payments (B) Signup and view all the answers

What is the relationship between bond rating and bond valuation?

A lower bond rating decreases bond valuation (C) Signup and view all the answers

What is the main difference between a coupon bond and a zero-coupon bond?

The presence of coupon payments (A) Signup and view all the answers

What is the primary risk associated with bonds?

Credit risk (D) Signup and view all the answers

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 (A) Signup and view all the answers

What is the relationship between a bond's rating and its yield?

A lower bond rating results in a higher yield (A) Signup and view all the answers

What is the main benefit of understanding the yield to maturity for finance managers?

To manage the cost of borrowing (D) Signup and view all the answers

What is unique about convertible bonds?

They combine features of both debt and equity (A) Signup and view all the answers

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 (B) Signup and view all the answers

What can be inferred from a bond's rating being B-?

The bond is considered speculative and has a high credit risk (D) Signup and view all the answers

What determines the demand for a bond and its resulting price?

The market demand and supply (C) Signup and view all the answers

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 (A) Signup and view all the answers

What is the primary benefit of convertible bonds to investors?

Participation in the company's potential upside through the conversion option (D) Signup and view all the answers

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 (C) Signup and view all the answers

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 (B) Signup and view all the answers

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 (D) Signup and view all the answers

What is the primary benefit of convertible bonds to the issuing company?

Lower borrowing cost due to the conversion option (D) Signup and view all the answers

Why did Tesla Inc. issue convertible bonds in 2014?

To provide flexibility for investors to participate in the company's potential upside (B) Signup and view all the answers

What is the unique characteristic of convertible bonds that distinguishes them from conventional bonds?

Embedded conversion option (B) Signup and view all the answers

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 (D) Signup and view all the answers