Finance 101: Debt vs Equity

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Questions and Answers

What is the main purpose of covenants in a debt agreement?

  • To provide tax-deductible interest on borrowed money
  • To ensure the repayment of borrowed capital
  • To restrict the use of loaned funds and protect the investor (correct)
  • To offer pre-emptive rights to existing shareholders

Which security offers the highest reward with the highest risk?

  • Common Stocks (correct)
  • Retained Earnings
  • Preferred Stocks
  • Bonds

What is the primary difference between debt and equity financing?

  • Debt financing offers voting rights, while equity financing does not
  • Debt financing requires collateral, while equity financing does not
  • Interest rates on debt financing are higher than equity financing
  • Debt financing involves repayment of borrowed capital, while equity financing does not (correct)

What is the benefit of retained earnings in a company?

<p>It represents the cumulative net earnings of a company after dividend payments (A)</p>
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What is the primary advantage of using debt financing?

<p>It does not require additional shareholder investment (D)</p>
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What is the purpose of collateral in a debt agreement?

<p>To secure the repayment of borrowed capital (A)</p>
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What is the primary purpose of the Sinking Fund Method in bond repayment?

<p>To set aside funds to pay off debt over time (D)</p>
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What is the main advantage of investing in a Mutual Fund?

<p>Diversification at a low cost (B)</p>
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Which stock market index tracks the performance of 300 different stocks?

<p>NASDAQ (A)</p>
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What is the main difference between the Primary and Secondary markets?

<p>Primary market is for newly listed shares, Secondary is for existing shares (C)</p>
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What is the purpose of a Convertible Bond?

<p>To allow bondholders to exchange bonds for shares (D)</p>
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What does the P/E ratio indicate in stock market analysis?

<p>The price of the share relative to its earnings (C)</p>
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