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12 Questions

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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?

It represents the cumulative net earnings of a company after dividend payments Signup and view all the answers

What is the primary advantage of using debt financing?

It does not require additional shareholder investment Signup and view all the answers

What is the purpose of collateral in a debt agreement?

To secure the repayment of borrowed capital Signup and view all the answers

What is the primary purpose of the Sinking Fund Method in bond repayment?

To set aside funds to pay off debt over time Signup and view all the answers

What is the main advantage of investing in a Mutual Fund?

Diversification at a low cost Signup and view all the answers

Which stock market index tracks the performance of 300 different stocks?

NASDAQ Signup and view all the answers

What is the main difference between the Primary and Secondary markets?

Primary market is for newly listed shares, Secondary is for existing shares Signup and view all the answers

What is the purpose of a Convertible Bond?

To allow bondholders to exchange bonds for shares Signup and view all the answers

What does the P/E ratio indicate in stock market analysis?

The price of the share relative to its earnings Signup and view all the answers