Principles of Finance 5e: Bond Features Quiz

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What is the primary role of a trustee in a bond indenture?

To ensure the bondholder's interests are protected (correct)

To ensure the issuer's interests are protected

To manage the sinking fund for bond amortization

To facilitate the conversion of bonds to common stock

Which of the following is a bond feature that constrains the actions of the borrower?

Call provision

Conversion option

Sinking fund

Restrictive covenant (correct)

What is the purpose of a call provision in a bond contract?

To give the issuer the right to redeem the bonds before maturity (correct)

To constrain the actions of the borrower

To allow bondholders to exchange their bonds for common stock

To require the issuer to make annual payments to amortize the bond

Which bond feature allows bondholders to exchange their investment for a fixed number of shares of common stock?

Conversion option Signup and view all the answers

What is the purpose of a sinking fund in a bond issue?

To amortize the bond issue through required annual payments Signup and view all the answers

Which of the following is NOT a typical bond feature discussed in the text?

Maturity date Signup and view all the answers

What feature of preferred stock allows the issuing company to redeem or buy back the stock at a predetermined price?

Call provision Signup and view all the answers

What is the amount paid by the company in excess of the par value when calling or redeeming a preferred stock issue?

Call premium Signup and view all the answers

Which feature of preferred stock requires that any unpaid dividends be paid before common stock dividends can be distributed?

Cumulative dividends Signup and view all the answers

What provision effectively sets a maturity date for preferred stock issues?

Sinking fund Signup and view all the answers

Which statement about common stock is true?

It represents residual ownership in the company. Signup and view all the answers

What feature is NOT typically associated with preferred stock?

Voting rights Signup and view all the answers

What is a bond indenture?

A formal agreement between the bond issuer and bondholders Signup and view all the answers

Which of the following is NOT a major bond rating agency?

Bloomberg Bond Rating Agency Signup and view all the answers

What is the term for a provision in a bond indenture that restricts certain actions by the issuer?

Restrictive covenant Signup and view all the answers

Which of the following bonds are considered investment grade?

Bonds rated AAA Signup and view all the answers

What is a call provision in a bond indenture?

A provision giving the issuer the right to redeem bonds early Signup and view all the answers

How can a sinking fund be used in relation to bonds?

To periodically retire a portion of outstanding bonds Signup and view all the answers