17 Questions
Which rating agencies are mentioned in the text for bond ratings?
Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P)
What type of bonds are considered investment grade based on the text?
Triple B or better
What are the criteria for rating bonds according to the text?
Creditworthiness and risk factors
In the period 1990-2010, what type of bond showed the narrowest spread between yields?
U.S. Government bonds
Based on the yields shown in the chart, which bond type had the highest yield in 2008?
Corporate BBB
What are some features of debt according to the text?
Control of the firm (voting rights)
Which of the following is an example of Short-Term Debt?
Treasury Bill (T-bill)
What is the characteristic of Long-Term Debt mentioned in the text?
Low issuance costs
Which type of debt is associated with Maturity value and Par value according to the text?
Treasury Bills
What kind of asset is a Certificate of Deposit (CD)?
Debt asset
In the realm of Debt, what do Discounted Securities typically involve?
Securities sold at a lower value than face value
What is a characteristic of preferred stock based on the text?
Voting rights
Which financial instrument has no maturity date for repayment?
Common Stock
What differentiates common stock from preferred stock in terms of dividend payments?
Common stock has no obligation for dividend payments
Which financial instrument provides control to stockholders?
Common Stock
Why do government bonds not offer voting rights or control to investors?
To increase creditworthiness
Which type of financial instrument has higher after-tax costs due to dividends not being deductible?
Preferred Stock
Study Notes
Features of Preferred Stock
- Fixed payment but not obligated
- No voting rights
- Higher after-tax cost since dividends are not deductible expenses
Features of Common Stock
- No obligation of dividend payments
- No maturity date for "repayment"
- Increases creditworthiness
- Prospects affect terms
- Gives control to stockholders
- Shares the income of the firm
- Higher costs of distribution than debt
- Dividends are not deductible
Bond Ratings
- Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P) rate bonds
- Investment grade bonds have a rating of Triple B or better
- Criteria for rating bonds include creditworthiness and ability to repay
- Importance of bond ratings lies in their influence on investment decisions
- Changes in ratings can affect bond prices and yields
Yields on Selected Long-Term Bonds
- Yields on U.S. government bonds with 10-year maturities are plotted from 1990 to 2010
- Corporate BBB bonds had a narrow spread, while U.S. government bonds had a wide spread
- Yields on AAA-rated corporate bonds were lower than those on BBB-rated bonds
Debt
- A loan to an individual, company, or government
- Debt features include priority to assets and earnings
- Principal value, Face value, Maturity value, and Par value are important concepts
- Interest payments are made regularly
- Discounted securities and maturity date affect debt valuation
- Control of the firm is not relinquished with debt financing
Short-Term Debt
- Treasury Bill (T-bill) is a short-term government debt
- Repurchase Agreement (Repo) is a short-term collateralized loan
- Federal Funds are excess reserves lent between banks
- Banker's Acceptance is a short-term credit instrument
- Commercial Paper is a short-term debt instrument
- Certificate of Deposit is a time deposit offered by banks
- Eurodollar Deposit is a dollar-denominated deposit in a foreign bank
- Money Market Mutual Fund invests in low-risk, short-term debt securities
Long-Term Debt
- Term Loans have fixed interest rates and maturities
- Speed, flexibility, and low issuance costs are benefits of long-term debt
- Bonds are a type of long-term debt with fixed interest rates and maturities
Test your knowledge on financial assets, including debt features, priority to assets and earnings, interest payments, and control of the firm. This quiz is based on Principles of Finance 5th edition, Chapter 2.
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