Principles of Finance Ch. 2 - Financial Assets Quiz

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Questions and Answers

Which rating agencies are mentioned in the text for bond ratings?

Morningstar and Thomson Reuters

Dow Jones and Nasdaq

Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P) (correct)

Fitch Ratings and DBRS

What type of bonds are considered investment grade based on the text?

Junk bonds

Triple B or better (correct)

Below Double A

Below Triple B

What are the criteria for rating bonds according to the text?

Maturity dates and coupon rates

Not mentioned in the text

Interest rates and stock prices

Creditworthiness and risk factors (correct)

In the period 1990-2010, what type of bond showed the narrowest spread between yields?

U.S. Government bonds Signup and view all the answers

Based on the yields shown in the chart, which bond type had the highest yield in 2008?

Corporate BBB Signup and view all the answers

What are some features of debt according to the text?

Control of the firm (voting rights) Signup and view all the answers

Which of the following is an example of Short-Term Debt?

Treasury Bill (T-bill) Signup and view all the answers

What is the characteristic of Long-Term Debt mentioned in the text?

Low issuance costs Signup and view all the answers

Which type of debt is associated with Maturity value and Par value according to the text?

Treasury Bills Signup and view all the answers

What kind of asset is a Certificate of Deposit (CD)?

Debt asset Signup and view all the answers

In the realm of Debt, what do Discounted Securities typically involve?

Securities sold at a lower value than face value Signup and view all the answers

What is a characteristic of preferred stock based on the text?

Voting rights Signup and view all the answers

Which financial instrument has no maturity date for repayment?

Common Stock Signup and view all the answers

What differentiates common stock from preferred stock in terms of dividend payments?

Common stock has no obligation for dividend payments Signup and view all the answers

Which financial instrument provides control to stockholders?

Common Stock Signup and view all the answers

Why do government bonds not offer voting rights or control to investors?

To increase creditworthiness Signup and view all the answers

Which type of financial instrument has higher after-tax costs due to dividends not being deductible?

Preferred Stock Signup and view all the answers

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

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Description

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.