Introduction to Bonds and Bond Characteristics quiz #2 Flashcards
Introduction to Bonds and Bond Characteristics quiz #2
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What is the impact on a company's liabilities when it issues bonds at a premium?
The company records a liability equal to the face value, but receives more cash, with the difference recorded as a premium. What is the coupon rate of a bond?
The coupon rate is another term for the stated interest rate on the bond. What is the effective rate of a bond?
The effective rate is another term for the market rate of interest for similar bonds. Why do bond prices fluctuate in the market?
Bond prices fluctuate due to changes in market interest rates and the perceived creditworthiness of the issuer. What is the main advantage of secured bonds for investors?
Secured bonds offer lower risk because they are backed by specific assets as collateral. What is the main disadvantage of callable bonds for investors?
Callable bonds can be redeemed early by the issuer, potentially limiting the investor's interest income. How does the call price of a bond typically compare to its face value?
The call price is usually higher than the face value to compensate investors for early redemption. What is the main feature of a convertible bond?
A convertible bond can be exchanged for a predetermined number of shares of the issuing company's stock. How does the stated rate affect the attractiveness of a bond to investors?
A higher stated rate makes the bond more attractive, while a lower stated rate makes it less attractive compared to market rates. What is the relationship between the stated rate and the market rate when a bond is issued at a discount?
The stated rate is less than the market rate when a bond is issued at a discount. What is the relationship between the stated rate and the market rate when a bond is issued at a premium?
The stated rate is greater than the market rate when a bond is issued at a premium. What is the primary reason investors buy bonds at a premium?
Investors buy bonds at a premium to receive a higher stated interest rate than what is available in the market. What is the primary reason investors buy bonds at a discount?
Investors buy bonds at a discount when the stated interest rate is lower than the market rate, so they pay less upfront. What does it mean for a bond to be issued at face value?
It means the bond is sold for its face value, with the stated rate equal to the market rate. How does the market rate affect the interest expense recorded by the issuer?
The market rate determines the actual interest expense recognized by the issuer, even if the cash paid is based on the stated rate. What is the main purpose of quoting bond prices as a percentage of face value?
Quoting bond prices as a percentage standardizes pricing and makes it easier to compare bonds of different denominations. What is the risk to investors if a company defaults on a debenture bond?
Investors may lose their entire investment since debenture bonds are not backed by collateral. How does a company benefit from issuing bonds at a premium?
The company receives more cash than the face value, which can reduce the effective cost of borrowing. How does a company benefit from issuing bonds at a discount?
Issuing at a discount may allow the company to attract investors when its stated rate is below the market rate. What is the main difference between a bond's face value and its issue price?
The face value is the amount repaid at maturity, while the issue price is the amount received by the issuer when the bond is sold. Why might a company choose to issue serial bonds instead of term bonds?
Serial bonds allow the company to spread out principal repayments over time, reducing the burden at maturity. What is the main risk for a company issuing callable bonds?
The company may have to pay a premium to redeem the bonds early, increasing its costs. What is the main risk for investors in callable bonds?
Investors risk losing future interest income if the bonds are called before maturity. How does the conversion feature of a convertible bond benefit the issuer?
It may allow the issuer to offer a lower interest rate, as investors value the option to convert to stock. What is the main difference between secured and unsecured bonds?
Secured bonds are backed by collateral, while unsecured (debenture) bonds are not. How does the market rate of interest affect the demand for a company's bonds?
If the market rate is higher than the stated rate, demand for the company's bonds decreases, and vice versa. What is the impact on investors if a bond is called before maturity?
Investors receive the call price, which may be higher than face value, but lose out on future interest payments. Why do companies sometimes pay a premium to call bonds early?
The premium compensates investors for the loss of future interest income due to early redemption. What is the main purpose of issuing bonds for a company?
The main purpose is to raise capital from multiple investors for business needs.
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