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Homework answers / question archive / Feel free to use any type of note (handwritten, printed,
Feel free to use any type of note (handwritten, printed, .pdf files, etc.). . You can also use any calculator that you want. . The exam will be available on Dec. 08, from 10:15 am to 12:45 pm. However, you have only 120 minutes to submit it. For example, if you start at 10:20 am, you will have access to the exam by 12:20 pm . This exam will NOT be administered to students separately on a day or time different from the date and time mentioned above, under any circumstances. Time Attempt 1 Hour D Question 1 15 pts Which one of the following statements is true? Preferred shareholders are the first investors to be repaid in bankruptcy liquidation Debt instruments ofter residual claims to future cash payouts Bonds with call wisions will have lower coupon rates than otherwise identical bonds In case of bankruptcy link bonds have higher priority than preferred stock Next
Which of the following would allow a corporation to issue a bond at a lower coupon rate, all else equal? The addition of a call provision to the bond 1. Issuing at a lower market price III. A deterioration in the corporation's credit quality IV. A decrease in the expected inflation rate land in Land land IV I and IV
Question1:
Option1 : FALSE ; Reason: In case of bankruptcy, bond holders or lenders are the first to get preference
Option 2:FALSE ; Reason: Debt instruments do not pay any residual cliams
Option 3:FALSE; Reason: Bonds with call provision have higher coupon rates in order to incentivize to purchase such bonds.
Option 4: TRUE; Reason: As we know, bonds have higher preference than preferred shares , which has higher priority than common shares. Junk bonds are a type of bonds that are risky in nature.
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Question 2:
I. addition of a call provision makes the bond a risky investment proposition for potential bond holders as the bond can be recalled much before the maturuty date. So, these bonds have a higer coupon rate to incentivize potential investors. - INCORRECT
II.When coupon rate is lower than the prevailing market rate, the bonds are sold at a discount i.e.issued at a lower market price. - CORRECT
III.A deterioration in credit quality makes the imnvestment risky. So, investors expect a higher return than normal to take such risky invetment.-INCORRECT
IV.A decrease in expectd inflation rate allows a bond to be issued at a lower coupon rate as there is less chance of bond value getting eroded due to inflation - CORRECT
Based on the above explanations,
Option II & IV are CORRECT
