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Free CMA Exam Braindumps (page: 141)

Page 141 of 336
PDF with 1336 Questions
View Related Case Study

Which one of the following characteristics distinguishes income bonds from other bonds?

  1. The bondholder is guaranteed an income over the life of the security.
  2. By promising a return to the bondholder, an income bond is junior to preferred and common stock.
  3. Income bonds are junior to subordinated debt but senior to preferred and common stock.
  4. Income bonds pay interest only if the issuing company has earned the interest.

Answer(s): D

Explanation:

An income bond is one that pays interest only if the issuing company has earned the interest, although the principal must still be paid on the due date. Such bonds are riskier than normal bonds



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Serial bonds are attractive to investors because

  1. All bonds in the issue mature on the same date
  2. The yield to maturity is the same for all bonds in the issue.
  3. Investors can choose the maturity that suits their financial needs.
  4. The coupon rate on these bonds is adjusted to the maturity date.

Answer(s): C

Explanation:

Serial bonds have staggered maturities; that is, they mature over a period (series) of years. Thus, investors can choose the maturity date that meets their investment needs. For example, an investor who will have a child starting college in 16 years can choose bonds that mature in 16 years



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The best advantage of a zero-coupon bond to the issuer is that the

  1. Bond requires a low issuance cost.
  2. Bond requires no interest income calculation to the holder or issuer until maturity.
  3. Interest can be amortized annually by the APR method and need not be shown as an interest expense to the issuer
  4. Interest can be amortized annually on a straight-line basis but is a noncash outlay

Answer(s): D

Explanation:

Zero-coupon bonds do not pay periodic interest. The bonds are sold at a discount from their face value, and the investors do not receive interest until the bonds mature. The issuer does not have to make annual cash outlays for interest. However, the discount must be amortized annual and reported as interest expense.



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Junk bonds are

  1. Securities rated at less than investment grade.
  2. Worthless securities.
  3. Securities that are highly risky but offer only low yields.
  4. Considered illegal since the collapse of the Drexel Burnham Lambert firm

Answer(s): A

Explanation:

Junk bonds are high-risk and therefore high-yield securities that are normally issued when the debt ratio is very high. Thus, the bondholders have as much risk as the holders of equity securities. Such bonds are not highly rated by credit evaluation companies. Junk bonds have become accepted because of the tax deductibility of the interest paid.



Page 141 of 336



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