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Free CMA Exam Braindumps (page: 144)

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Randolf Castell opened a small general store in 1964. A cousin, Alfred Bedford, served as bookkeeper and office manager while Castell concentrated on operations. The business prospered and each of Castell's three sons joined their father in the business. In fact, as
each son finished school, Castell opened a new store and put the son in charge. In time, each son began to specialize: one in hardware; another in dry goods, and the third in furniture. Further expansion took place, and the business was incorporated as Four Castles Inc. with all of the stock being held by the family. Castell closed his original store to serve as president and concentrate on administration. As Four Castles prospered and more stores opened, the company needed additional capital Bedford suggested "going public" but pointed out that this required accounting and reporting procedures with which he was unfamiliar. Therefore, a trained and qualified accountant was hired as controller. The new controller has had to provide explanations to Castell and Bedford on the accounting and reporting requirements of public companies. From the viewpoint of the investor, which of the following securities provides the least risk?

  1. Mortgage bond.
  2. Subordinated debenture
  3. Income bond.
  4. Debentures.

Answer(s): A

Explanation:

A mortgage bond is secured with specific fixed assets, usually real property. Thus, under the rights enumerated in the bond indenture, creditors will be able to receive payments from liquidation of the property in case of default. In a bankruptcy proceeding, these amounts are paid before any transfers are made to other creditors, including those preferences. Hence, mortgage bonds are less risky than the others listed.



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If a bond sells at a premium, the

  1. Stated coupon rate must be less than the required market rate
  2. Nominal rate must be less than the yield rate.
  3. Bond purchase price must be more than the fair market value of the bond.
  4. Stated coupon rate must be more than the required market rate.

Answer(s): D

Explanation:

If the stated, or coupon, rate of a bond is higher (lower) than the effective; or market; rate on the date of issue, the bonds sell at a premium (discount).



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From an investor's viewpoint, the least risky type of bond in which to invest is a(n)

  1. Debenture bond
  2. Deep discount bond.
  3. Income bond
  4. Secured bond.

Answer(s): D

Explanation:

A secured bond is backed by tangible property, making it the safest type for the investor four listed.



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A financial manager usually prefers to issue preferred stock rather than debt because

  1. Payments to preferred stockholders are not considered fixed payments
  2. The cost of fixed debt is less expensive since it is tax deductible even if a sinking fund is required to retire the debt.
  3. The preferred dividend is often cumulative, whereas interest payments are not.
  4. In a legal sense, preferred stock is equity, therefore, dividend payments are not legal obligations

Answer(s): D

Explanation:

For a financial manager, preferred stock is preferable to debt because dividends do not have to be paid on preferred stock, but failure to pay interest on debt could lead to bankruptcy. Thus, preferred stock is less risky than debt. However, debt has some advantages over preferred stock, the most notable of which is that interest payments are tax deductible. Preferred stock dividends are not.






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