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03%20bonds%20test%20bank%20problems%20solutions

03%20bonds%20test%20bank%20problems%20solutions - FNAN 301...

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FNAN 301 Solutions to test bank problems – bonds Some answers may be slightly different than provided solutions due to rounding 1. On Monday, 20,000 bonds issued by Brooks Books were bought by a variety of investors for $1,000 per bond. Brooks Books received $20 million from the sale of these bonds. Were the 20,000 bonds more likely sold on the primary market or the secondary market? Answer: the primary market The primary market is the market for the sale of new securities by the corporation. The primary bond market involves a bond issuer like a company raising money by selling bonds to investors. 1
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FNAN 301 Solutions to test bank problems – bonds 2. On Monday, 20,000 bonds issued by Brooks Books were bought by a variety of investors for $1,000 per bond. Brooks Books received nothing from the sale of these bonds. Were the 20,000 bonds more likely sold on the primary market or the secondary market? Answer: the secondary market The secondary market is the market in which previously issued securities are traded among investors. The secondary bond market involves one investor selling bonds to another investor. A bond issuer like a company gets no money from transactions in the secondary market. 2
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FNAN 301 Solutions to test bank problems – bonds 3. Which of the following entities issue bonds? You may choose more than one. A. Corporations B. The U.S. government C. States D. Counties E. Cities F. Bodies and agencies created by political subdivisions G. Foreign countries Answer: all of the entities listed above issue bonds. 3
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FNAN 301 Solutions to test bank problems – bonds 4. Indicate whether the following assertion is generally true or false: If a company performs very well, bond investors can receive higher cash flows than indicated by the coupon rate and face value. Answer: false Payments to bondholders do not increase if the firm does well. The promised payments are the most that bondholders receive. 4
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FNAN 301 Solutions to test bank problems – bonds 5. Indicate whether the following assertion is generally true or false: If a company performs very poorly, bond investors can receive lower cash flows than indicated by the coupon rate and face value. Answer: true There is a risk that all or some of the promised scheduled payments may not be made. This risk is called default risk or credit risk 5
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FNAN 301 Solutions to test bank problems – bonds 6. Indicate whether the following assertion is true or false: If Donatello Company is performing very poorly, the firm must still make promised coupon payments to bondholders or else the bondholders could take legal recourse against the firm. True: Creditors can take legal recourse to try to secure payment, which may or may not be successful. For example, the bondholders can force the firm into bankruptcy.
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