Financial Management - Study Mode

[#1181] According to top rating agencies S&P double-B and other lower grade bonds are classified as
Correct Answer

(B) junk bonds

Explanation

Solution: According to top rating agencies S&P double-B and other lower grade bonds are classified as junk bonds. Junk bonds represent bonds issued by companies that are struggling financially and have a high risk of defaulting or not paying their interest payments or repaying the principal to investors.

[#1182] Bond call provision that is not practiced even after several years of issuance is classified as
Correct Answer

(B) deferred call

Explanation

Solution: Bond call provision that is not practiced even after several years of issuance is classified as deferred call. A provision that prohibits the company from calling the bond before a certain date. During this period the bond is said to be call protected.

[#1183] Price of an outstanding bond increases when market rate
Correct Answer

(C) decreases

Explanation

Solution: Price of an outstanding bond increases when market rate decreases.

[#1184] An average inflation rate which is expected over life of security is classified as
Correct Answer

(A) inflation premium

Explanation

Solution: An average inflation rate which is expected over life of security is classified as inflation premium. An inflation premium is the part of prevailing interest rates that results from lenders compensating for expected inflation by pushing nominal interest rates to higher levels. Key points : Investors seek this premium to compensate for the erosion in the value of their capital due to inflation.

[#1185] Type of bond which pays interest payment only when it earns is classified as
Correct Answer

(A) income bond

Explanation

Solution: Type of bond which pays interest payment only when it earns is classified as income bond. An income bond is a type of debt security in which only the face value of the bond is promised to be paid to the investor, with any coupon payments paid only if the issuing company has enough earnings to pay for the coupon payment.