Answer (C) is correct. 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.
Answer (C) is correct. With average payments of $1,500,000 per day, the firm delays payments of $4,500,000 ($1,500,000 × 3 days). The rate at which average interest is saved or earned is calculated by weighting the two interest rates by the proportion of the year that each is earned: 7% × 8 months = 56 4% × 4 months = 16 72 ÷ 12 months 6 The savings is $270,000 ($4,500,000 additional cash available × 6%).
(d) The requirement is to identify the instrument with the highest return. Answer (d) is correct because commercial paper is issued by a corporation and, therefore, has more risk than Treasury notes, Treasury bonds, or money market accounts.
(d) The requirement is to identify the item that is not a characteristic of a negotiable certificate of deposit. The correct answer is (d) because negotiable certificates of deposit have lower yields than banker’s acceptances and commercial paper— they have less risk. Answer (a) is incorrect because negotiable certificates of deposit do have a secondary market. Answer (b) is incorrect because negotiable certificates of deposit are regulated by the Federal Reserve System. Answer (c) is incorrect because they are usually sold in denominations of a minimum of $100,000.
(c) The requirement is to identify the correct statement about bond financing alternatives. Answer (c) is correct because a call provision is detrimental to the investor because he or she may be forced to redeem the bond. Answer (a) is incorrect because a bond with a call provision typically has a higher yield than a similar bond without a call provision. Answer (b) is incorrect because a convertible bond is convertible at the option of the holder. Answer (d) is incorrect because the relationship of the stated rate on the bond to the market rate determines whether or not the bond will sell for more than par value.
(b) The requirement is to identify the definition of Eurobonds. Answer (b) is correct because Eurobonds are always sold in some country other than the one in whose currency the bond issue is denominated. The advantage of Eurobonds is that they are less regulated than other bonds and the transaction costs are lower. Answer (a) is incorrect because Eurobonds are not always denominated in Eurodollars, which are US dollars deposited outside the US. Answer (c) is incorrect because foreign bonds are denominated in the currency of the country in which they are sold. Answer (d) is incorrect because Eurobonds are usually issued not as registered bonds, but as bearer bonds.
(c) The requirement is to identify the proper accounting for an operating lease. Answer (c) is correct because an operating lease is one that does not meet the criteria to be a capital lease. Operating leases are treated as rental agreements and the payments are expensed as rent as incurred. Answer (a) is incorrect because it describes the proper accounting for a capital lease. Answers (b) and (d) are incorrect because they describe accounting that is not proper for either type of lease.
(d) The requirement is to identify the difference between a capital and an operating lease. Answer (d) is correct because in a capital lease, the risks and rewards of ownership are transferred to the lessee. If the risks/rewards are not transferred, the lease is a rental arrangement and is called an operating lease. In accounting for a capital lease, the lessee capitalizes the net investment in the lease. Answer (a) is incorrect because the lessee obtains use of the asset in all lease agreements. Answer (b) is incorrect because the lessee uses the lease as a source of financing under a capital lease. Answer (c) is incorrect because the lessee does not receive title to the asset in all cases.
(c) The requirement is to identify the advantages/ disadvantages of debt versus equity financing. Answer (c) is correct because the fixed obligation of interest and principal is an advantage to debt financing. Answers (a), (b), and (d) are incorrect because they are all disadvantages of debt financing.
(d) The requirement is to identify the advantages/ disadvantages of debt versus equity financing. Answer (d) is correct because debt actually increases stockholders’ risk because the financial leverage of the firm is higher. Answers (a), (b), and (c) are incorrect because they are all advantages of debt financing.
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