Commerce MCQs
Topic Notes: Commerce
MCQs and preparation resources for competitive exams, covering important concepts, past papers, and detailed explanations.
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
111
How does the coupon rate of a convertible bond typically compare to that of a non-convertible bond with similar characteristics?
Answer:
lower
Convertible bonds offer investors the option to convert their debt into equity shares. Because this conversion feature provides potential capital appreciation, investors are willing to accept a lower coupon rate compared to a standard, non-convertible bond. The lower interest payment is essentially the price the investor pays for the embedded equity option, making it a cost-effective financing tool for the issuing corporation.
112
What is the term for the legally defined time period between the issuance date and the maturity date of a bond?
Answer:
original maturity
Original maturity refers to the total duration of a bond from the date it is first issued until the date the principal is due to be repaid. This duration is established in the bond indenture at the time of issuance and remains constant. It is a critical factor for investors in assessing the long-term risk and interest rate exposure associated with the debt instrument.
113
What is the classification for debt instruments where the interest rate fluctuates in accordance with changes in market interest rates?
Answer:
floating rate debt
A floating rate debt instrument, also known as a variable-rate note, features an interest rate that adjusts periodically based on a benchmark market interest rate. This structure protects the issuer and investor from significant interest rate volatility, as the coupon payments are linked to current market conditions rather than being fixed for the entire duration of the debt.
114
How are debentures best characterized within the context of corporate finance?
Answer:
Long-term loan with a fixed interest rate
Debentures are long-term debt instruments issued by corporations to raise capital. They are characterized by a fixed interest rate (coupon rate) and a specified maturity date. Unlike equity, they do not provide ownership rights to the holder, but they do provide a contractual claim on the company's assets and interest payments.
115
How is an unsecured bond that lacks a lien against specific property as collateral for the debt obligation classified?
Answer:
debenture
A debenture is a long-term debt instrument that is not backed by any physical collateral or assets. Instead, it is secured only by the general creditworthiness and reputation of the issuer. Because they lack specific security, debentures typically carry higher interest rates than secured bonds to compensate investors for the increased risk of default. They are commonly issued by corporations and governments to raise capital.
116
In the event of company liquidation, what priority do debenture holders have regarding their claims?
Answer:
Both A and B
Debenture holders are creditors of the company. Upon liquidation, they are entitled to receive both the outstanding principal amount and any accrued interest up to the date of payment before any funds are distributed to shareholders.