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WGU C214 QUESTIONS WITH
CORRECT ANSWERS
Question: What are the characteristics of preferred stock?
Correct answer: Characteristics of preferred stock include
dividends in arrears, dividends are cumulative, higher payoff claim in a bankruptcy (has first dibs in a bankruptcy), considered "hybrid" (part stock/part bond), no fixed maturity date, no voting rights, can skip dividend payments, dividends don't change year-after-year, used in start-ups (IPO).
Question: What is true about preferred stock dividends?
Correct answer: Preferred stock dividends can go without
payment and pay in arrears the following year.
Question: What are the characteristics of common stock?
Correct answer: Characteristics of common stock are
voting rights, no maturity date, corporate governance, lower payoff claim in bankruptcy, variable returns, unlimited earnings potential, earnings are in dividends and the increase in price of stock.
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Question: What type of stock do new start-up ventures
often issue?
Correct answer: New start-up ventures often issue
preferred stock (in an IPO).
Question: What stock is considered a hybrid?
Correct answer: Preferred stock.
Question: What is one thing common stock and preferred
stock have in common?
Correct answer: Both have no maturity date.
Question: Which type of security has voting rights?
Correct answer: Common stock.
Question: What do debt covenants and restrictions help to
ensure?
Correct answer: Debt covenants and restrictions help to
ensure that management is meeting bond and shareholder
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expectations. NOTE: covenants are promises meant to be
kept.
Question: What is true regarding bonds?
Correct answer: When a bond matures, the bondholder
gets a lump sum back, the coupon rate doesn't change, maturity is in years, PAR value is typically $1000, Future value (same as PAR) is typically $1000.
Question: When does a bond sell at face value?
Correct answer: A bond sells at face value when the
required rate of return is equal to the coupon rate.
Question: Why are bonds the primary method for raising
capital?
Correct answer: Bonds are the primary method for raising
capital because bonds remove the intermediary costs.
NOTE: IPOs require an intermediary known as a
syndicate - a group of banks underwriting the security issue.
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Question: What type of bond can be traded for stock?
Correct answer: Convertible bonds.
Question: What is the interest rate for annual payments of
a bond known as?Correct answer: The coupon rate. NOTE: coupon rate is the established interest rate for the life of the bond and will remain unchanged.
Question: What is true about the coupon rate of a bond?
Correct answer: Coupon rate is the established rate of the
bond and should never change.
Question: What are debentures?
Correct answer: Debentures are secured bonds. NOTE: debentures are a debt instrument (bond) issued to raise cash, secured against a company's assets and backed by credit, transferable by the holder, and may also be unsecured.