Exam 19: Corporate Bond Pricing, Market Development, and Financing Strategies

What is the effective rate of interest on a loan of $1 million if the bank charges 9% interest and requires a 10% compensating balance?

With an equity kicker the lender of funds receives a portion of the net earnings from an investment project but no fixed interest return.

Describe the important role that investment bankers play in the functioning of the corporate bond market.

The method of financing a corporate merger that results in the issue of high-yielding unsecured and low-credit-rated debt obligations is called:

Since the advent of the European Community (EC), European bond dealers are finding that differences in bond yields issued from different EC members are:

Banks are among the heaviest investors in corporate bonds.

A corporate bond secured only by the earning power of the issuing corporation and not by any specific property is known as a (an):

In an expanding economy in a boom period businesses rely less upon the money and capital markets for funds, as measured by the total volume of funds they borrow, because their net cash flow rises due to growing sales and profits.

Between 1993 and 2005 outstanding medium-term notes (MTN) increased from $500 billion to nearly $713 million.

Debt instruments used mainly in corporate reorganizations that earn interest for the holder only when the issuing company has sufficient earnings are known as income funds.

The two principal investor groups in the corporate bond market today, as measured by the volume of bonds purchased, are insurance companies and commercial banks.

Bond pricing in some parts of the market is inefficient due to information asymmetries.

Large institutional investors eligible to buy privately placed corporate bonds are labeled by the SEC as:

Financial corporations have issued the lion's share, almost ___________ of medium-term notes outstanding.

A bank quotes one of its corporate customers a loan at prime plus 4 percentage points when prime is 12 percent. Another bank, posting the same prime rate, quotes this same customer a loan at 1 1/4 times prime. Which loan would you recommend the corporation to take? Suppose both loans carry floating rates. Prime increases to 16 percent. Which loan is the better deal? Which would be the better deal if prime rises to 18 percent?

A bond that has warrants attached to purchase the issuing company's stock is known as a reset bond.

The total performance concept is an investment strategy followed by many institutional investors today in which long-term bonds are purchased on or close to date of issue and held until maturity.

Foreign investors have increased their holdings of U.S. corporate bonds by nearly fivefold.