Question 1

A bond has a face value of $10,000 and a conversion ratio of 265.The stock is currently trading at $38.80.What is the conversion price?

Accepted Answer

A)  $1.56 
B)  $5.84 
C)  $25.73 
D)  $26.50 
E)  $37.74 
A)  $1.56 
B)  $5.84 
C)  $25.73 
D)  $26.50 
E)  $37.74

Question 2

What is a call provision?

Accepted Answer

A)  the periodic repurchasing of issued bonds through a sinking fund by the issuer 
B)  an option to the issuer to repurchase the bonds at a predetermined price 
C)  the option for the bondholder to convert each bond owned into a fixed number of shares of common stock 
D)  a clause in a bond contract that restricts the actions of the issuer that might harm the interests of the bondholders 
E)  a formal contract that specifies the firm's obligations to the bondholder 
A)  the periodic repurchasing of issued bonds through a sinking fund by the issuer 
B)  an option to the issuer to repurchase the bonds at a predetermined price 
C)  the option for the bondholder to convert each bond owned into a fixed number of shares of common stock 
D)  a clause in a bond contract that restricts the actions of the issuer that might harm the interests of the bondholders 
E)  a formal contract that specifies the firm's obligations to the bondholder

Question 3

BC Brewery issues $30 million in straight bonds at an original issue discount of 2% and a coupon rate of 6%.The firm also pays underwriting fees of 2.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

Accepted Answer

A)  $27.45 million 
B)  $26.85 million 
C)  $29.25 million 
D)  $30 million 
E)  $28.65 million 
A)  $27.45 million 
B)  $26.85 million 
C)  $29.25 million 
D)  $30 million 
E)  $28.65 million

Question 4

BC Brewery issues $50 million in straight bonds at an original issue discount of 1% and a coupon rate of 7.5%.The firm also pays underwriting fees of 3.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

Accepted Answer

A)  $49.5 million 
B)  $50 million 
C)  $47.75 million 
D)  $48.25 million 
E)  $44 million 
A)  $49.5 million 
B)  $50 million 
C)  $47.75 million 
D)  $48.25 million 
E)  $44 million

Question 5

Which of the following statements is most accurate?

Accepted Answer

A)  Before the call date, investors anticipate the optimal strategy that the issuer will follow, and the bond price reflects this strategy. 
B)  The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity. 
C)  A callable bond will trade at a higher price (and therefore a lower yield) than an otherwise equivalent non-callable bond. 
D)  A firm raising capital by issuing callable bonds instead of non-callable bonds will be able to pay a lower coupon rate. 
E)  When the bond's coupon rate is below the yield for similar securities, the bond is likely to be called. 
A)  Before the call date, investors anticipate the optimal strategy that the issuer will follow, and the bond price reflects this strategy. 
B)  The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity. 
C)  A callable bond will trade at a higher price (and therefore a lower yield) than an otherwise equivalent non-callable bond. 
D)  A firm raising capital by issuing callable bonds instead of non-callable bonds will be able to pay a lower coupon rate. 
E)  When the bond's coupon rate is below the yield for similar securities, the bond is likely to be called.

Question 6

A firm raising capital by issuing callable bonds instead of non-callable bonds will either have to pay a higher coupon rate or accept lower proceeds.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is most accurate?

Accepted Answer

A)  In the event of default, the assets not pledged as collateral for outstanding bonds can be used to pay off the holders of subordinated debentures before more senior debt has been paid off. 
B)  Even though more than one debenture might be outstanding, the bondholders all have the same priority in claiming assets in the event of default. 
C)  When a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt, the new debt is known as a subordinated debenture. 
D)  Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt. 
E)  Debentures are a type of secured corporate debt with maturities greater than 10 years. 
A)  In the event of default, the assets not pledged as collateral for outstanding bonds can be used to pay off the holders of subordinated debentures before more senior debt has been paid off. 
B)  Even though more than one debenture might be outstanding, the bondholders all have the same priority in claiming assets in the event of default. 
C)  When a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt, the new debt is known as a subordinated debenture. 
D)  Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt. 
E)  Debentures are a type of secured corporate debt with maturities greater than 10 years.

Question 8

A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $104 per $100 of face value.What is the yield to call of this bond when it is released?

Accepted Answer

A)  0.60% 
B)  1.50% 
C)  1.92% 
D)  5.47% 
E)  6.00% 
A)  0.60% 
B)  1.50% 
C)  1.92% 
D)  5.47% 
E)  6.00%

Question 9

Why are bond covenants necessary?

Accepted Answer

Since managers work for the equity holde

Question 10

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm makes a final payment of $145 million on the tenth and final coupon date.If the firm uses a sinking fund to repurchase some of the bond issue on each coupon payment date,what percentage of the issue must they repurchase each year?

Accepted Answer

A)  4% 
B)  3.7% 
C)  3.8% 
D)  3.9% 
E)  4.1% 
A)  4% 
B)  3.7% 
C)  3.8% 
D)  3.9% 
E)  4.1%

Question 11

Which of the following would be most likely to have the lowest price?

Accepted Answer

A)  a straight senior bond 
B)  a convertible senior bond 
C)  a callable subordinated bond 
D)  a straight subordinated bond 
E)  a callable senior bond 
A)  a straight senior bond 
B)  a convertible senior bond 
C)  a callable subordinated bond 
D)  a straight subordinated bond 
E)  a callable senior bond

Question 12

Kruller A.G.issues a bond that is offered for sale simultaneously in Europe,the United States,and Japan.Which of the following best describes this bond?

Accepted Answer

A)  a domestic bond 
B)  a foreign bond 
C)  a Eurobond 
D)  a global bond 
E)  a corporate bond 
A)  a domestic bond 
B)  a foreign bond 
C)  a Eurobond 
D)  a global bond 
E)  a corporate bond

Question 13

A bond with a face value of $1000 is convertible to common stock at a conversion ratio of 60.If the stock is currently trading at $8.20 per share,the value of the bond is probably closest in value to which of the following?

Accepted Answer

A)  less than $492 
B)  about $492 
C)  about $508 
D)  about $1000 
E)  above $1666 
A)  less than $492 
B)  about $492 
C)  about $508 
D)  about $1000 
E)  above $1666

Question 14

Which of the following is an advantage of private debt over public debt?

Accepted Answer

A)  It is liquid. 
B)  It does not need to be registered with the securities commission. 
C)  It does not require interest and principal payments made upon it. 
D)  It dilutes the ownership of the firm. 
E)  It is sold to a wider group of investors. 
A)  It is liquid. 
B)  It does not need to be registered with the securities commission. 
C)  It does not require interest and principal payments made upon it. 
D)  It dilutes the ownership of the firm. 
E)  It is sold to a wider group of investors.

Question 15

A company issues a 10-year,callable bond at par with 8% annual coupon payments.The bond can be called at par in one year after issue or any time after that on a coupon payment date.The call price is $105 per $100 of face value.What is the yield to call if this bond is called in one year?

Accepted Answer

A)  5% 
B)  8% 
C)  10% 
D)  11% 
E)  13% 
A)  5% 
B)  8% 
C)  10% 
D)  11% 
E)  13%

Question 16

Which of the following statements regarding bonds is most accurate?

Accepted Answer

A)  Foreign bonds are bonds issued by a local entity and traded in a local market, but purchased by foreigners. 
B)  Domestic bonds are bonds issued by a foreign company in a local market and are intended for local investors. 
C)  Debentures are a type of secured corporate debt in which specific assets are pledged as collateral. 
D)  Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued. 
E)  Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously. 
A)  Foreign bonds are bonds issued by a local entity and traded in a local market, but purchased by foreigners. 
B)  Domestic bonds are bonds issued by a foreign company in a local market and are intended for local investors. 
C)  Debentures are a type of secured corporate debt in which specific assets are pledged as collateral. 
D)  Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued. 
E)  Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously.

Question 17

What kind of unsecured corporate debt has a maturity of greater than ten years?

Accepted Answer

A)  mortgage bonds 
B)  asset-back bonds 
C)  term loans 
D)  notes 
E)  debentures 
A)  mortgage bonds 
B)  asset-back bonds 
C)  term loans 
D)  notes 
E)  debentures

Question 18

A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $104 per $100 of face value.What is the yield to worst of this bond when it is released?

Accepted Answer

A)  0.60% 
B)  1.92% 
C)  4.00% 
D)  5.47% 
E)  6.00% 
A)  0.60% 
B)  1.92% 
C)  4.00% 
D)  5.47% 
E)  6.00%

Question 19

A covenant that restricts a company from making loans or otherwise providing credit is best viewed as a restriction on which of the following?

Accepted Answer

A)  issuing new debt 
B)  dividends and share repurchases 
C)  mergers and acquisitions 
D)  asset disposition 
E)  investment opportunities 
A)  issuing new debt 
B)  dividends and share repurchases 
C)  mergers and acquisitions 
D)  asset disposition 
E)  investment opportunities

Question 20

Private debt cannot be in the form of bonds.

Accepted Answer

A) True 
 B)False

Exam 15: Debt Financing

A bond has a face value of $10,000 and a conversion ratio of 265.The stock is currently trading at $38.80.What is the conversion price?

What is a call provision?

BC Brewery issues $30 million in straight bonds at an original issue discount of 2% and a coupon rate of 6%.The firm also pays underwriting fees of 2.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

BC Brewery issues $50 million in straight bonds at an original issue discount of 1% and a coupon rate of 7.5%.The firm also pays underwriting fees of 3.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

Which of the following statements is most accurate?

A firm raising capital by issuing callable bonds instead of non-callable bonds will either have to pay a higher coupon rate or accept lower proceeds.

Which of the following statements is most accurate?

Why are bond covenants necessary?

Which of the following would be most likely to have the lowest price?

Kruller A.G.issues a bond that is offered for sale simultaneously in Europe,the United States,and Japan.Which of the following best describes this bond?

A bond with a face value of $1000 is convertible to common stock at a conversion ratio of 60.If the stock is currently trading at $8.20 per share,the value of the bond is probably closest in value to which of the following?

Which of the following is an advantage of private debt over public debt?

A company issues a 10-year,callable bond at par with 8% annual coupon payments.The bond can be called at par in one year after issue or any time after that on a coupon payment date.The call price is $105 per $100 of face value.What is the yield to call if this bond is called in one year?

Which of the following statements regarding bonds is most accurate?

What kind of unsecured corporate debt has a maturity of greater than ten years?

A covenant that restricts a company from making loans or otherwise providing credit is best viewed as a restriction on which of the following?

Private debt cannot be in the form of bonds.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

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