Question 1

The cash flows of a collateralized debt obligation are usually divided into how many different branches?

Accepted Answer

A) 2 
B) 3 
C) 4 
D) 6 
A) 2 
B) 3 
C) 4 
D) 6 C

Question 2

Which of the following does NOT issue asset-backed securities?

Accepted Answer

A) Government National Mortgage Association 
B) Federal National Mortgage Association 
C) Student Loan Marketing Association 
D) Federal Reserve 
A) Government National Mortgage Association 
B) Federal National Mortgage Association 
C) Student Loan Marketing Association 
D) Federal Reserve D

Question 3

The largest sector of the asset-backed security market is the ________ market.

Accepted Answer

A) collateralized debt obligation 
B) mortgage-backed security 
C) real property-backed security 
D) double-barreled security 
A) collateralized debt obligation 
B) mortgage-backed security 
C) real property-backed security 
D) double-barreled security B

Question 4

You own a bond with a face value of $1000 and a conversion price of $40.The conversion ratio is closest to:

Accepted Answer

A) 15 
B) 20 
C) 25 
D) 40 
A) 15 
B) 20 
C) 25 
D) 40

Question 5

What is the Yield to Call (YTC)on this bond?

Accepted Answer

N = 10 (5 × 2)
PMT =

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) The assumption that underlies the yield calculation of a callable bond-that it will not be called-is not always realistic,so bond traders often quote the yield to call. 
B) The yield to call (YT
C) is the annual yield of a callable bond assuming that the bond is called at the earliest opportunity. 
C) We can think of the yield to maturity of a callable bond as the interest rate the bondholder receives if the bond is not called and repaid in full. 
D) Because the price of a callable bond is higher than the price of an otherwise identical non-callable bond,the yield to maturity of a callable bond will be lower than the yield to maturity for its non-callable counterpart. 
A) The assumption that underlies the yield calculation of a callable bond-that it will not be called-is not always realistic,so bond traders often quote the yield to call. 
B) The yield to call (YT
C) is the annual yield of a callable bond assuming that the bond is called at the earliest opportunity. 
C) We can think of the yield to maturity of a callable bond as the interest rate the bondholder receives if the bond is not called and repaid in full. 
D) Because the price of a callable bond is higher than the price of an otherwise identical non-callable bond,the yield to maturity of a callable bond will be lower than the yield to maturity for its non-callable counterpart.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) Global bonds combine the features of domestic,foreign,and Eurobonds,and are offered for sale in several different markets simultaneously. 
B) In a leveraged buyout (LBO),a group of private investors purchases all the equity of a public corporation. 
C) A term loan is a bank loan that lasts for a specific term. 
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued. 
A) Global bonds combine the features of domestic,foreign,and Eurobonds,and are offered for sale in several different markets simultaneously. 
B) In a leveraged buyout (LBO),a group of private investors purchases all the equity of a public corporation. 
C) A term loan is a bank loan that lasts for a specific term. 
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued.

Question 8

What kind of corporate debt can be secured by any specified assets?

Accepted Answer

A) Mortgage bonds 
B) Notes 
C) Asset-backed bonds 
D) Debentures 
A) Mortgage bonds 
B) Notes 
C) Asset-backed bonds 
D) Debentures

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) If the issuer fails to live up to any covenant,the issuer goes into bankruptcy. 
B) The stronger the covenants in the bond contract,the less likely the issuer will default on the bond,and so the lower the interest rate investors will require to buy the bond. 
C) Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds. 
D) Bond agreements often contain covenants that restrict the ability of management to pay dividends. 
A) If the issuer fails to live up to any covenant,the issuer goes into bankruptcy. 
B) The stronger the covenants in the bond contract,the less likely the issuer will default on the bond,and so the lower the interest rate investors will require to buy the bond. 
C) Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds. 
D) Bond agreements often contain covenants that restrict the ability of management to pay dividends.

Question 10

In January 2010,the U.S.Treasury issued a $1000 par,ten-year,inflation-indexed note with a coupon of 4%.On the date of issue,the consumer price index (CPI)was 200.By January 2020,the CPI had increased to 300.The principal payment that was made in January 2020 is closest to:

Accepted Answer

A) $1000 
B) $1020 
C) $1030 
D) $1500 
A) $1000 
B) $1020 
C) $1030 
D) $1500

Question 11

Rearden Metal has just issued a callable,$1000 par value,twenty-year,8% coupon bond with semiannual coupon payments.The bond can be called at par in five years or anytime thereafter on a coupon payment date.If the bond is currently trading for $1040.79,then its yield to maturity is closest to:

Accepted Answer

A) 3.8% 
B) 7.0% 
C) 7.6% 
D) 8.0% 
A) 3.8% 
B) 7.0% 
C) 7.6% 
D) 8.0%

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) In the event of default,the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off. 
B) Because more than one debenture might be outstanding,the bondholder's priority in claiming assets in the event of default,known as the bond's seniority,is important. 
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. 
A) In the event of default,the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off. 
B) Because more than one debenture might be outstanding,the bondholder's priority in claiming assets in the event of default,known as the bond's seniority,is important. 
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.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) Almost all bonds that are issued today are registered bonds. 
B) The trust company represents the bondholders and makes sure that the terms of the indenture are enforced. 
C) For private placements,the prospectus must include an indenture,a formal contract between the bond issuer and a trust company. 
D) In the case of default,the trust company represents the bondholders' interests. 
A) Almost all bonds that are issued today are registered bonds. 
B) The trust company represents the bondholders and makes sure that the terms of the indenture are enforced. 
C) For private placements,the prospectus must include an indenture,a formal contract between the bond issuer and a trust company. 
D) In the case of default,the trust company represents the bondholders' interests.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) In the case of a Treasury note or Treasury bond offering,the stop-out yield determines the coupon of the bond and then all bidders pay the discounted value for the bond or note. 
B) All competitive bidders submit sealed bids in terms of yields and the amount of bonds they are willing to purchase. 
C) In the past,the Treasury has issued bonds with maturities of 30 years (often called long bonds)and 20 years. 
D) Noncompetitive bidders (usually individuals)just submit the amount of bonds they wish to purchase and are guaranteed to have their orders filled at the auction. 
A) In the case of a Treasury note or Treasury bond offering,the stop-out yield determines the coupon of the bond and then all bidders pay the discounted value for the bond or note. 
B) All competitive bidders submit sealed bids in terms of yields and the amount of bonds they are willing to purchase. 
C) In the past,the Treasury has issued bonds with maturities of 30 years (often called long bonds)and 20 years. 
D) Noncompetitive bidders (usually individuals)just submit the amount of bonds they wish to purchase and are guaranteed to have their orders filled at the auction.

Question 15

Which of the following statements regarding sinking fund provisions is FALSE?

Accepted Answer

A) With a sinking fund,if a bond is trading below its face value,because the bonds are repurchased at par the decision as to which bonds to repurchase is made by lottery. 
B) With a sinking fund,instead of repaying the entire principal balance on the maturity date,the company makes regular payments into a sinking fund administered by a trustee over the life of the bond. 
C) Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund. 
D) Because the sinking fund allows the issuer to repurchase the bonds at par,the option to accelerate the payments is another form of call provision. 
A) With a sinking fund,if a bond is trading below its face value,because the bonds are repurchased at par the decision as to which bonds to repurchase is made by lottery. 
B) With a sinking fund,instead of repaying the entire principal balance on the maturity date,the company makes regular payments into a sinking fund administered by a trustee over the life of the bond. 
C) Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund. 
D) Because the sinking fund allows the issuer to repurchase the bonds at par,the option to accelerate the payments is another form of call provision.

Question 16

Which of the following statements regarding the private debt market is FALSE?

Accepted Answer

A) Private debt has the advantage that it avoids the cost of registration. 
B) Bank loans are an example of private debt,debt that is not publicly traded. 
C) Private debt has the disadvantage of being illiquid. 
D) The public debt market is larger than the private debt market. 
A) Private debt has the advantage that it avoids the cost of registration. 
B) Bank loans are an example of private debt,debt that is not publicly traded. 
C) Private debt has the disadvantage of being illiquid. 
D) The public debt market is larger than the private debt market.

Question 17

When banks resecuritize other asset-backed securities,the new asset-backed security is known as a:

Accepted Answer

A) mortgage-backed security. 
B) double-barreled security. 
C) collateralized debt obligation. 
D) resecuritized security. 
A) mortgage-backed security. 
B) double-barreled security. 
C) collateralized debt obligation. 
D) resecuritized security.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) Zero-coupon Treasury securities with maturities longer than one year also trade in the bond market. 
B) Treasury securities are initially sold to the public through dealers. 
C) Municipal bonds ("munis")are issued by state and local governments. 
D) Municipal bonds' distinguishing characteristic is that the income on municipal bonds is not taxable at the federal level. 
A) Zero-coupon Treasury securities with maturities longer than one year also trade in the bond market. 
B) Treasury securities are initially sold to the public through dealers. 
C) Municipal bonds ("munis")are issued by state and local governments. 
D) Municipal bonds' distinguishing characteristic is that the income on municipal bonds is not taxable at the federal level.

Question 19

What kind of corporate debt must be secured by real property?

Accepted Answer

A) Mortgage bonds 
B) Notes 
C) Asset-backed bonds 
D) Debentures 
A) Mortgage bonds 
B) Notes 
C) Asset-backed bonds 
D) Debentures

Question 20

A(n)________ cash flows come from the cash flows of underlying financial securities.

Accepted Answer

A) general obligation security's 
B) revenue bond's 
C) asset-backed security's 
D) double-barreled bond's 
A) general obligation security's 
B) revenue bond's 
C) asset-backed security's 
D) double-barreled bond's

Exam 24: Debt Financing

The cash flows of a collateralized debt obligation are usually divided into how many different branches?

Which of the following does NOT issue asset-backed securities?

The largest sector of the asset-backed security market is the ________ market.

You own a bond with a face value of $1000 and a conversion price of $40.The conversion ratio is closest to:

What is the Yield to Call (YTC)on this bond?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

What kind of corporate debt can be secured by any specified assets?

Which of the following statements is FALSE?

In January 2010,the U.S.Treasury issued a $1000 par,ten-year,inflation-indexed note with a coupon of 4%.On the date of issue,the consumer price index (CPI)was 200.By January 2020,the CPI had increased to 300.The principal payment that was made in January 2020 is closest to:

Rearden Metal has just issued a callable,$1000 par value,twenty-year,8% coupon bond with semiannual coupon payments.The bond can be called at par in five years or anytime thereafter on a coupon payment date.If the bond is currently trading for $1040.79,then its yield to maturity is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements regarding sinking fund provisions is FALSE?

Which of the following statements regarding the private debt market is FALSE?

When banks resecuritize other asset-backed securities,the new asset-backed security is known as a:

Which of the following statements is FALSE?

What kind of corporate debt must be secured by real property?

A(n)________ cash flows come from the cash flows of underlying financial securities.

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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