Question 1

What kind of corporate debt has a maturity of less than 10 years?

Accepted Answer

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

Question 2

Which of the following statements is FALSE?

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 lower price (and therefore a higher yield)than an otherwise equivalent non-callable bond. 
D) The price of a callable bond can be low when yields are high,but does not rise above the call value when the yield is low. 
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 lower price (and therefore a higher yield)than an otherwise equivalent non-callable bond. 
D) The price of a callable bond can be low when yields are high,but does not rise above the call value when the yield is low.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant. 
B) On the maturity date of the bond,the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is,the conversion price. 
C) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders. 
D) If the stock price is low so that the embedded warrant is deep out-of-the-money,the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision. 
A) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant. 
B) On the maturity date of the bond,the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is,the conversion price. 
C) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders. 
D) If the stock price is low so that the embedded warrant is deep out-of-the-money,the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision.

Question 4

Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then its yield to maturity is closest to:

Accepted Answer

A) 3.4% 
B) 6.0% 
C) 6.5% 
D) 6.8% 
A) 3.4% 
B) 6.0% 
C) 6.5% 
D) 6.8%

Question 5

Treasury securities that are semiannual coupon bonds with original maturities of between 1 and 10 years are called:

Accepted Answer

A) Treasury bonds. 
B) Treasury bills. 
C) Treasury notes. 
D) TIPS. 
A) Treasury bonds. 
B) Treasury bills. 
C) Treasury notes. 
D) TIPS.

Question 6

Bonds issued by a local entity,denominated in the local currency,traded in a local market,but purchased by foreigners are called:

Accepted Answer

A) domestic bonds. 
B) Yankee bonds. 
C) Eurobonds. 
D) foreign bonds. 
A) domestic bonds. 
B) Yankee bonds. 
C) Eurobonds. 
D) foreign bonds.

Question 7

What kind of unsecured corporate debt has a maturity of less than 10 years?

Accepted Answer

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

Question 8

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

Accepted Answer

N = 6 (3 × 2)
PMT =

Question 9

Mortgages that do not meet certain credit criteria and have a high probability of default are know as ________ mortgages.

Accepted Answer

A) prepayment 
B) pooled 
C) under-water 
D) subprime 
A) prepayment 
B) pooled 
C) under-water 
D) subprime

Question 10

Which of the following statements regarding private placements is FALSE?

Accepted Answer

A) A private placement is a bond issue that does not trade on a public market but rather is sold to a small group of investors. 
B) Privately placed debt need not conform to the same standards as public debt;as a consequence,it can be tailored to the particular situation. 
C) In 1990,the U.S.Securities and Exchange Commission (SE
C) issued Rule 144A,which significantly decreased the liquidity of certain privately placed debt. 
D) Because a private placement does not need to be registered,it is less costly to issue. 
A) A private placement is a bond issue that does not trade on a public market but rather is sold to a small group of investors. 
B) Privately placed debt need not conform to the same standards as public debt;as a consequence,it can be tailored to the particular situation. 
C) In 1990,the U.S.Securities and Exchange Commission (SE
C) issued Rule 144A,which significantly decreased the liquidity of certain privately placed debt. 
D) Because a private placement does not need to be registered,it is less costly to issue.

Question 11

You own a bond with a face value of $1000 and a conversion ratio of 45.The conversion price is closest to:

Accepted Answer

A) $18 
B) $22 
C) $45 
D) $1000 
A) $18 
B) $22 
C) $45 
D) $1000

Question 12

An asset-backed security backed by home mortgages is a:

Accepted Answer

A) mortgage-backed security. 
B) primary home-backed security. 
C) bond-backed security. 
D) real estate-backed security. 
A) mortgage-backed security. 
B) primary home-backed security. 
C) bond-backed security. 
D) real estate-backed security.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) With registered bonds,on each coupon payment date,the bond issuer consults its list of registered owners and mails each owner a check (or directly deposits the coupon payment into the owner's brokerage account). 
B) If a coupon bond is issued at a discount,it is called an original issue discount bond. 
C) The face value or principal amount of the bond is denominated in standard increments,most often $10,000. 
D) In a public offering,the indenture lays out the terms of the bond issue. 
A) With registered bonds,on each coupon payment date,the bond issuer consults its list of registered owners and mails each owner a check (or directly deposits the coupon payment into the owner's brokerage account). 
B) If a coupon bond is issued at a discount,it is called an original issue discount bond. 
C) The face value or principal amount of the bond is denominated in standard increments,most often $10,000. 
D) In a public offering,the indenture lays out the terms of the bond issue.

Question 14

Asset securitization is the process of creating a(n):

Accepted Answer

A) collateralized security. 
B) asset-backed security. 
C) municipal security. 
D) payment security. 
A) collateralized security. 
B) asset-backed security. 
C) municipal security. 
D) payment security.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving. 
B) When yields have risen,the issuer will not choose to exercise the call on the callable bond. 
C) The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond. 
D) A callable bond is relatively less attractive to the bondholder than the identical non-callable bond. 
A) The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving. 
B) When yields have risen,the issuer will not choose to exercise the call on the callable bond. 
C) The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond. 
D) A callable bond is relatively less attractive to the bondholder than the identical non-callable bond.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) By including more covenants,issuers increase their costs of borrowing. 
B) Once bonds are issued,equity holders have an incentive to increase dividends at the expense of debt holders. 
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital. 
D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative NPV actions that exploit debt holders,then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants. 
A) By including more covenants,issuers increase their costs of borrowing. 
B) Once bonds are issued,equity holders have an incentive to increase dividends at the expense of debt holders. 
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital. 
D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative NPV actions that exploit debt holders,then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants.

Question 17

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 call 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 18

Use the information for the question(s)below.
Luther Industries has just issued a callable (at 102)ten-year,8% coupon bond with semiannual coupon payments.The bond can be called at 102 in three years or anytime thereafter on a coupon payment date.It has a current price of 99.
-What is the Yield to Maturity (YTM)on this bond?

Accepted Answer

N = 20 (10 × 2)
PMT

Question 19

In January 2010,the U.S.Treasury issued a $1000 par,five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2015,the CPI had decreased to 200.The coupon payment that was made in January 2015 is closest to:

Accepted Answer

A) $20 
B) $25 
C) $30 
D) $40 
A) $20 
B) $25 
C) $30 
D) $40

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) Mortgage-backed securities,such as GNMAs,are pass-through securities.That is,each security is backed by an underlying portfolio or pool of mortgages. 
B) The Government National Mortgage Association (GNMA,or "Ginnie Mae")is an example of an enterprise;the Student Loan Marketing Association ("Sallie Mae")is an example of a government-sponsored agency. 
C) Sovereign debt is debt issued by national governments. 
D) Agency securities are issued by agencies of the U.S.government or by U.S.government sponsored enterprises. 
A) Mortgage-backed securities,such as GNMAs,are pass-through securities.That is,each security is backed by an underlying portfolio or pool of mortgages. 
B) The Government National Mortgage Association (GNMA,or "Ginnie Mae")is an example of an enterprise;the Student Loan Marketing Association ("Sallie Mae")is an example of a government-sponsored agency. 
C) Sovereign debt is debt issued by national governments. 
D) Agency securities are issued by agencies of the U.S.government or by U.S.government sponsored enterprises.

Exam 24: Debt Financing

What kind of corporate debt has a maturity of less than 10 years?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then its yield to maturity is closest to:

Treasury securities that are semiannual coupon bonds with original maturities of between 1 and 10 years are called:

Bonds issued by a local entity,denominated in the local currency,traded in a local market,but purchased by foreigners are called:

What kind of unsecured corporate debt has a maturity of less than 10 years?

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

Mortgages that do not meet certain credit criteria and have a high probability of default are know as ________ mortgages.

Which of the following statements regarding private placements is FALSE?

You own a bond with a face value of $1000 and a conversion ratio of 45.The conversion price is closest to:

An asset-backed security backed by home mortgages is a:

Which of the following statements is FALSE?

Asset securitization is the process of creating a(n):

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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 call is closest to:

In January 2010,the U.S.Treasury issued a $1000 par,five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2015,the CPI had decreased to 200.The coupon payment that was made in January 2015 is closest to:

Which of the following statements is FALSE?

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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