Question 1

Why do the issuers of bonds not seek to minimize the strength and number of covenants in a bond agreement?

Accepted Answer

A) More covenants favor the equity holders that managers work for. 
B) More covenants can increase the flexibility of the company issuing bonds. 
C) More covenants lower the interest rate investors will require to buy the bond. 
D) Less covenants force the company to renegotiate the terms of the bond if they are broken. 
A) More covenants favor the equity holders that managers work for. 
B) More covenants can increase the flexibility of the company issuing bonds. 
C) More covenants lower the interest rate investors will require to buy the bond. 
D) Less covenants force the company to renegotiate the terms of the bond if they are broken. C

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) The registered bond system facilitates tax collection because the government can easily keep track of all interest payments made. 
B) Asset-backed bonds and mortgage bonds are secured debt, and specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy. 
C) Notes typically have longer maturities (more than ten years)than debentures. 
D) Although the word "bond" is commonly used to mean any kind of debt security, technically a corporate bond must be secured. 
A) The registered bond system facilitates tax collection because the government can easily keep track of all interest payments made. 
B) Asset-backed bonds and mortgage bonds are secured debt, and specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy. 
C) Notes typically have longer maturities (more than ten years)than debentures. 
D) Although the word "bond" is commonly used to mean any kind of debt security, technically a corporate bond must be secured. C

Question 3

A convertible bond has a face value of $1,000 and a conversion ratio of 50. This bond will sell at a premium when which of the following occurs?

Accepted Answer

A) when market rates fall below the bond's coupon rate 
B) when the firm's stock sells for more than $20 per share 
C) when market rates rise above the bond's coupon rate 
D) A and B 
A) when market rates fall below the bond's coupon rate 
B) when the firm's stock sells for more than $20 per share 
C) when market rates rise above the bond's coupon rate 
D) A and B D

Question 4

What are the implications of stronger bond covenants?

Accepted Answer

While equity holders may prefe

Question 5

A company issues a callable (at par)five-year, 7% 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 $110 per $100 of face value. What is the yield to maturity of this bond when it is released?

Accepted Answer

A) 1.40% 
B) 2.80% 
C) 4.71% 
D) 5.66% 
A) 1.40% 
B) 2.80% 
C) 4.71% 
D) 5.66%

Question 6

A company issues a callable (at par)five-year, 7% 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 $110 per $100 of face value. What is the yield to worst of this bond when it is released?

Accepted Answer

A) 1.40% 
B) 2.73% 
C) 3.00% 
D) 4.71% 
A) 1.40% 
B) 2.73% 
C) 3.00% 
D) 4.71%

Question 7

What kind of unsecured corporate debt has a maturity of less than ten 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

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

Question 9

A company issues a 20-year, callable bond at par with a(n)9% annual coupon payments. The bond can be called at par in three years or any time after that on a coupon payment date. The call price is $110 per $100 of face value. What is the yield to call?

Accepted Answer

A) 7% 
B) 15% 
C) 9% 
D) 12% 
A) 7% 
B) 15% 
C) 9% 
D) 12%

Question 10

A company issues a callable (at par)five-year, 7% 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 $110 per $100 of face value. What is the yield to call of this bond when it is released?

Accepted Answer

A) 1.40% 
B) 2.73% 
C) 4.71% 
D) 5.66% 
A) 1.40% 
B) 2.73% 
C) 4.71% 
D) 5.66%

Question 11

Eurobonds issued in the United Kingdom could NOT be issued in which of the following denominations?

Accepted Answer

A) U.S. dollars 
B) euros 
C) pounds sterling 
D) yen 
A) U.S. dollars 
B) euros 
C) pounds sterling 
D) yen

Question 12

A firm issues $300 million in ten-year bonds with an annual coupon rate of 8%. The firm uses a sinking fund to repurchase 10% of the bond issue on each coupon payment date. What payment must they make on the tenth and final coupon payment?

Accepted Answer

A) $32 million 
B) $38 million 
C) $43 million 
D) $54 million 
A) $32 million 
B) $38 million 
C) $43 million 
D) $54 million

Question 13

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $27.24. What is the minimum conversion ratio that would make a bondholder prefer to convert rather than accept the call price?

Accepted Answer

A) 33 shares per $1,000 principal amount 
B) 36 shares per $1,000 principal amount 
C) 38 shares per $1,000 principal amount 
D) 42 shares per $1,000 principal amount 
A) 33 shares per $1,000 principal amount 
B) 36 shares per $1,000 principal amount 
C) 38 shares per $1,000 principal amount 
D) 42 shares per $1,000 principal amount

Question 14

Which of the following is an advantage of a public bond issue over private placement?

Accepted Answer

A) It can be tailored to a particular situation. 
B) It is less costly to issue. 
C) It does not need to be registered with the SEC. 
D) It is freely tradable on the bond market. 
A) It can be tailored to a particular situation. 
B) It is less costly to issue. 
C) It does not need to be registered with the SEC. 
D) It is freely tradable on the bond market.

Question 15

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 European currency. 
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 European currency.

Question 16

By definition, a preferred stock is a form of debt security.

Accepted Answer

A) True 
 B)False

Question 17

Convertible bonds have a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock.

Accepted Answer

A) True 
 B)False

Question 18

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 19

A firm issues $300 million in straight bonds at an original issue discount of 0.50% and a coupon rate of 7%. The firm pays fees of 2.0% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Accepted Answer

A) $248,625,000 
B) $263,250,000 
C) $277,875,000 
D) $292,500,000 
A) $248,625,000 
B) $263,250,000 
C) $277,875,000 
D) $292,500,000

Question 20

Which of the following best describes an international bond that is not denominated in the local currency of the country in which it is issued?

Accepted Answer

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

Exam 15: Debt Financing

Why do the issuers of bonds not seek to minimize the strength and number of covenants in a bond agreement?

Which of the following statements is FALSE?

A convertible bond has a face value of $1,000 and a conversion ratio of 50. This bond will sell at a premium when which of the following occurs?

What are the implications of stronger bond covenants?

What kind of unsecured corporate debt has a maturity of less 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?

A company issues a 20-year, callable bond at par with a(n)9% annual coupon payments. The bond can be called at par in three years or any time after that on a coupon payment date. The call price is $110 per $100 of face value. What is the yield to call?

Eurobonds issued in the United Kingdom could NOT be issued in which of the following denominations?

A firm issues $300 million in ten-year bonds with an annual coupon rate of 8%. The firm uses a sinking fund to repurchase 10% of the bond issue on each coupon payment date. What payment must they make on the tenth and final coupon payment?

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $27.24. What is the minimum conversion ratio that would make a bondholder prefer to convert rather than accept the call price?

Which of the following is an advantage of a public bond issue over private placement?

Which of the following statements is FALSE?

By definition, a preferred stock is a form of debt security.

Convertible bonds have a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock.

Which of the following statements is FALSE?

A firm issues $300 million in straight bonds at an original issue discount of 0.50% and a coupon rate of 7%. The firm pays fees of 2.0% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Which of the following best describes an international bond that is not denominated in the local currency of the country in which it is issued?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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