Question 1

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 2

What are callable bonds?

Accepted Answer

A call feature allows the issu

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) When bond yields have increased, by exercising the call on the callable bond and then immediately refinancing, the issuer can lower its borrowing costs. 
B) To understand how call provisions affect the price of a bond, we first need to consider when an issuer will exercise its right to call the bond. 
C) If the call provision offers a cheaper way to retire the bonds the issuer will forgo the option of purchasing the bonds in the open market and call the bonds instead. 
D) An issuer can always retire one of its bonds early by repurchasing the bond in the open market. 
A) When bond yields have increased, by exercising the call on the callable bond and then immediately refinancing, the issuer can lower its borrowing costs. 
B) To understand how call provisions affect the price of a bond, we first need to consider when an issuer will exercise its right to call the bond. 
C) If the call provision offers a cheaper way to retire the bonds the issuer will forgo the option of purchasing the bonds in the open market and call the bonds instead. 
D) An issuer can always retire one of its bonds early by repurchasing the bond in the open market.

Question 4

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 5

Supreme Industries issues the following announcement to holders of an issue of callable, convertible notes: "Prior to the close of business on May 17, 2008, holders may convert their Notes into shares of Supreme Industries common stock at 33.25 shares of Supreme Industries common stock per $1,000 principal amount of the Notes. Cash will be paid in lieu of fractional shares. On April 16, 2008, the last reported sale price of Supreme Industries common stock on the NYSE was $21.60 per share."
If on May 17, Supreme Industries is trading as $24.60, what is the value of common stock a holder of a $1,000 note would receive?

Accepted Answer

A) $664.20 
B) $701.10 
C) $817.95 
D) $739.85 
A) $664.20 
B) $701.10 
C) $817.95 
D) $739.85

Question 6

Bond covenants tend to increase a bond issuer's borrowing costs.

Accepted Answer

A) True 
 B)False

Question 7

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 8

A company issues a callable (at par)20-year, 5% 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 $102 per $100 of face value. What is the yield to maturity of this bond when it is released?

Accepted Answer

A) 2.40% 
B) 4.84% 
C) 5.60% 
D) 6.66% 
A) 2.40% 
B) 4.84% 
C) 5.60% 
D) 6.66%

Question 9

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 10

What is yield to worst?

Accepted Answer

Yield to worst is qu

Question 11

Which of the following is NOT an advantage of private debt over public debt?

Accepted Answer

A) It is liquid. 
B) It need not be registered with the U.S. Securities and Exchange Commission. 
C) It has to have interest and principal payments made upon it. 
D) It does not dilute the ownership of a firm. 
A) It is liquid. 
B) It need not be registered with the U.S. Securities and Exchange Commission. 
C) It has to have interest and principal payments made upon it. 
D) It does not dilute the ownership of a firm.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) If a bond issuer fails to live up to any covenant, the issuer goes into bankruptcy immediately. 
B) The stronger the covenants in the bond contract, the less likely an 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 a bond issuer fails to live up to any covenant, the issuer goes into bankruptcy immediately. 
B) The stronger the covenants in the bond contract, the less likely an 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 13

Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy, holders of this debt may claim the property held by Athelstone Realty. Which of the following best describes this type of corporate debt?

Accepted Answer

A) a note 
B) a debenture 
C) a mortgage bond 
D) an asset-backed bond 
A) a note 
B) a debenture 
C) a mortgage bond 
D) an asset-backed bond

Question 14

Smithfield Enterprises issues debt with a maturity of 7 years. In the case of bankruptcy, holders of this debt may only claim those assets of the firm that are not already pledged as collateral on other debt. Which of the following best describes this type of corporate debt?

Accepted Answer

A) a note 
B) a mortgage bond 
C) an asset-backed bond 
D) unsecured debt 
A) a note 
B) a mortgage bond 
C) an asset-backed bond 
D) unsecured debt

Question 15

A firm issues $200 million in straight bonds at par and a coupon rate of 7%. The firm pays fees of 4.0% on the face value of the bonds. What is the net amount of funds that the debt issue will provide for the firm?

Accepted Answer

A) $182.4 million 
B) $211 million 
C) $192 million 
D) $202 million 
A) $182.4 million 
B) $211 million 
C) $192 million 
D) $202 million

Question 16

In which of the following situations does the value of a convertible bond exceed the value of straight debt or equity by the greatest amount?

Accepted Answer

A) when the price of the stock is higher than the issuing price 
B) when the price of the stock is close to the conversion price 
C) when the price of the stock is low 
D) when the price of the stock much lower than the conversion price 
A) when the price of the stock is higher than the issuing price 
B) when the price of the stock is close to the conversion price 
C) when the price of the stock is low 
D) when the price of the stock much lower than the conversion price

Question 17

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

Question 18

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $15.14. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

A) par plus 3.29% 
B) par plus 3.89% 
C) par plus 4.49% 
D) par plus 5.98% 
A) par plus 3.29% 
B) par plus 3.89% 
C) par plus 4.49% 
D) par plus 5.98%

Question 19

Which of the following terms best describes a loan where a larger line of credit or lower interest rate has been obtained by providing collateral to back that loan?

Accepted Answer

A) a term loan 
B) a revolving line of credit 
C) an asset-backed line of credit 
D) a private placement 
A) a term loan 
B) a revolving line of credit 
C) an asset-backed line of credit 
D) a private placement

Question 20

A company issues a callable (at par)20-year, 5% 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 $102 per $100 of face value. What is the yield to call of this bond when it is released?

Accepted Answer

A) 2.94% 
B) 4.11% 
C) 5.60% 
D) 6.66% 
A) 2.94% 
B) 4.11% 
C) 5.60% 
D) 6.66%

Exam 15: Debt Financing

Which of the following statements is FALSE?

What are callable bonds?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Bond covenants tend to increase a bond issuer's borrowing costs.

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

Which of the following statements is FALSE?

What is yield to worst?

Which of the following is NOT an advantage of private debt over public debt?

Which of the following statements is FALSE?

Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy, holders of this debt may claim the property held by Athelstone Realty. Which of the following best describes this type of corporate debt?

Smithfield Enterprises issues debt with a maturity of 7 years. In the case of bankruptcy, holders of this debt may only claim those assets of the firm that are not already pledged as collateral on other debt. Which of the following best describes this type of corporate debt?

A firm issues $200 million in straight bonds at par and a coupon rate of 7%. The firm pays fees of 4.0% on the face value of the bonds. What is the net amount of funds that the debt issue will provide for the firm?

In which of the following situations does the value of a convertible bond exceed the value of straight debt or equity by the greatest amount?

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 firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $15.14. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Which of the following terms best describes a loan where a larger line of credit or lower interest rate has been obtained by providing collateral to back that loan?

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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