Question 1

What is a bond's seniority?

Accepted Answer

A) the bondholder's priority in claiming assets in the event of default 
B) clauses restricting a company from issuing new debt 
C) the yield to maturity of a bond as compared to bonds of comparable rating 
D) the issue price of the bond as compared to its face value 
A) the bondholder's priority in claiming assets in the event of default 
B) clauses restricting a company from issuing new debt 
C) the yield to maturity of a bond as compared to bonds of comparable rating 
D) the issue price of the bond as compared to its face value

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) With registered bonds, on each coupon payment date, the bond issuer consults the firm's registered owners and mails each bondholder 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 $1,000. 
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 the firm's registered owners and mails each bondholder 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 $1,000. 
D) In a public offering, the indenture lays out the terms of the bond issue.

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

What are bond covenants?

Accepted Answer

Bond covenants are restrictive

Question 5

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 6

If a company issues both a straight bond and a convertible bond simultaneously, at par, then the straight bond will have a higher interest rate.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is FALSE regarding a call provision?

Accepted Answer

A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue. 
B) A call provision allows the issuer to repurchase the bonds at a predetermined price. 
C) The call price is generally set at or below, and expressed as a percentage of, the bond's face value. 
D) A call feature allows the issuer of the bond the right (but not the obligation)to retire all outstanding bonds on (or after)a specific date (the call date), for the call price. 
A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue. 
B) A call provision allows the issuer to repurchase the bonds at a predetermined price. 
C) The call price is generally set at or below, and expressed as a percentage of, the bond's face value. 
D) A call feature allows the issuer of the bond the right (but not the obligation)to retire all outstanding bonds on (or after)a specific date (the call date), for the call price.

Question 8

In terms of public offerings of bonds, what is an indenture?

Accepted Answer

A) a list of the duties of a trust company representing the bondholders' interests 
B) a memorandum that must be produced to describe the details of a bond offering 
C) a formal contract that specifies a firm's obligations to the bondholders 
D) a schedule of the fees charged by an underwriting company 
A) a list of the duties of a trust company representing the bondholders' interests 
B) a memorandum that must be produced to describe the details of a bond offering 
C) a formal contract that specifies a firm's obligations to the bondholders 
D) a schedule of the fees charged by an underwriting company

Question 9

A firm issues $225 million in straight bonds at an original issue discount of 2.0% and a coupon rate of 6%. The firm pays fees of 4% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is ________.

Accepted Answer

A) $200.925 million 
B) $211.5 million 
C) $222.075 million 
D) $232.65 million 
A) $200.925 million 
B) $211.5 million 
C) $222.075 million 
D) $232.65 million

Question 10

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $37.57. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

A) par 
B) par plus 7.5% 
C) par plus 9.7% 
D) par plus 11.2% 
A) par 
B) par plus 7.5% 
C) par plus 9.7% 
D) par plus 11.2%

Question 11

In terms of public offerings of bonds, what is a prospectus?

Accepted Answer

A) a list of the duties of a trust company representing the bondholders' interests 
B) a memorandum that must be produced to describe the details of a bond offering 
C) a formal contract that specifies a firm's obligations to the bondholders 
D) a schedule of the fees charged by an underwriting company 
A) a list of the duties of a trust company representing the bondholders' interests 
B) a memorandum that must be produced to describe the details of a bond offering 
C) a formal contract that specifies a firm's obligations to the bondholders 
D) a schedule of the fees charged by an underwriting company

Question 12

Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?

Accepted Answer

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

Question 13

The face value of bonds is denominated most commonly in which of the following standard increments?

Accepted Answer

A) $10 
B) $100 
C) $1,000 
D) $10,000 
A) $10 
B) $100 
C) $1,000 
D) $10,000

Question 14

The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.

Accepted Answer

A) True 
 B)False

Question 15

In which of the following situations would the yield to worst for a certain bond be that bond's yield to call?
I. The bond's coupon payments are high relative to market yields.
II. The bond price is at a discount.
III. The likelihood of the bond being called is high.

Accepted Answer

A) I only 
B) II only 
C) I and II 
D) I and III 
A) I only 
B) II only 
C) I and II 
D) I and III

Question 16

A bond has a face value of $15,000 and a conversion ratio of 220. The stock is currently trading at $39.20. What is the conversion price?

Accepted Answer

A) $3.41 
B) $13.64 
C) $40.91 
D) $68.18 
A) $3.41 
B) $13.64 
C) $40.91 
D) $68.18

Question 17

When would it make sense for a firm to call a bond issue?

Accepted Answer

A) when the market price of the bond exceeds the call price, and market interest rates are greater than the bond's coupon rate 
B) when the market price of the bond exceeds the call price, and market interest rates are less than the bond's coupon rate 
C) when the market price of the bond is less than the call price, and market interest rates are greater than the bond's coupon rate 
D) when the market price of the bond is less than the call price, and market interest rates are less than the bond's coupon rate 
A) when the market price of the bond exceeds the call price, and market interest rates are greater than the bond's coupon rate 
B) when the market price of the bond exceeds the call price, and market interest rates are less than the bond's coupon rate 
C) when the market price of the bond is less than the call price, and market interest rates are greater than the bond's coupon rate 
D) when the market price of the bond is less than the call price, and market interest rates are less than the bond's coupon rate

Question 18

A firm issues $500 million in straight bonds at par and a coupon rate of 5%. The firm pays fees of 2% 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) $466 million 
B) $490 million 
C) $539 million 
D) $514.5 million 
A) $466 million 
B) $490 million 
C) $539 million 
D) $514.5 million

Question 19

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

Accepted Answer

A) preferred stocks 
B) notes 
C) asset-backed bonds 
D) debentures 
A) preferred stocks 
B) notes 
C) asset-backed bonds 
D) debentures

Question 20

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.

Exam 15: Debt Financing

What is a bond's seniority?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

What are bond covenants?

Which of the following statements is FALSE?

If a company issues both a straight bond and a convertible bond simultaneously, at par, then the straight bond will have a higher interest rate.

Which of the following statements is FALSE regarding a call provision?

In terms of public offerings of bonds, what is an indenture?

A firm issues $225 million in straight bonds at an original issue discount of 2.0% and a coupon rate of 6%. The firm pays fees of 4% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is ________.

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $37.57. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

In terms of public offerings of bonds, what is a prospectus?

Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?

The face value of bonds is denominated most commonly in which of the following standard increments?

The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.

In which of the following situations would the yield to worst for a certain bond be that bond's yield to call? I. The bond's coupon payments are high relative to market yields. II. The bond price is at a discount. III. The likelihood of the bond being called is high.

A bond has a face value of $15,000 and a conversion ratio of 220. The stock is currently trading at $39.20. What is the conversion price?

When would it make sense for a firm to call a bond issue?

A firm issues $500 million in straight bonds at par and a coupon rate of 5%. The firm pays fees of 2% on the face value of the bonds. What is the net amount of funds that the debt issue will provide for the firm?

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

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

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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