Question 1

Which of the following statements concerning the use of sinking funds to repurchase a bond issue is NOT true?

Accepted Answer

A)  A firm should make regular payments into a sinking fund administered by a trustee over the life of the bond. 
B)  A firm can reduce the amount of outstanding debt without affecting the cash flows of the remaining bonds. 
C)  Payments from the sinking fund are used to repurchase bonds. 
D)  Bonds can be issued with a sinking fund provision or a call provision, but not both. 
A)  A firm should make regular payments into a sinking fund administered by a trustee over the life of the bond. 
B)  A firm can reduce the amount of outstanding debt without affecting the cash flows of the remaining bonds. 
C)  Payments from the sinking fund are used to repurchase bonds. 
D)  Bonds can be issued with a sinking fund provision or a call provision, but not both. D

Question 2

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 A

Question 3

What are bond covenants?

Accepted Answer

Bond covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds.

Question 4

Tompkinson's PLC., a British company, issues a bond in U.S. dollars in the United States which is intended for U.S. investors. Which of the following best describes this bond?

Accepted Answer

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

Question 5

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 6

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 7

Gepps Cross Industries issues debt with a maturity of 25 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 debenture 
C)  an asset-backed bond 
D)  a mortgage bond 
A)  a note 
B)  a debenture 
C)  an asset-backed bond 
D)  a mortgage bond

Question 8

A bond with a face value of $1,000 is convertible to common stock at a conversion ratio of 60. If the stock is currently trading at $8.20 per share, the value of the bond is probably closest in value to which of the following?

Accepted Answer

A)  less than $492.00 
B)  about $492.00 
C)  about $1,000 
D)  above $1666.67 
A)  less than $492.00 
B)  about $492.00 
C)  about $1,000 
D)  above $1666.67

Question 9

A firm issues $525 million in straight bonds at an original issue discount of 2% 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)  $580 million 
B)  $554.4 million 
C)  $529 million 
D)  $504 million 
A)  $580 million 
B)  $554.4 million 
C)  $529 million 
D)  $504 million

Question 10

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 11

A bond has a face value of $10,000 and a conversion ratio of 530. The stock is currently trading at $16.50. What is the conversion price?

Accepted Answer

A)  $7.55 
B)  $16.50 
C)  $18.87 
D)  $53.00 
A)  $7.55 
B)  $16.50 
C)  $18.87 
D)  $53.00

Question 12

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 13

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 14

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 15

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 16

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 17

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 worst of this bond when it is released?

Accepted Answer

A)  2.94% 
B)  4.84% 
C)  5.60% 
D)  6.66% 
A)  2.94% 
B)  4.84% 
C)  5.60% 
D)  6.66%

Question 18

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 19

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 20

A company issues a callable (at par) ten-year, 6% 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 $104 per $100 of face value. What is the yield to call of this bond when it is released?

Accepted Answer

A)  0.60% 
B)  1.50% 
C)  1.92% 
D)  5.47% 
A)  0.60% 
B)  1.50% 
C)  1.92% 
D)  5.47%

Exam 15: Debt Financing

Which of the following statements concerning the use of sinking funds to repurchase a bond issue is NOT true?

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

What are bond covenants?

Tompkinson's PLC., a British company, issues a bond in U.S. dollars in the United States which is intended for U.S. investors. Which of the following best describes this bond?

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

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.

Gepps Cross Industries issues debt with a maturity of 25 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 bond with a face value of $1,000 is convertible to common stock at a conversion ratio of 60. If the stock is currently trading at $8.20 per share, the value of the bond is probably closest in value to which of the following?

A firm issues $525 million in straight bonds at an original issue discount of 2% 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?

Which of the following statements is FALSE?

A bond has a face value of $10,000 and a conversion ratio of 530. The stock is currently trading at $16.50. What is the conversion price?

Which of the following statements is FALSE?

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 ________.

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

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?

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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