Question 1

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 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

A bond has a face value of $100 and a conversion ratio of 25. What is the conversion price?

Accepted Answer

A)  $0.25 
B)  $2.50 
C)  $4.00 
D)  $25.00 
A)  $0.25 
B)  $2.50 
C)  $4.00 
D)  $25.00

Question 6

What are the implications of stronger bond covenants?

Accepted Answer

While equity holders may prefe

Question 7

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 8

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

Question 9

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 10

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 11

If a bond covenant is not met, then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Foreign bonds in the United States are known as ________.

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 14

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 15

A company issues a 10-year, callable bond at par with 8% annual coupon payments. The bond can be called at par in one year after issue or any time after that on a coupon payment date. The call price is $104 per $100 of face value. What is the yield to call if this bond is called in one year?

Accepted Answer

A)  7% 
B)  12% 
C)  10% 
D)  4% 
A)  7% 
B)  12% 
C)  10% 
D)  4%

Question 16

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 17

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $6.00. 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 12% 
C)  par plus 8% 
D)  par plus 1.2% 
A)  par 
B)  par plus 12% 
C)  par plus 8% 
D)  par plus 1.2%

Question 18

What kind of corporate debt has a maturity of less than ten 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 19

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 20

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.

Exam 15: Debt Financing

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?

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

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?

A bond has a face value of $100 and a conversion ratio of 25. What is the conversion price?

What are the implications of stronger bond covenants?

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?

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

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

If a bond covenant is not met, then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.

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.

Foreign bonds in the United States are known as ________.

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?

A company issues a 10-year, callable bond at par with 8% annual coupon payments. The bond can be called at par in one year after issue or any time after that on a coupon payment date. The call price is $104 per $100 of face value. What is the yield to call if this bond is called in one year?

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 $6.00. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

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

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?

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

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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