Question 1

What is a call provision?

Accepted Answer

A)  the periodic repurchasing of issued bonds through a sinking fund by the issuer 
B)  an option to the issuer to repurchase the bonds at a predetermined price 
C)  the option for the bondholder to convert each bond owned into a fixed number of shares of common stock 
D)  a clause in a bond contract that restricts the actions of the issuer that might harm the interests of the bondholders 
A)  the periodic repurchasing of issued bonds through a sinking fund by the issuer 
B)  an option to the issuer to repurchase the bonds at a predetermined price 
C)  the option for the bondholder to convert each bond owned into a fixed number of shares of common stock 
D)  a clause in a bond contract that restricts the actions of the issuer that might harm the interests of the bondholders

Question 2

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 3

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 4

Which of the following statements regarding sinking fund provisions is FALSE?

Accepted Answer

A)  With a sinking fund, if a bond is trading at below its face value, because the bonds are repurchased at par, the decision as to which bonds to repurchase is made by lottery. 
B)  With a sinking fund, instead of repaying the entire principal balance on the maturity date, the company makes regular payments into a sinking fund administered by a trustee over the life of the bond. 
C)  Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund. 
D)  Because the sinking fund allows the issuer to repurchase the bonds at par, the option to accelerate the payments is another form of call provision. 
A)  With a sinking fund, if a bond is trading at below its face value, because the bonds are repurchased at par, the decision as to which bonds to repurchase is made by lottery. 
B)  With a sinking fund, instead of repaying the entire principal balance on the maturity date, the company makes regular payments into a sinking fund administered by a trustee over the life of the bond. 
C)  Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund. 
D)  Because the sinking fund allows the issuer to repurchase the bonds at par, the option to accelerate the payments is another form of call provision.

Question 5

When a callable bond sells at a discount, the bond's coupon rate is ________ than market yields and the yield to worst is the yield to ________.

Accepted Answer

A)  higher, call 
B)  lower, maturity 
C)  lower, call 
D)  high, maturity 
A)  higher, call 
B)  lower, maturity 
C)  lower, call 
D)  high, maturity

Question 6

When a callable bond sells at a premium, the likelihood of a call is ________ and the yield to worst is the yield to ________.

Accepted Answer

A)  high, call 
B)  low, call 
C)  low, maturity 
D)  high, maturity 
A)  high, call 
B)  low, call 
C)  low, maturity 
D)  high, maturity

Question 7

Which of the following statements about bonds that are both convertible and callable is NOT true?

Accepted Answer

A)  If these bonds are called by the issuer, the holder can choose to convert them rather than let them be called. 
B)  Prior to maturity, the value of such bonds will be greater than the shares of stock that bond can be converted into. 
C)  The decision to be made by the bondholders when the bonds are called is the same as they would have to make at maturity. 
D)  By calling the bonds, the issuer can force bondholders to decide to convert at a time of the issuer's choice. 
A)  If these bonds are called by the issuer, the holder can choose to convert them rather than let them be called. 
B)  Prior to maturity, the value of such bonds will be greater than the shares of stock that bond can be converted into. 
C)  The decision to be made by the bondholders when the bonds are called is the same as they would have to make at maturity. 
D)  By calling the bonds, the issuer can force bondholders to decide to convert at a time of the issuer's choice.

Question 8

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

Question 9

A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Which of the following is a type of call provision?

Accepted Answer

A)  sinking fund 
B)  balloon payment 
C)  conversion feature 
D)  indenture 
A)  sinking fund 
B)  balloon payment 
C)  conversion feature 
D)  indenture

Question 12

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%

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 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 14

What are debentures?

Accepted Answer

Debentures are unsec

Question 15

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 16

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 17

A firm issues $170 million in straight bonds at par and a coupon rate of 8.5%. The firm pays fees of 2% 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)  $150 million 
B)  $158 million 
C)  $167 million 
D)  $175 million 
A)  $150 million 
B)  $158 million 
C)  $167 million 
D)  $175 million

Question 18

The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in the bond contract.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Exam 15: Debt Financing

What is a call provision?

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?

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?

Which of the following statements regarding sinking fund provisions is FALSE?

When a callable bond sells at a discount, the bond's coupon rate is ________ than market yields and the yield to worst is the yield to ________.

When a callable bond sells at a premium, the likelihood of a call is ________ and the yield to worst is the yield to ________.

Which of the following statements about bonds that are both convertible and callable is NOT true?

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 bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.

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

Which of the following is a type of call provision?

What are debentures?

A covenant that restricts a company from making loans or otherwise providing credit is best viewed as a restriction on which of the following?

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.

A firm issues $170 million in straight bonds at par and a coupon rate of 8.5%. The firm pays fees of 2% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is ________.

The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in the bond contract.

What is a bond's seniority?

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?

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

Filters

When a callable bond sells at a discount, the bond's coupon rate is than market yields and the yield to worst is the yield to .

When a callable bond sells at a premium, the likelihood of a call is and the yield to worst is the yield to .