Question 1

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 2

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 3

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 4

Which of the following would be most likely to have the lowest price?

Accepted Answer

A)  a straight senior bond 
B)  a convertible senior bond 
C)  a callable subordinated bond 
D)  a straight subordinated bond 
A)  a straight senior bond 
B)  a convertible senior bond 
C)  a callable subordinated bond 
D)  a straight subordinated bond

Question 5

What are notes?

Accepted Answer

Notes are unsecured

Question 6

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 7

Which of the following statements is FALSE?

Accepted Answer

A)  The registered bond system facilitates tax collection because the government can easily keep track of all interest payments made. 
B)  Asset-backed bonds and mortgage bonds are secured debt, and specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy. 
C)  Notes typically have longer maturities (more than ten years) than debentures. 
D)  Although the word "bond" is commonly used to mean any kind of debt security, technically a corporate bond must be secured. 
A)  The registered bond system facilitates tax collection because the government can easily keep track of all interest payments made. 
B)  Asset-backed bonds and mortgage bonds are secured debt, and specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy. 
C)  Notes typically have longer maturities (more than ten years) than debentures. 
D)  Although the word "bond" is commonly used to mean any kind of debt security, technically a corporate bond must be secured.

Question 8

What is yield to maturity?

Accepted Answer

Yield to maturity is the annua

Question 9

Private debt cannot be in the form of bonds.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is usually a form of public debt?

Accepted Answer

A)  a preferred stock 
B)  a bank loan 
C)  a bond issue 
D)  a revolving line of credit 
A)  a preferred stock 
B)  a bank loan 
C)  a bond issue 
D)  a revolving line of credit

Question 11

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 12

What are callable bonds?

Accepted Answer

A call feature allows the issu

Question 13

What is an original issue discount bond?

Accepted Answer

An original issue di

Question 14

Which of the following best describes a bond that is issued by a local entity and traded in a local market, but may be purchased by foreigners?

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 15

What is yield to call?

Accepted Answer

For callable bonds, yield to c

Question 16

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 17

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 worst of this bond when it is released?

Accepted Answer

A)  0.60% 
B)  1.92% 
C)  4.00% 
D)  5.47% 
A)  0.60% 
B)  1.92% 
C)  4.00% 
D)  5.47%

Question 18

By definition, a preferred stock is a form of debt security.

Accepted Answer

A) True 
 B)False

Question 19

A callable bond will typically have a ________ yield than an otherwise identical bond without a call feature because ________.

Accepted Answer

A)  lower, the firm loses flexibility with a callable bond 
B)  higher, the firm loses flexibility with a callable bond 
C)  lower, the option to call a bond is valuable 
D)  higher, the option to call a bond is valuable 
A)  lower, the firm loses flexibility with a callable bond 
B)  higher, the firm loses flexibility with a callable bond 
C)  lower, the option to call a bond is valuable 
D)  higher, the option to call a bond is valuable

Question 20

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.

Exam 15: Debt Financing

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 $37.57. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Which of the following statements is FALSE?

Which of the following would be most likely to have the lowest price?

What are notes?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

What is yield to maturity?

Private debt cannot be in the form of bonds.

Which of the following is usually a form of public debt?

Which of the following statements is FALSE?

What are callable bonds?

What is an original issue discount bond?

Which of the following best describes a bond that is issued by a local entity and traded in a local market, but may be purchased by foreigners?

What is yield to call?

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?

By definition, a preferred stock is a form of debt security.

A callable bond will typically have a ________ yield than an otherwise identical bond without a call feature because ________.

Which of the following statements 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

Filters

A callable bond will typically have a yield than an otherwise identical bond without a call feature because .