Question 1

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 D

Question 2

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 C

Question 3

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 B

Question 4

Clearview Corporation, a company that deals mainly with the financing and distribution of music, issues debt with a maturity of 15 years. In the case of bankruptcy, holders of this debt will have claim to the intellectual property of Clearview. 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 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 7

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 8

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 9

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 10

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 11

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 12

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 13

What are the implications of stronger bond covenants?

Accepted Answer

While equity holders may prefe

Question 14

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 maturity 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 15

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 16

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 17

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 18

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 19

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 20

Which of the following statements is FALSE?

Accepted Answer

A)  The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving. 
B)  When yields have risen, the issuer will not choose to exercise the call on the callable bond. 
C)  The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond. 
D)  A callable bond is relatively less attractive to the bondholder than the identical non-callable bond. 
A)  The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving. 
B)  When yields have risen, the issuer will not choose to exercise the call on the callable bond. 
C)  The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond. 
D)  A callable bond is relatively less attractive to the bondholder than the identical non-callable bond.

Exam 15: Debt Financing

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?

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

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 ________.

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

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Foreign bonds in the United States are known as ________.

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

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

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?

What are the implications of stronger bond covenants?

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?

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?

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

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?

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

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 .