Question 1

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 2

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 3

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 4

What are debentures?

Accepted Answer

Debentures are unsec

Question 5

A firm issues $300 million in straight bonds at an original issue discount of 0.50% and a coupon rate of 7%. The firm pays fees of 2.0% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Accepted Answer

A)  $248,625,000 
B)  $263,250,000 
C)  $277,875,000 
D)  $292,500,000 
A)  $248,625,000 
B)  $263,250,000 
C)  $277,875,000 
D)  $292,500,000

Question 6

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 7

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 8

What kind of corporate debt must be secured by real property?

Accepted Answer

A)  mortgage bonds 
B)  notes 
C)  asset-backed bonds 
D)  debentures 
A)  mortgage bonds 
B)  notes 
C)  asset-backed bonds 
D)  debentures

Question 9

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $4.70. If the bonds are called on this date, which of the following is the action most likely to be taken by a holder of bond of face value of $10,000?

Accepted Answer

A)  Convert the bond and accept shares with a value of $10,000. 
B)  Convert the bond and accept shares with a value of $9599.75. 
C)  Convert the bond and accept shares with a value of $10,105.00. 
D)  Accept the call price and receive $10,000. 
A)  Convert the bond and accept shares with a value of $10,000. 
B)  Convert the bond and accept shares with a value of $9599.75. 
C)  Convert the bond and accept shares with a value of $10,105.00. 
D)  Accept the call price and receive $10,000.

Question 10

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 11

What is an original issue discount bond?

Accepted Answer

An original issue di

Question 12

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 13

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 14

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 15

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 16

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 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

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 19

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.

Exam 15: Debt Financing

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

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 ________.

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?

What are debentures?

A firm issues $300 million in straight bonds at an original issue discount of 0.50% and a coupon rate of 7%. The firm pays fees of 2.0% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

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

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

What kind of corporate debt must be secured by real property?

A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $4.70. If the bonds are called on this date, which of the following is the action most likely to be taken by a holder of bond of face value of $10,000?

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 an original issue discount bond?

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?

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

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.

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?

Which of the following statements is FALSE?

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?

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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