Question 1

A bond with a face value of $1,000 is convertible to common stock at a conversion ratio of 60. If the stock is currently trading at $8.20 per share, the value of the bond is probably closest in value to which of the following?

Accepted Answer

A)  less than $492.00 
B)  about $492.00 
C)  about $1,000 
D)  above $1666.67

Question 2

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

Question 3

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

Question 4

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

Question 5

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

Question 6

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

Question 7

A convertible bond has a face value of $1,000 and a conversion ratio of 50. This bond will sell at a premium when which of the following occurs?

Accepted Answer

A)  when market rates fall below the bond's coupon rate 
B)  when the firm's stock sells for more than $20 per share 
C)  when market rates rise above the bond's coupon rate 
D)  A and B

Question 8

The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.

Accepted Answer

A) True 
 B)False

Question 9

Covenants in a bond contract restrict the actions that management of a firm can take that would benefit the debtholders of a firm at the expense of the equity holders of the firm.

Accepted Answer

A) True 
 B)False

Question 10

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.

Question 11

Which of the following statements is FALSE?

Accepted Answer

A)  Almost all bonds that are issued today are registered bonds. 
B)  The trust company represents the bondholders and makes sure that the terms of the indenture are enforced. 
C)  For private placements, the prospectus must include an indenture, a formal contract between the bond issuer and a trust company. 
D)  In the case of default, the trust company represents the bondholders' interests.

Question 12

Tompkinson's PLC., a British company, issues a bond in U.S. dollars in the United States which is intended for U.S. investors. Which of the following best describes this bond?

Accepted Answer

A)  a domestic bond 
B)  a Eurobond 
C)  a global bond 
D)  a Yankee bond

Question 13

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

Question 14

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

Question 15

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.

Question 16

In which of the following situations would the yield to worst for a certain bond be that bond's yield to call?
I. The bond's coupon payments are high relative to market yields.
II. The bond price is at a discount.
III. The likelihood of the bond being called is high.

Accepted Answer

A)  I only 
B)  II only 
C)  I and II 
D)  I and III

Question 17

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%

Question 18

Gepps Cross Industries issues debt with a maturity of 25 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 debenture 
C)  an asset-backed bond 
D)  a mortgage bond

Question 19

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.

Question 20

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

Exam 15: Debt Financing

A bond with a face value of $1,000 is convertible to common stock at a conversion ratio of 60. If the stock is currently trading at $8.20 per share, the value of the bond is probably closest in value to which of the following?

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?

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 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?

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?

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?

A convertible bond has a face value of $1,000 and a conversion ratio of 50. This bond will sell at a premium when which of the following occurs?

The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.

Covenants in a bond contract restrict the actions that management of a firm can take that would benefit the debtholders of a firm at the expense of the equity holders of the firm.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Tompkinson's PLC., a British company, issues a bond in U.S. dollars in the United States which is intended for U.S. investors. Which of the following best describes this bond?

What is a call provision?

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

Which of the following statements is FALSE?

In which of the following situations would the yield to worst for a certain bond be that bond's yield to call? I. The bond's coupon payments are high relative to market yields. II. The bond price is at a discount. III. The likelihood of the bond being called is high.

Gepps Cross Industries issues debt with a maturity of 25 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?

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

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