Question 1

Many times warrants may be issued on their own and do not have to be issued in conjunction with other securities.

Accepted Answer

A) True 
 B)False  True

Question 2

What are the three elements of convertible bond value?

Accepted Answer

The value of a convertible bond is determined by straight bond value, conversion value, and the option value. Value of a convertible bond = higher of [straight bond value, conversion value] + option value. The straight bond value and the conversion values provide the floor for the convertible bond value.

Question 3

The following are various types of secured debt:
I.mortgage bonds;
II.collateral trust bonds;
III.equipment trust certificate;
IV.debentures

Accepted Answer

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

Question 4

The following are some of the complications associated with call provisions of bonds:
I.The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt.
II.The call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders.
III.There may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond.
IV.There are costs and delays associated with calling and reissuing debt.

Accepted Answer

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

Question 5

Floating price convertibles are convertible debt where bondholders can convert into a fixed value of shares.

Accepted Answer

A) True 
 B)False

Question 6

The term bearer bond refers to bonds that bear little interest via coupon payments.

Accepted Answer

A) True 
 B)False

Question 7

A bond-warrant package has different effects on the firm's cash flow and capital structure than a convertible bond.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following are included in the typical bond indenture?
I.the basic terms of the bond;
II.details of the protective covenants;
III.sinking fund arrangements;
IV.call provisions

Accepted Answer

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

Question 9

A type of bond that has the advantage of secrecy of ownership, but has the disadvantage of ownership not recorded by the firm's registrar, is a

Accepted Answer

A) registered bond. 
B) premium bond. 
C) par bond. 
D) bearer bond. 
A) registered bond. 
B) premium bond. 
C) par bond. 
D) bearer bond.

Question 10

Which of the following is not an example of an affirmative (positive)covenant?

Accepted Answer

A) Requirement to maintain a minimum level of working capital 
B) Requirement to furnish bondholders with a copy of the firm's annual accounts 
C) Requirement to limit dividends to net income 
D) Requirement to maintain a minimum level of net worth 
A) Requirement to maintain a minimum level of working capital 
B) Requirement to furnish bondholders with a copy of the firm's annual accounts 
C) Requirement to limit dividends to net income 
D) Requirement to maintain a minimum level of net worth

Question 11

Briefly explain the restrictive covenants in a bond indenture.

Accepted Answer

The restrictive covenants, also called p

Question 12

A negative pledge clause states that the company may grant an exclusive lien or claim on any of its assets.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following provisions would often be included in the indenture for a first-mortgage bond?

Accepted Answer

A) A limit on officer salaries 
B) A negative pledge clause 
C) A limit on new issues of subordinated debt 
D) A limit on the amount of senior debt that can be issued 
A) A limit on officer salaries 
B) A negative pledge clause 
C) A limit on new issues of subordinated debt 
D) A limit on the amount of senior debt that can be issued

Question 14

A 5 percent debenture (face value = $1,000)pays interest on June 30 and December 31. It is callable at a price of 105 percent together with accrued interest. Suppose the company decides to call the bonds on September 30. What amount must it pay for each bond?

Accepted Answer

A) $1,000.00 
B) $1,037.50 
C) $1,062.50 
D) $1,050.00 
A) $1,000.00 
B) $1,037.50 
C) $1,062.50 
D) $1,050.00

Question 15

Generally, convertible bonds are issued by

Accepted Answer

A) smaller and more speculative firms. 
B) mature and profitable firms. 
C) very large firms. 
D) the U.S. government. 
A) smaller and more speculative firms. 
B) mature and profitable firms. 
C) very large firms. 
D) the U.S. government.

Question 16

Warrants are sometimes issued
I.with private placement bonds;
II.to investment bankers as compensation;
III.to creditors in the event of bankruptcy;
IV.to common stockholders

Accepted Answer

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

Question 17

A $1,000 face value bond can be exchanged any time for 25 shares of stock. Then the conversion price is

Accepted Answer

A) $40. 
B) $25. 
C) $100. 
D) $975. 
A) $40. 
B) $25. 
C) $100. 
D) $975.

Question 18

PIKs are

Accepted Answer

A) pay-in-kind bonds. 
B) pay interest kicker bonds. 
C) pay interest in Krugerrands. 
D) pay interest in kroner. 
A) pay-in-kind bonds. 
B) pay interest kicker bonds. 
C) pay interest in Krugerrands. 
D) pay interest in kroner.

Question 19

All else equal, which of the following features will increase the value of a convertible bond?

Accepted Answer

A) The risk-free interest rate is higher. 
B) The conversion ratio is higher. 
C) The conversion price is lower. 
D) All of the features increase the value. 
A) The risk-free interest rate is higher. 
B) The conversion ratio is higher. 
C) The conversion price is lower. 
D) All of the features increase the value.

Question 20

What are LYONs?

Accepted Answer

LYONs (liquid yield option not

Exam 24: The Many Different Kinds of Debt

Many times warrants may be issued on their own and do not have to be issued in conjunction with other securities.

What are the three elements of convertible bond value?

The following are various types of secured debt: I.mortgage bonds; II.collateral trust bonds; III.equipment trust certificate; IV.debentures

Floating price convertibles are convertible debt where bondholders can convert into a fixed value of shares.

The term bearer bond refers to bonds that bear little interest via coupon payments.

A bond-warrant package has different effects on the firm's cash flow and capital structure than a convertible bond.

Which of the following are included in the typical bond indenture? I.the basic terms of the bond; II.details of the protective covenants; III.sinking fund arrangements; IV.call provisions

A type of bond that has the advantage of secrecy of ownership, but has the disadvantage of ownership not recorded by the firm's registrar, is a

Which of the following is not an example of an affirmative (positive)covenant?

Briefly explain the restrictive covenants in a bond indenture.

A negative pledge clause states that the company may grant an exclusive lien or claim on any of its assets.

Which of the following provisions would often be included in the indenture for a first-mortgage bond?

A 5 percent debenture (face value = $1,000)pays interest on June 30 and December 31. It is callable at a price of 105 percent together with accrued interest. Suppose the company decides to call the bonds on September 30. What amount must it pay for each bond?

Generally, convertible bonds are issued by

Warrants are sometimes issued I.with private placement bonds; II.to investment bankers as compensation; III.to creditors in the event of bankruptcy; IV.to common stockholders

A $1,000 face value bond can be exchanged any time for 25 shares of stock. Then the conversion price is

PIKs are

All else equal, which of the following features will increase the value of a convertible bond?

What are LYONs?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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