Question 1

Briefly explain what is meant by force conversion.

Accepted Answer

If the conversion value is greater than

Question 2

Which of the following bonds is typically secured?

Accepted Answer

A) Sinking fund debenture 
B) Mortgage bond 
C) Floating rate note 
D) Eurobond 
A) Sinking fund debenture 
B) Mortgage bond 
C) Floating rate note 
D) Eurobond

Question 3

Loan guarantees are valuable methods for propping up the value of debt without up-front cash.

Accepted Answer

A) True 
 B)False

Question 4

Briefly explain project financing.

Accepted Answer

Project financing refers to debt financi

Question 5

Explain why the following phrase is true or false. "Government loan guarantees are a costless method for the government to help troubled firms."

Accepted Answer

This phrase is false for many reasons. W

Question 6

If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be

Accepted Answer

A) callable. 
B) convertible. 
C) protected. 
D) None of the options are correct. 
A) callable. 
B) convertible. 
C) protected. 
D) None of the options are correct.

Question 7

According to SEC Rule 144A,

Accepted Answer

A) bonds issued through private placements can be bought and sold by institutional investors. 
B) SEC registration is not needed for privately placed bonds. 
C) SEC registration is required of all securities issued in the United States. 
D) bonds issued through private placements can be bought and sold by institutional investors and SEC registration is not needed for privately placed bonds. 
A) bonds issued through private placements can be bought and sold by institutional investors. 
B) SEC registration is not needed for privately placed bonds. 
C) SEC registration is required of all securities issued in the United States. 
D) bonds issued through private placements can be bought and sold by institutional investors and SEC registration is not needed for privately placed bonds.

Question 8

A convertible bond is selling for $993. It has 15 years to maturity, $1,000 face value, and pays 8 percent coupon interest payments annually. Similar straight bonds (nonconvertible)are priced to yield 8.5 percent. The conversion ratio is 20. The stock is currently selling for $45. Calculate the convertible bond's option value.

Accepted Answer

A) $34.52 
B) $93.00 
C) $7.00 
D) $58.48 
A) $34.52 
B) $93.00 
C) $7.00 
D) $58.48

Question 9

A sinking fund may be useful to a corporation because

Accepted Answer

A) the corporation does not have to worry about paying the bondholders. 
B) it may provide the corporation with the option to acquire the bonds at the lower of face value or market price. 
C) the payments to the sinking fund are not necessary when the firm is in financial difficulty. 
D) they are simple and easy to monitor. 
A) the corporation does not have to worry about paying the bondholders. 
B) it may provide the corporation with the option to acquire the bonds at the lower of face value or market price. 
C) the payments to the sinking fund are not necessary when the firm is in financial difficulty. 
D) they are simple and easy to monitor.

Question 10

Briefly explain the term conversion premium.

Accepted Answer

The conversion premium is the difference

Question 11

The Alfa Co. has a 12 percent bond outstanding on a $1,000 face value bond that pays interest on February 1st and July 1st. Today is March 1st and you are planning to purchase one of these bonds. How much will you pay in accrued interest?

Accepted Answer

A) $10 
B) $20 
C) $30 
D) $60 
A) $10 
B) $20 
C) $30 
D) $60

Question 12

The bonds that are sold to local investors issued by a firm from another country are called

Accepted Answer

A) private placement. 
B) foreign bonds. 
C) junk bonds. 
D) investment-grade bonds. 
A) private placement. 
B) foreign bonds. 
C) junk bonds. 
D) investment-grade bonds.

Question 13

Issuing convertible debt makes sense whenever investors have difficulty estimating the risk of the company's bond.

Accepted Answer

A) True 
 B)False

Question 14

The term Yankee bond refers to any bond sold in the United States.

Accepted Answer

A) True 
 B)False

Question 15

A Yankee bond will be denominated in

Accepted Answer

A) U.S. dollars. 
B) British pounds. 
C) Japanese yen. 
D) Euros. 
A) U.S. dollars. 
B) British pounds. 
C) Japanese yen. 
D) Euros.

Question 16

Firms often bundle up a group of assets and then sell the cash flows from these assets in the form of securities. They are called

Accepted Answer

A) debentures. 
B) subordinated issues. 
C) asset-backed securities. 
D) mortgage bonds. 
A) debentures. 
B) subordinated issues. 
C) asset-backed securities. 
D) mortgage bonds.

Question 17

Briefly explain the provisions of a typical bond indenture.

Accepted Answer

An indenture is a written agreement betw

Question 18

Explain why firms issue convertible debt.

Accepted Answer

Smaller and more risky firms generally i

Question 19

The Alfa Co. has a 6 percent coupon bond outstanding that pays annual interest. Calculate the annual interest payment on a $1,000 face value bond.

Accepted Answer

A) $60 
B) $30 
C) $10 
D) $120 
A) $60 
B) $30 
C) $10 
D) $120

Question 20

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because

Accepted Answer

A) the effects of risk are opposite on the two value components and tend to cancel each other out. 
B) if the firm is high risk, the option premium will be higher while the straight bond value is fixed. 
C) only risky companies issued these instruments. 
D) the equity value is dependent on current risks only, not the future risk at conversion. 
A) the effects of risk are opposite on the two value components and tend to cancel each other out. 
B) if the firm is high risk, the option premium will be higher while the straight bond value is fixed. 
C) only risky companies issued these instruments. 
D) the equity value is dependent on current risks only, not the future risk at conversion.

Exam 24: The Many Different Kinds of Debt

Briefly explain what is meant by force conversion.

Which of the following bonds is typically secured?

Loan guarantees are valuable methods for propping up the value of debt without up-front cash.

Briefly explain project financing.

Explain why the following phrase is true or false. "Government loan guarantees are a costless method for the government to help troubled firms."

If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be

According to SEC Rule 144A,

A sinking fund may be useful to a corporation because

Briefly explain the term conversion premium.

The Alfa Co. has a 12 percent bond outstanding on a $1,000 face value bond that pays interest on February 1st and July 1st. Today is March 1st and you are planning to purchase one of these bonds. How much will you pay in accrued interest?

The bonds that are sold to local investors issued by a firm from another country are called

Issuing convertible debt makes sense whenever investors have difficulty estimating the risk of the company's bond.

The term Yankee bond refers to any bond sold in the United States.

A Yankee bond will be denominated in

Firms often bundle up a group of assets and then sell the cash flows from these assets in the form of securities. They are called

Briefly explain the provisions of a typical bond indenture.

Explain why firms issue convertible debt.

The Alfa Co. has a 6 percent coupon bond outstanding that pays annual interest. Calculate the annual interest payment on a $1,000 face value bond.

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because

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

Filters

The Alfa Co. has a 12 percent bond outstanding on a $1,000 face value bond that pays interest on February 1^st and July 1^st. Today is March 1^st and you are planning to purchase one of these bonds. How much will you pay in accrued interest?