Question 1

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

Accepted Answer

A) With a sinking fund,if a bond is trading 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. 
A) With a sinking fund,if a bond is trading 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. A

Question 2

Packaging a portfolio of financial securities and issuing an asset-backed security backed by this portfolio is known as:

Accepted Answer

A) asset securitization. 
B) revenue securitization. 
C) backup securitization. 
D) payment securitization. 
A) asset securitization. 
B) revenue securitization. 
C) backup securitization. 
D) payment securitization. A

Question 3

Treasury securities that are semiannual-paying coupon bonds with maturities longer than 10 years are called:

Accepted Answer

A) Treasury bonds. 
B) TIPS. 
C) Treasury bills. 
D) Treasury notes. 
A) Treasury bonds. 
B) TIPS. 
C) Treasury bills. 
D) Treasury notes. A

Question 4

Use the information for the question(s)below.
Luther Industries has just issued a callable (at 102)ten-year,8% coupon bond with semiannual coupon payments.The bond can be called at 102 in three years or anytime thereafter on a coupon payment date.It has a current price of 99.
-What is the Yield to Maturity (YTM)on this bond?

Accepted Answer

N = 20 (10 × 2)
PMT = 40 ($80/

Question 5

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. 
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 6

Which of the following statements regarding convertible bonds is FALSE?

Accepted Answer

A) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant. 
B) On the maturity date of the bond,the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is,the conversion price. 
C) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders. 
D) If the stock price is low so that the embedded warrant is deep out-of-the-money,the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision. 
A) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant. 
B) On the maturity date of the bond,the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is,the conversion price. 
C) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders. 
D) If the stock price is low so that the embedded warrant is deep out-of-the-money,the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision.

Question 7

Which of the following statements regarding municipal bonds is FALSE?

Accepted Answer

A) A single municipal bond issue will often contain a number of different maturity dates.Such issues are often called multi-muni bonds because the bonds are scheduled to mature over a multiple number of years. 
B) Revenue bonds are where the local government pledges specific revenues generated by projects that were initially financed by the bond issue. 
C) Municipal bonds are sometimes also referred to as tax-exempt bonds. 
D) Bonds backed by the full faith and credit of a local government are known as general obligation bonds and are not as secure as bonds backed by the full faith and credit of the federal government. 
A) A single municipal bond issue will often contain a number of different maturity dates.Such issues are often called multi-muni bonds because the bonds are scheduled to mature over a multiple number of years. 
B) Revenue bonds are where the local government pledges specific revenues generated by projects that were initially financed by the bond issue. 
C) Municipal bonds are sometimes also referred to as tax-exempt bonds. 
D) Bonds backed by the full faith and credit of a local government are known as general obligation bonds and are not as secure as bonds backed by the full faith and credit of the federal government.

Question 8

The largest sector of the asset-backed security market is the ________ market.

Accepted Answer

A) collateralized debt obligation 
B) mortgage-backed security 
C) real property-backed security 
D) double-barreled security 
A) collateralized debt obligation 
B) mortgage-backed security 
C) real property-backed security 
D) double-barreled security

Question 9

In January 2010,the U.S.Treasury issued a $1000 par,five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2015,the CPI had decreased to 200.The principal payment that was made in January 2015 is closest to:

Accepted Answer

A) $800. 
B) $1000. 
C) $1250. 
D) $1500. 
A) $800. 
B) $1000. 
C) $1250. 
D) $1500.

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) The registered bond system also facilitates tax collection because the government can easily keep track of all interest payments made. 
B) Asset-backed bonds and mortgage bonds are secured debt: Specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy. 
C) Notes typically have longer maturities (more than ten years)than debentures. 
D) Although the word "bond" is commonly used to mean any kind of debt security,technically a corporate bond must be secured. 
A) The registered bond system also facilitates tax collection because the government can easily keep track of all interest payments made. 
B) Asset-backed bonds and mortgage bonds are secured debt: Specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy. 
C) Notes typically have longer maturities (more than ten years)than debentures. 
D) Although the word "bond" is commonly used to mean any kind of debt security,technically a corporate bond must be secured.

Question 11

Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then its yield to call is closest to:

Accepted Answer

A) 3.4%. 
B) 6.0%. 
C) 6.5%. 
D) 6.8%. 
A) 3.4%. 
B) 6.0%. 
C) 6.5%. 
D) 6.8%.

Question 12

The cash flows of a collateralized debt obligation are usually divided into how many different branches?

Accepted Answer

A) 2 
B) 3 
C) 4 
D) 6 
A) 2 
B) 3 
C) 4 
D) 6

Question 13

Treasury securities that are standard coupon bonds where the outstanding principal is adjusted for inflation are called:

Accepted Answer

A) Treasury notes. 
B) Treasury bonds. 
C) TIPS. 
D) Treasury bills. 
A) Treasury notes. 
B) Treasury bonds. 
C) TIPS. 
D) Treasury bills.

Question 14

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 15

Which of the following statements regarding callable bonds 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 16

Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then its yield to maturity is closest to:

Accepted Answer

A) 3.4%. 
B) 6.0%. 
C) 6.5%. 
D) 6.8%. 
A) 3.4%. 
B) 6.0%. 
C) 6.5%. 
D) 6.8%.

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) With registered bonds,on each coupon payment date,the bond issuer consults its list of registered owners and mails each owner 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 $10,000. 
D) In a public offering,the indenture lays out the terms of the bond issue. 
A) With registered bonds,on each coupon payment date,the bond issuer consults its list of registered owners and mails each owner 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 $10,000. 
D) In a public offering,the indenture lays out the terms of the bond issue.

Question 18

When banks re-securitize other asset-backed securities,the new asset-backed security is known as a:

Accepted Answer

A) mortgage-backed security. 
B) double-barreled security. 
C) collateralized debt obligation. 
D) re-securitized security. 
A) mortgage-backed security. 
B) double-barreled security. 
C) collateralized debt obligation. 
D) re-securitized security.

Question 19

In January 2010,the U.S.Treasury issued a $1000 par,five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2015,the CPI had decreased to 200.The coupon payment that was made in January 2015 is closest to:

Accepted Answer

A) $20. 
B) $25. 
C) $30. 
D) $40. 
A) $20. 
B) $25. 
C) $30. 
D) $40.

Question 20

Rearden Metal has just issued a callable,$1000 par value,twenty-year,8% coupon bond with semiannual coupon payments.The bond can be called at par in five years or anytime thereafter on a coupon payment date.If the bond is currently trading for $1040.79,then its yield to maturity is closest to:

Accepted Answer

A) 3.8%. 
B) 7.0%. 
C) 7.6%. 
D) 8.0%. 
A) 3.8%. 
B) 7.0%. 
C) 7.6%. 
D) 8.0%.

Exam 24: Debt Financing

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

Packaging a portfolio of financial securities and issuing an asset-backed security backed by this portfolio is known as:

Treasury securities that are semiannual-paying coupon bonds with maturities longer than 10 years are called:

Which of the following statements is FALSE?

Which of the following statements regarding convertible bonds is FALSE?

Which of the following statements regarding municipal bonds is FALSE?

The largest sector of the asset-backed security market is the ________ market.

In January 2010,the U.S.Treasury issued a $1000 par,five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2015,the CPI had decreased to 200.The principal payment that was made in January 2015 is closest to:

Which of the following statements is FALSE?

Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then its yield to call is closest to:

The cash flows of a collateralized debt obligation are usually divided into how many different branches?

Treasury securities that are standard coupon bonds where the outstanding principal is adjusted for inflation are called:

Which of the following statements is FALSE?

Which of the following statements regarding callable bonds is FALSE?

Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then its yield to maturity is closest to:

Which of the following statements is FALSE?

When banks re-securitize other asset-backed securities,the new asset-backed security is known as a:

In January 2010,the U.S.Treasury issued a $1000 par,five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2015,the CPI had decreased to 200.The coupon payment that was made in January 2015 is closest to:

Rearden Metal has just issued a callable,$1000 par value,twenty-year,8% coupon bond with semiannual coupon payments.The bond can be called at par in five years or anytime thereafter on a coupon payment date.If the bond is currently trading for $1040.79,then its yield to maturity is closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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