Question 1

Which of the following statements regarding the yield calculation of a callable bond 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.

Question 2

Which of the following statements regarding bond call provisions 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. 
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 3

An asset-backed security backed by home mortgages is a:

Accepted Answer

A) mortgage-backed security. 
B) primary home-backed security. 
C) bond-backed security. 
D) real estate-backed security. 
A) mortgage-backed security. 
B) primary home-backed security. 
C) bond-backed security. 
D) real estate-backed security.

Question 4

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

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 5

What kind of unsecured corporate debt has a maturity of less than 10 years?

Accepted Answer

A) Mortgage bonds 
B) Asset-backed bonds 
C) Debentures 
D) Notes 
A) Mortgage bonds 
B) Asset-backed bonds 
C) Debentures 
D) Notes

Question 6

Which of the following statements regarding bonds is FALSE?

Accepted Answer

A) If the issuer fails to live up to any covenant,the issuer goes into bankruptcy. 
B) The stronger the covenants in the bond contract,the less likely the issuer will default on the bond,and so the lower the interest rate investors will require to buy the bond. 
C) Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds. 
D) Bond agreements often contain covenants that restrict the ability of management to pay dividends. 
A) If the issuer fails to live up to any covenant,the issuer goes into bankruptcy. 
B) The stronger the covenants in the bond contract,the less likely the issuer will default on the bond,and so the lower the interest rate investors will require to buy the bond. 
C) Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds. 
D) Bond agreements often contain covenants that restrict the ability of management to pay dividends.

Question 7

In January 2010,the U.S.Treasury issued a $1000 par,ten-year,inflation-indexed note with a coupon of 4%.On the date of issue,the consumer price index (CPI)was 200.By January 2020,the CPI had increased to 300.The coupon payment that is made in January 2020 is closest to:

Accepted Answer

A) $20. 
B) $30. 
C) $40. 
D) $50. 
A) $20. 
B) $30. 
C) $40. 
D) $50.

Question 8

Bonds issued by a local entity,denominated in the local currency,traded in a local market,but purchased by foreigners are called:

Accepted Answer

A) domestic bonds. 
B) Yankee bonds. 
C) Eurobonds. 
D) foreign bonds. 
A) domestic bonds. 
B) Yankee bonds. 
C) Eurobonds. 
D) foreign bonds.

Question 9

Which of the following statements regarding bonds is FALSE?

Accepted Answer

A) By including more covenants,issuers increase their costs of borrowing. 
B) Once bonds are issued,equity holders have an incentive to increase dividends at the expense of debt holders. 
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital. 
D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative NPV actions that exploit debt holders,then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants. 
A) By including more covenants,issuers increase their costs of borrowing. 
B) Once bonds are issued,equity holders have an incentive to increase dividends at the expense of debt holders. 
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital. 
D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative NPV actions that exploit debt holders,then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants.

Question 10

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 call 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%.

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) In the case of a Treasury note or Treasury bond offering,the stop-out yield determines the coupon of the bond and then all bidders pay the discounted value for the bond or note. 
B) All competitive bidders submit sealed bids in terms of yields and the amount of bonds they are willing to purchase. 
C) In the past,the Treasury has issued bonds (often called long bonds)with maturities of 30 years and 20 years. 
D) Noncompetitive bidders (usually individuals)just submit the amount of bonds they wish to purchase and are guaranteed to have their orders filled at the auction. 
A) In the case of a Treasury note or Treasury bond offering,the stop-out yield determines the coupon of the bond and then all bidders pay the discounted value for the bond or note. 
B) All competitive bidders submit sealed bids in terms of yields and the amount of bonds they are willing to purchase. 
C) In the past,the Treasury has issued bonds (often called long bonds)with maturities of 30 years and 20 years. 
D) Noncompetitive bidders (usually individuals)just submit the amount of bonds they wish to purchase and are guaranteed to have their orders filled at the auction.

Question 12

Suppose that in January 2001,the U.S.Treasury issued a ten-year inflation-indexed note with a coupon of 3 1/2%.On the date of issue,the consumer price index (CPI)was 175.1.In January 2006,the CPI had increased to 198.3.What coupon payment was made on this bond in January 2006?

Accepted Answer

Between January 2001 and January 2006 th

Question 13

Which of the following statements regarding private placements is FALSE?

Accepted Answer

A) A private placement is a bond issue that does not trade on a public market but rather is sold to a small group of investors. 
B) Privately placed debt need not conform to the same standards as public debt;as a consequence,it can be tailored to the particular situation. 
C) In 1990,the U.S.Securities and Exchange Commission (SE
C) issued Rule 144A,which significantly decreased the liquidity of certain privately placed debt. 
D) Because a private placement does not need to be registered,it is less costly to issue. 
A) A private placement is a bond issue that does not trade on a public market but rather is sold to a small group of investors. 
B) Privately placed debt need not conform to the same standards as public debt;as a consequence,it can be tailored to the particular situation. 
C) In 1990,the U.S.Securities and Exchange Commission (SE
C) issued Rule 144A,which significantly decreased the liquidity of certain privately placed debt. 
D) Because a private placement does not need to be registered,it is less costly to issue.

Question 14

Which of the following statements regarding the private debt market is FALSE?

Accepted Answer

A) Private debt has the advantage that it avoids the cost of registration. 
B) Bank loans are an example of private debt,debt that is not publicly traded. 
C) Private debt has the disadvantage of being illiquid. 
D) The public debt market is larger than the private debt market. 
A) Private debt has the advantage that it avoids the cost of registration. 
B) Bank loans are an example of private debt,debt that is not publicly traded. 
C) Private debt has the disadvantage of being illiquid. 
D) The public debt market is larger than the private debt market.

Question 15

Mortgages that do not meet certain credit criteria and have a high probability of default are known as ________ mortgages.

Accepted Answer

A) prepayment 
B) pooled 
C) underwater 
D) subprime 
A) prepayment 
B) pooled 
C) underwater 
D) subprime

Question 16

Use the information for the question(s)below.
KT Enterprises has just issued a callable (at par)fifteen-year,7% coupon bond with semiannual coupon payments.The bond can be called at par in five years or anytime thereafter on a coupon payment date.It has a current price of 101.
-What is the Yield to Maturity (YTM)on this bond?

Accepted Answer

N = 30 (15 × 2)
PMT = 35 ($70/

Question 17

Which of the following statements is FALSE regarding a call provision?

Accepted Answer

A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue. 
B) A call provision allows the issuer to repurchase the bonds at a predetermined price. 
C) The call price is generally set at or below,and expressed as a percentage of,the bond's face value. 
D) A call feature allows the issuer of the bond the right (but not the obligation)to retire all outstanding bonds on (or after)a specific date (the call date),for the call price. 
A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue. 
B) A call provision allows the issuer to repurchase the bonds at a predetermined price. 
C) The call price is generally set at or below,and expressed as a percentage of,the bond's face value. 
D) A call feature allows the issuer of the bond the right (but not the obligation)to retire all outstanding bonds on (or after)a specific date (the call date),for the call price.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) Mortgage-backed securities,such as GNMAs,are pass-through securities.That is,each security is backed by an underlying portfolio or pool of mortgages. 
B) The Government National Mortgage Association (GNMA,or "Ginnie Mae")is an example of an enterprise backed by the government,but owned privately;the Student Loan Marketing Association ("Sallie Mae")is an example of a government-sponsored agency,a wholly owned subsidiary of the U.S.government. 
C) Sovereign debt is debt issued by national governments. 
D) Agency securities are issued by agencies of the U.S.government or by U.S.government-sponsored enterprises. 
A) Mortgage-backed securities,such as GNMAs,are pass-through securities.That is,each security is backed by an underlying portfolio or pool of mortgages. 
B) The Government National Mortgage Association (GNMA,or "Ginnie Mae")is an example of an enterprise backed by the government,but owned privately;the Student Loan Marketing Association ("Sallie Mae")is an example of a government-sponsored agency,a wholly owned subsidiary of the U.S.government. 
C) Sovereign debt is debt issued by national governments. 
D) Agency securities are issued by agencies of the U.S.government or by U.S.government-sponsored enterprises.

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) Global bonds combine the features of domestic,foreign,and Eurobonds,and are offered for sale in several different markets simultaneously. 
B) In a leveraged buyout (LBO),a group of private investors purchases all the equity of a public corporation. 
C) A term loan is a bank loan that lasts for a specific term. 
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued. 
A) Global bonds combine the features of domestic,foreign,and Eurobonds,and are offered for sale in several different markets simultaneously. 
B) In a leveraged buyout (LBO),a group of private investors purchases all the equity of a public corporation. 
C) A term loan is a bank loan that lasts for a specific term. 
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued.

Question 20

You own a bond with a face value of $1000 and a conversion price of $40.The conversion ratio is closest to:

Accepted Answer

A) 15. 
B) 20. 
C) 25. 
D) 40. 
A) 15. 
B) 20. 
C) 25. 
D) 40.

Exam 24: Debt Financing

Which of the following statements regarding the yield calculation of a callable bond is FALSE?

Which of the following statements regarding bond call provisions is FALSE?

An asset-backed security backed by home mortgages is a:

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

What kind of unsecured corporate debt has a maturity of less than 10 years?

Which of the following statements regarding bonds is FALSE?

In January 2010,the U.S.Treasury issued a $1000 par,ten-year,inflation-indexed note with a coupon of 4%.On the date of issue,the consumer price index (CPI)was 200.By January 2020,the CPI had increased to 300.The coupon payment that is made in January 2020 is closest to:

Bonds issued by a local entity,denominated in the local currency,traded in a local market,but purchased by foreigners are called:

Which of the following statements regarding bonds is FALSE?

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 call is closest to:

Which of the following statements is FALSE?

Suppose that in January 2001,the U.S.Treasury issued a ten-year inflation-indexed note with a coupon of 3 1/2%.On the date of issue,the consumer price index (CPI)was 175.1.In January 2006,the CPI had increased to 198.3.What coupon payment was made on this bond in January 2006?

Which of the following statements regarding private placements is FALSE?

Which of the following statements regarding the private debt market is FALSE?

Mortgages that do not meet certain credit criteria and have a high probability of default are known as ________ mortgages.

Which of the following statements is FALSE regarding a call provision?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

You own a bond with a face value of $1000 and a conversion price of $40.The conversion ratio 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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