Question 1

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  True

Question 2

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

Accepted Answer

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

Question 3

Which of the following statements is FALSE?

Accepted Answer

A)  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. 
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)  By including more covenants, issuers increase their costs of borrowing. 
A)  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. 
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)  By including more covenants, issuers increase their costs of borrowing. D

Question 4

Which of the following statements is FALSE?

Accepted Answer

A)  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. 
B)  Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders. 
C)  A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant. 
D)  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. 
A)  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. 
B)  Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders. 
C)  A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant. 
D)  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.

Question 5

The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in the bond contract.

Accepted Answer

A) True 
 B)False

Question 6

What are notes?

Accepted Answer

Notes are unsecured

Question 7

A firm issues $250 million in straight bonds at an original issue discount of 1.5% and a coupon rateof 6%. The firm pays fees of 3% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Accepted Answer

A)  $225 million 
B)  $250 million 
C)  $239 million 
D)  $261 million 
A)  $225 million 
B)  $250 million 
C)  $239 million 
D)  $261 million

Question 8

Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?

Accepted Answer

A)  a debenture 
B)  a foreign bond 
C)  a mortgage bond 
D)  an asset-backed bond 
A)  a debenture 
B)  a foreign bond 
C)  a mortgage bond 
D)  an asset-backed bond

Question 9

What is a bond's seniority?

Accepted Answer

A)  the yield to maturity of a bond as compared to bonds of comparable rating 
B)  the issue price of the bond as compared to its face value 
C)  clauses restricting a company from issuing new debt 
D)  the bondholder's priority in claiming assets in the event of default 
A)  the yield to maturity of a bond as compared to bonds of comparable rating 
B)  the issue price of the bond as compared to its face value 
C)  clauses restricting a company from issuing new debt 
D)  the bondholder's priority in claiming assets in the event of default

Question 10

A bond with a face value of $1000 is convertible to ordinary shares at a conversion ratio of 60. If the shares are 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)  about $492 
B)  about $1000 
C)  less than $492 
D)  above $1666 
A)  about $492 
B)  about $1000 
C)  less than $492 
D)  above $1666

Question 11

A company issues a callable (at par) 20-year, 5% 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 $102 per $100 of face value. What is the yield to maturity of this bond when it is released?

Accepted Answer

A)  6.66% 
B)  5.60% 
C)  4.84% 
D)  2.40% 
A)  6.66% 
B)  5.60% 
C)  4.84% 
D)  2.40%

Question 12

What is a call provision?

Accepted Answer

A)  the periodic repurchasing of issued bonds through a sinking fund by the issuer 
B)  the option for the bondholder to convert each bond owned into a fixed number of ordinary shares 
C)  a clause in a bond contract that restricts the actions of the issuer that might harm the interests of the bondholders 
D)  an option to the issuer to repurchase the bonds at a predetermined price 
A)  the periodic repurchasing of issued bonds through a sinking fund by the issuer 
B)  the option for the bondholder to convert each bond owned into a fixed number of ordinary shares 
C)  a clause in a bond contract that restricts the actions of the issuer that might harm the interests of the bondholders 
D)  an option to the issuer to repurchase the bonds at a predetermined price

Question 13

A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.

Accepted Answer

A) True 
 B)False

Question 14

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)  4.71% 
B)  2.73% 
C)  5.66% 
D)  1.40% 
A)  4.71% 
B)  2.73% 
C)  5.66% 
D)  1.40%

Question 15

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

Accepted Answer

A)  a revolving line of credit 
B)  a private placement 
C)  a bond issue 
D)  a bank loan 
A)  a revolving line of credit 
B)  a private placement 
C)  a bond issue 
D)  a bank loan

Question 16

If a company issues both a straight bond and a convertible bond simultaneously, at par, then the straight bond will have a higher interest rate.

Accepted Answer

A) True 
 B)False

Question 17

What are callable bonds?

Accepted Answer

A call feature allows the issu

Question 18

What is an original issue discount bond?

Accepted Answer

An original issue di

Question 19

A firm issues $500 million in straight bonds at par and a coupon rate of 5%. The firm pays fees of 3% 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)  $485 million 
B)  $500 million 
C)  $505 million 
D)  $475 million 
A)  $485 million 
B)  $500 million 
C)  $505 million 
D)  $475 million

Question 20

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)  an asset-backed bond 
B)  unsecured debt 
C)  a mortgage bond 
D)  a note 
A)  an asset-backed bond 
B)  unsecured debt 
C)  a mortgage bond 
D)  a note

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.

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in the bond contract.

What are notes?

A firm issues $250 million in straight bonds at an original issue discount of 1.5% and a coupon rateof 6%. The firm pays fees of 3% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?

What is a bond's seniority?

A bond with a face value of $1000 is convertible to ordinary shares at a conversion ratio of 60. If the shares are currently trading at $8.20 per share, the value of the bond is probably closest in value to which of the following?

What is a call provision?

A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.

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

If a company issues both a straight bond and a convertible bond simultaneously, at par, then the straight bond will have a higher interest rate.

What are callable bonds?

What is an original issue discount bond?

A firm issues $500 million in straight bonds at par and a coupon rate of 5%. The firm pays fees of 3% 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?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bond Valuation

Share Valuation: the Dividend-Discount Model

Investment Decision Rules

Fundamentals of Capital Budgeting

Share Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Capital

Capital Structure

Payout Policy

Filters

Exam 15: Debt Financing

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.

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in the bond contract.

What are notes?

A firm issues $250 million in straight bonds at an original issue discount of 1.5% and a coupon rateof 6%. The firm pays fees of 3% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?

What is a bond's seniority?

A bond with a face value of $1000 is convertible to ordinary shares at a conversion ratio of 60. If the shares are currently trading at $8.20 per share, the value of the bond is probably closest in value to which of the following?

What is a call provision?

A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.

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

If a company issues both a straight bond and a convertible bond simultaneously, at par, then the straight bond will have a higher interest rate.

What are callable bonds?

What is an original issue discount bond?

A firm issues $500 million in straight bonds at par and a coupon rate of 5%. The firm pays fees of 3% 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?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bond Valuation

Share Valuation: the Dividend-Discount Model

Investment Decision Rules

Fundamentals of Capital Budgeting

Share Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Capital

Capital Structure

Payout Policy

Filters