Question 1

Which of the following statements about convertible bonds is (are) true?

Accepted Answer

A)  A convertible bond cannot have call feature. 
B)  A callable bond cannot have a convertible feature. 
C)  A convertible bond can also have call feature. 
D)  all of the above statements about convertible bonds are false 
A)  A convertible bond cannot have call feature. 
B)  A callable bond cannot have a convertible feature. 
C)  A convertible bond can also have call feature. 
D)  all of the above statements about convertible bonds are false

Question 2

Briefly explain project financing.

Accepted Answer

Project financing refers to debt financi

Question 3

Puttable provision in bonds allows:

Accepted Answer

A)  The issuer to call the bond at par on the coupon payment date 
B)  The holder to redeem the bond at par before maturity 
C)  The issuer to extend the maturity of the bond 
D)  The holder to extend the maturity of the bond 
A)  The issuer to call the bond at par on the coupon payment date 
B)  The holder to redeem the bond at par before maturity 
C)  The issuer to extend the maturity of the bond 
D)  The holder to extend the maturity of the bond

Question 4

A convertible bond is selling for $993. It has 15 years to maturity, $1,000 face value, and pays 8% coupon interest payments annually. Similar straight bonds (non-convertible) are priced to yield 8.5%. 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)  None of the above 
A)  $34.52 
B)  $93.00 
C)  $7.00 
D)  None of the above

Question 5

A loan guarantee provided by the government on a corporate bond acts like what kind of derivative security for the investor?

Accepted Answer

A)  Long put 
B)  Short put 
C)  Long call 
D)  Short call 
A)  Long put 
B)  Short put 
C)  Long call 
D)  Short call

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

A warrant holder is not entitled to vote but receives dividends.

Accepted Answer

A) True 
 B)False

Question 8

What happens to the value of a convertible bond as the total value of the firm increases?

Accepted Answer

A)  Goes up 
B)  Goes down 
C)  Stays the same 
D)  May go up or down 
A)  Goes up 
B)  Goes down 
C)  Stays the same 
D)  May go up or down

Question 9

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

Accepted Answer

This phrase is false for many reasons. W

Question 10

Reverse floaters are floating rate bonds that pay a higher rate of interest when other interest rates fall and a lower rate when other rates rise.

Accepted Answer

A) True 
 B)False

Question 11

The call policy that maximizes shareholder wealth is to call a bond issue when:

Accepted Answer

A)  The bond's price is above par 
B)  The bond's price is above par, but below the call price 
C)  The bond's price exceeds the call premium 
D)  The bond's price equals or exceeds the call price 
A)  The bond's price is above par 
B)  The bond's price is above par, but below the call price 
C)  The bond's price exceeds the call premium 
D)  The bond's price equals or exceeds the call price

Question 12

A "foreign" bond is a bond:

Accepted Answer

A)  Sold in the United States by a company in the USA 
B)  Sold to investors in the local market issued by a company from some other country 
C)  Sold in Europe by a company from the United States 
D)  None of the above 
A)  Sold in the United States by a company in the USA 
B)  Sold to investors in the local market issued by a company from some other country 
C)  Sold in Europe by a company from the United States 
D)  None of the above

Question 13

LYONs are bonds that are:
I. Callable
II. Puttable
III. Convertible
IV. Zero-coupon

Accepted Answer

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

Question 14

Which of the following bonds is typically not secured?

Accepted Answer

A)  Collateral trust bond 
B)  Mortgage bond 
C)  Debentures 
D)  Equipment trust certificate 
A)  Collateral trust bond 
B)  Mortgage bond 
C)  Debentures 
D)  Equipment trust certificate

Question 15

Briefly explain the provisions of a typical bond indenture.

Accepted Answer

An indenture is a written agreement betw

Question 16

The Alfa Co. has a 6% coupon bond outstanding that pays annual interest. Calculate the annual interest payment:

Accepted Answer

A)  $60 
B)  $30 
C)  $10 
D)  None of the above 
A)  $60 
B)  $30 
C)  $10 
D)  None of the above

Question 17

An 8% debenture has 5 years of call protection and is thereafter callable at 100%, except that it is non-refundable below interest cost. Which of the following statements is correct?

Accepted Answer

A)  The debenture may be called any time during the next 5 years 
B)  The debenture may not be called during the next 5 years 
C)  The lender has the option to demand early repayment 
D)  The bond should be called when the yield on similar non-callable bonds falls to 8% 
A)  The debenture may be called any time during the next 5 years 
B)  The debenture may not be called during the next 5 years 
C)  The lender has the option to demand early repayment 
D)  The bond should be called when the yield on similar non-callable bonds falls to 8%

Question 18

Generally, convertible bonds are issued by:

Accepted Answer

A)  smaller and more speculative firms 
B)  mature and profitable firms 
C)  very large firms 
D)  none of the above 
A)  smaller and more speculative firms 
B)  mature and profitable firms 
C)  very large firms 
D)  none of the above

Question 19

Briefly explain what is meant by "force conversion?"

Accepted Answer

If the conversion value is greater than

Question 20

A convertible bond issue by a firm can be thought of as:

Accepted Answer

A)  selling straight bonds 
B)  selling a call options 
C)  selling the common stock plus a put option 
D)  selling common stock 
A)  selling straight bonds 
B)  selling a call options 
C)  selling the common stock plus a put option 
D)  selling common stock

Exam 24: The Many Different Kinds of Debt

Which of the following statements about convertible bonds is (are) true?

Briefly explain project financing.

Puttable provision in bonds allows:

A loan guarantee provided by the government on a corporate bond acts like what kind of derivative security for the investor?

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

A warrant holder is not entitled to vote but receives dividends.

What happens to the value of a convertible bond as the total value of the firm increases?

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

Reverse floaters are floating rate bonds that pay a higher rate of interest when other interest rates fall and a lower rate when other rates rise.

The call policy that maximizes shareholder wealth is to call a bond issue when:

A "foreign" bond is a bond:

LYONs are bonds that are: I. Callable II. Puttable III. Convertible IV. Zero-coupon

Which of the following bonds is typically not secured?

Briefly explain the provisions of a typical bond indenture.

The Alfa Co. has a 6% coupon bond outstanding that pays annual interest. Calculate the annual interest payment:

An 8% debenture has 5 years of call protection and is thereafter callable at 100%, except that it is non-refundable below interest cost. Which of the following statements is correct?

Generally, convertible bonds are issued by:

Briefly explain what is meant by "force conversion?"

A convertible bond issue by a firm can be thought of as:

Goals and Governance of the Firm

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

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

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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