Question 1

The trustee's job as agent for the bondholders is to:

Accepted Answer

A) represent the bondholders if the company defaults, manage any sinking fund, and see that
The indenture terms are obeyed. 
B) advise the company on debt disposition, manage any sinking fund, and minimize indenture
Covenants. 
C) represent the bondholders if the company defaults, call the bond issue and minimize
Indenture covenants. 
D) advise the company on debt disposition, call the bond issue and see that the terms of the
Indenture are obeyed. 
E) None of the above. 
A) represent the bondholders if the company defaults, manage any sinking fund, and see that
The indenture terms are obeyed. 
B) advise the company on debt disposition, manage any sinking fund, and minimize indenture
Covenants. 
C) represent the bondholders if the company defaults, call the bond issue and minimize
Indenture covenants. 
D) advise the company on debt disposition, call the bond issue and see that the terms of the
Indenture are obeyed. 
E) None of the above.

Question 2

Callable bonds may be issued in the real world because:

Accepted Answer

A) bondholders have lower tax rates than the corporation. 
B) management may have better information about future interest rates. 
C) interest rate risk of callable bonds are lower. 
D) callable bonds provide the option to reduce restrictive covenants. 
E) All of the above. 
A) bondholders have lower tax rates than the corporation. 
B) management may have better information about future interest rates. 
C) interest rate risk of callable bonds are lower. 
D) callable bonds provide the option to reduce restrictive covenants. 
E) All of the above.

Question 3

A ﬁrm wishes to issue a perpetual callable bond. The current interest rate is 7%. Next year, the interest rate will be 6.5% or 8.25% with equal probability. The bond is callable at €1,075, and it will
Be called if the interest rate drops to 6.5%.
If the coupon were set to €70 what would the bond sell for?

Accepted Answer

A) € 824.61 
B) € 898.82 
C) € 964.25 
D) €1,000.00 
E) €1,031.74 
A) € 824.61 
B) € 898.82 
C) € 964.25 
D) €1,000.00 
E) €1,031.74

Question 4

Bonds below BBB or Baa are called:

Accepted Answer

A) income bonds. 
B) deep-discount bonds. 
C) junk bonds. 
D) investment grade bonds. 
E) None of the above. 
A) income bonds. 
B) deep-discount bonds. 
C) junk bonds. 
D) investment grade bonds. 
E) None of the above.

Question 5

The written agreement between a corporation and the bondholder's representative is called:

Accepted Answer

A) the call provision. 
B) the collateral maintenance agreement (CM
A) . 
C) the indenture. 
D) the prospectus. 
E) None of the above. 
A) the call provision. 
B) the collateral maintenance agreement (CM
A) . 
C) the indenture. 
D) the prospectus. 
E) None of the above.

Question 6

Bonds that sell for much less than face value and pay no coupon are called:

Accepted Answer

A) original issue discount bonds. 
B) deep discount bonds. 
C) pure discount bonds. 
D) zero coupon bonds. 
E) All of the above. 
A) original issue discount bonds. 
B) deep discount bonds. 
C) pure discount bonds. 
D) zero coupon bonds. 
E) All of the above.

Question 7

A ﬁrm wishes to issue a perpetual callable bond. The current interest rate is 9%. Next year, there is a 40% chance that the interest rate will be 5% and a 60% chance that the rate will be 13.3333%. The
Bond is callable at €1,090, and it will be called if the interest rate drops to 5%.
What is the bond's value today if the coupon is set at €100?

Accepted Answer

A) €867.54 
B) €900.00 
C) €904.69 
D) €945.57 
E) €1000.00 
A) €867.54 
B) €900.00 
C) €904.69 
D) €945.57 
E) €1000.00

Question 8

A ﬁrm wishes to issue a perpetual callable bond. The current interest rate is 6%. Next year, there is a 30% chance that the interest rate will be 4.5% and a 70% chance that the rate will be 8.0%. The
Bond is callable at €1,000 plus an additional coupon payment and it will be called if the interest rate
Drops to 4.5%.
What is the bond's value today if the coupon is set at €70?

Accepted Answer

A) €935.75 
B) €946.70 
C) €950.00 
D) €980.00 
E) €982.55 
A) €935.75 
B) €946.70 
C) €950.00 
D) €980.00 
E) €982.55

Question 9

A deferred call protects the holders from:

Accepted Answer

A) an early call of the bonds. 
B) reinvesting at a lower rate of interest after a short investment period. 
C) bankruptcy or liquidation. 
D) Both A and C. 
E) Both A and B. 
A) an early call of the bonds. 
B) reinvesting at a lower rate of interest after a short investment period. 
C) bankruptcy or liquidation. 
D) Both A and C. 
E) Both A and B.

Question 10

Even though many bonds have deferred sinking funds, the sinking fund has the following effects on bondholders:

Accepted Answer

A) provide extra protection to bondholders as both an early warning system and perhaps
Some collateral cash. 
B) provides an option to the ﬁrm to buy bonds at the lower of market or face value. 
C) put the bondholders at added risk due to potential inability to meet sinking fund payments. 
D) Both A and B. 
E) Both B and C. 
A) provide extra protection to bondholders as both an early warning system and perhaps
Some collateral cash. 
B) provides an option to the ﬁrm to buy bonds at the lower of market or face value. 
C) put the bondholders at added risk due to potential inability to meet sinking fund payments. 
D) Both A and B. 
E) Both B and C.

Question 11

Privately placed loans are advantageous because:

Accepted Answer

A) there are usually fewer restrictive covenants. 
B) there is direct contact with the lender and renegotiations can be handled more easily. 
C) no SEC registration is necessary. 
D) Both B and C. 
E) Both A and C. 
A) there are usually fewer restrictive covenants. 
B) there is direct contact with the lender and renegotiations can be handled more easily. 
C) no SEC registration is necessary. 
D) Both B and C. 
E) Both A and C.

Question 12

A sinking fund is useful to a corporation because:

Accepted Answer

A) the corporation does not have to worry about paying the bondholders. 
B) it provides the corporation with the option to buy the bonds back 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. 
E) None of the above. 
A) the corporation does not have to worry about paying the bondholders. 
B) it provides the corporation with the option to buy the bonds back 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. 
E) None of the above.

Question 13

Most public debentures are issued by _________ companies and are _______ .

Accepted Answer

A) utility and railroad; secured by a pledge on speciﬁc assets 
B) industrial and ﬁnance; unsecured general obligations 
C) utility and railroad; unsecured general obligations 
D) industrial and ﬁnance; secured by a pledge on speciﬁc assets 
E) None of the above. 
A) utility and railroad; secured by a pledge on speciﬁc assets 
B) industrial and ﬁnance; unsecured general obligations 
C) utility and railroad; unsecured general obligations 
D) industrial and ﬁnance; secured by a pledge on speciﬁc assets 
E) None of the above.

Question 14

The popularity of ﬂoating rate bonds is likely tied to protection against:

Accepted Answer

A) default risk. 
B) marketability risk. 
C) inﬂation risk. 
D) operational risk. 
E) business risk. 
A) default risk. 
B) marketability risk. 
C) inﬂation risk. 
D) operational risk. 
E) business risk.

Question 15

The length of time debt remains outstanding with some unpaid balance is called the:

Accepted Answer

A) funded period. 
B) sinking fund period. 
C) deferred call period. 
D) maturity. 
E) None of the above. 
A) funded period. 
B) sinking fund period. 
C) deferred call period. 
D) maturity. 
E) None of the above.

Question 16

Income bonds provide the same tax advantage as regular coupon paying bonds but have an advantage of:

Accepted Answer

A) not being in default if a coupon payment is omitted due to a lack of corporate income. 
B) lacking the "Smell of Death" from ﬁnancial distress. 
C) being easier to sell in the marketplace given the lower risk of default. 
D) not having any agency costs between bondholders and shareholders. 
E) None of the above. 
A) not being in default if a coupon payment is omitted due to a lack of corporate income. 
B) lacking the "Smell of Death" from ﬁnancial distress. 
C) being easier to sell in the marketplace given the lower risk of default. 
D) not having any agency costs between bondholders and shareholders. 
E) None of the above.

Question 17

A ﬁrm wishes to issue a perpetual callable bond. The current interest rate is 6%. Next year, there is a 30% chance that the interest rate will be 4.5% and a 70% chance that the rate will be 8.0%. The
Bond is callable at €1,000 plus an additional coupon payment and it will be called if the interest rate
Drops to 4.5%.
If the bond is priced at €1,000, what is the cost to the ﬁrm of the call provision?

Accepted Answer

A) €70.00 
B) €75.62 
C) €140.00 
D) €198.40 
E) €260.33 
A) €70.00 
B) €75.62 
C) €140.00 
D) €198.40 
E) €260.33

Question 18

A ﬁrm wishes to issue a perpetual callable bond. The current interest rate is 9%. Next year, there is a 40% chance that the interest rate will be 5% and a 60% chance that the rate will be 13.3333%. The
Bond is callable at €1,090, and it will be called if the interest rate drops to 5%.
If the bond is priced at €1,000, what is the cost to the ﬁrm of the call provision?

Accepted Answer

A) €118.67 
B) €292.43 
C) €300.00 
D) €318.56 
E) €350.00 
A) €118.67 
B) €292.43 
C) €300.00 
D) €318.56 
E) €350.00

Question 19

A ﬁrm wishes to issue a perpetual callable bond. The current interest rate is 7%. Next year, the interest rate will be 6.5% or 8.25% with equal probability. The bond is callable at €1,075, and it will
Be called if the interest rate drops to 6.5%.
What is the cost of the call provision to the ﬁrm if the bond sells for €1,000 today?

Accepted Answer

A) €-71.43 
B) € 0.00 
C) € 77.43 
D) €178.57 
E) None of the above. 
A) €-71.43 
B) € 0.00 
C) € 77.43 
D) €178.57 
E) None of the above.

Question 20

A bearer bond has the disadvantage(s) of:

Accepted Answer

A) being non-transferable if lost or stolen. 
B) ownership of the bonds are recorded in the company's books. 
C) no direct communication as it is held by an unidentiﬁed owner. 
D) having to remit the coupon to the issuer (company) to collect. 
E) diﬃculty in tax collection on interest when the holder is unknown. 
A) being non-transferable if lost or stolen. 
B) ownership of the bonds are recorded in the company's books. 
C) no direct communication as it is held by an unidentiﬁed owner. 
D) having to remit the coupon to the issuer (company) to collect. 
E) diﬃculty in tax collection on interest when the holder is unknown.

Exam 20: Debt Financing

The trustee's job as agent for the bondholders is to:

Callable bonds may be issued in the real world because:

Bonds below BBB or Baa are called:

The written agreement between a corporation and the bondholder's representative is called:

Bonds that sell for much less than face value and pay no coupon are called:

A deferred call protects the holders from:

Even though many bonds have deferred sinking funds, the sinking fund has the following effects on bondholders:

Privately placed loans are advantageous because:

A sinking fund is useful to a corporation because:

Most public debentures are issued by _________ companies and are _______ .

The popularity of ﬂoating rate bonds is likely tied to protection against:

The length of time debt remains outstanding with some unpaid balance is called the:

Income bonds provide the same tax advantage as regular coupon paying bonds but have an advantage of:

A bearer bond has the disadvantage(s) of:

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Factor Models and the Arbitrage Pricing Theory

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

Most public debentures are issued by ___ companies and are _ .