Question 1

The public debt market is substantially larger than the private debt market.

Accepted Answer

A) True 
 B)False  False

Question 2

A callable bond will typically have a(n)________ yield than an otherwise identical bond without a call feature because ________.

Accepted Answer

A)  lower, the firm loses flexibility with a callable bond 
B)  higher, the firm loses flexibility with a callable bond 
C)  lower, the option to call a bond is valuable 
D)  higher, the option to call a bond is valuable 
E)  identical, the call feature is without value 
A)  lower, the firm loses flexibility with a callable bond 
B)  higher, the firm loses flexibility with a callable bond 
C)  lower, the option to call a bond is valuable 
D)  higher, the option to call a bond is valuable 
E)  identical, the call feature is without value D

Question 3

A bond has a face value of $10,000 and a conversion ratio of 560.The stock is currently trading at $16.30.What is the conversion price?

Accepted Answer

A)  $1.56 
B)  $6.13 
C)  $16.30 
D)  $17.86 
E)  $56.00 
A)  $1.56 
B)  $6.13 
C)  $16.30 
D)  $17.86 
E)  $56.00 D

Question 4

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 5

Covenants in a bond contract restrict the actions that management of a firm can take that would benefit the debt holders of the firm at the expense of the equity holders of that firm.

Accepted Answer

A) True 
 B)False

Question 6

What are callable bonds?

Accepted Answer

A call feature allows the issu

Question 7

A company issues a callable (at par)ten-year,6% 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 yield to call of 4.8%.What is the price of this bond per $100 of face value when it is released?

Accepted Answer

A)  $101.15 
B)  $109.36 
C)  $100.00 
D)  $104.80 
E)  $95.42 
A)  $101.15 
B)  $109.36 
C)  $100.00 
D)  $104.80 
E)  $95.42

Question 8

A bond has a face value of $100 and a conversion ratio of 28.What is the conversion price?

Accepted Answer

A)  $0.28 
B)  $2.80 
C)  $3.57 
D)  $7.14 
E)  $28.00 
A)  $0.28 
B)  $2.80 
C)  $3.57 
D)  $7.14 
E)  $28.00

Question 9

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $6.58.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

A)  par 
B)  par plus 0.6% 
C)  par plus 4% 
D)  par plus 6% 
E)  par plus 8% 
A)  par 
B)  par plus 0.6% 
C)  par plus 4% 
D)  par plus 6% 
E)  par plus 8%

Question 10

Alberta Energy issues $150 million in straight bonds at par with a coupon rate of 6%.The firm also pays underwriting fees of 2% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

Accepted Answer

A)  $141 million 
B)  $147 million 
C)  $150 million 
D)  $138 million 
E)  $144 million 
A)  $141 million 
B)  $147 million 
C)  $150 million 
D)  $138 million 
E)  $144 million

Question 11

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)  1.40%% 
B)  2.73% 
C)  4.71% 
D)  5.66% 
E)  7.00% 
A)  1.40%% 
B)  2.73% 
C)  4.71% 
D)  5.66% 
E)  7.00%

Question 12

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $14.40.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

A)  par plus 6.66% 
B)  par plus 7.50% 
C)  par plus 8.46% 
D)  par plus 12.32% 
E)  par plus 15.00% 
A)  par plus 6.66% 
B)  par plus 7.50% 
C)  par plus 8.46% 
D)  par plus 12.32% 
E)  par plus 15.00%

Question 13

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the twentieth and final coupon payment date?

Accepted Answer

A)  $25 million 
B)  $120 million 
C)  $145 million 
D)  $160 million 
E)  $200 million 
A)  $25 million 
B)  $120 million 
C)  $145 million 
D)  $160 million 
E)  $200 million

Question 14

A company issues a 20-year,callable bond at par with a 6% annual coupon.The bond can be called at par in three years or any time after that on a coupon payment date.The call price is $110 per $100 of face value.What is the yield to call?

Accepted Answer

A)  4% 
B)  6% 
C)  8% 
D)  9% 
E)  12% 
A)  4% 
B)  6% 
C)  8% 
D)  9% 
E)  12%

Question 15

Which of the following is a typical bond covenant restriction on the issuance of new debt?

Accepted Answer

A)  New debt must have a lower coupon payment than existing debt. 
B)  No new debt can be issued until existing debt has been paid. 
C)  New debt cannot mature before existing debt. 
D)  New debt must be offered at a discount. 
E)  New debt must be subordinate to existing debt. 
A)  New debt must have a lower coupon payment than existing debt. 
B)  No new debt can be issued until existing debt has been paid. 
C)  New debt cannot mature before existing debt. 
D)  New debt must be offered at a discount. 
E)  New debt must be subordinate to existing debt.

Question 16

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 maturity of this bond when it is released?

Accepted Answer

A)  1.40%% 
B)  2.80% 
C)  4.71% 
D)  5.66% 
E)  7.00% 
A)  1.40%% 
B)  2.80% 
C)  4.71% 
D)  5.66% 
E)  7.00%

Question 17

A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm uses a sinking fund to repurchase 8% of the bonds on each coupon payment date.What payment must they make on the first coupon payment date?

Accepted Answer

A)  $6 million 
B)  $12 million 
C)  $16 million 
D)  $22 million 
E)  $28 million 
A)  $6 million 
B)  $12 million 
C)  $16 million 
D)  $22 million 
E)  $28 million

Question 18

If a bond covenant is not met,then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.

Accepted Answer

A) True 
 B)False

Question 19

A company issues a callable (at par)ten-year 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 $102.50 per $100 of face value,and has a yield to call of 4.8%.What is the bond's coupon rate?

Accepted Answer

A)  5.12% 
B)  4.8% 
C)  7.10% 
D)  7.42% 
E)  8.54% 
A)  5.12% 
B)  4.8% 
C)  7.10% 
D)  7.42% 
E)  8.54%

Question 20

The purchase by a group of private investors of all the equity of a public corporation,primarily through debt financing,is known as a(n)

Accepted Answer

A)  IPO. 
B)  SEO. 
C)  LBO. 
D)  debt buyout. 
E)  equity buyout. 
A)  IPO. 
B)  SEO. 
C)  LBO. 
D)  debt buyout. 
E)  equity buyout.

Exam 15: Debt Financing

The public debt market is substantially larger than the private debt market.

A callable bond will typically have a(n)________ yield than an otherwise identical bond without a call feature because ________.

A bond has a face value of $10,000 and a conversion ratio of 560.The stock is currently trading at $16.30.What is the conversion price?

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.

Covenants in a bond contract restrict the actions that management of a firm can take that would benefit the debt holders of the firm at the expense of the equity holders of that firm.

What are callable bonds?

A bond has a face value of $100 and a conversion ratio of 28.What is the conversion price?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $6.58.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Alberta Energy issues $150 million in straight bonds at par with a coupon rate of 6%.The firm also pays underwriting fees of 2% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $14.40.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the twentieth and final coupon payment date?

A company issues a 20-year,callable bond at par with a 6% annual coupon.The bond can be called at par in three years or any time after that on a coupon payment date.The call price is $110 per $100 of face value.What is the yield to call?

Which of the following is a typical bond covenant restriction on the issuance of new debt?

A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm uses a sinking fund to repurchase 8% of the bonds on each coupon payment date.What payment must they make on the first coupon payment date?

If a bond covenant is not met,then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.

The purchase by a group of private investors of all the equity of a public corporation,primarily through debt financing,is known as a(n)

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

A callable bond will typically have a(n) yield than an otherwise identical bond without a call feature because .