Question 1

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  True

Question 2

Explain the differences between a bond issued only in the United States and Eurobond issues.

Accepted Answer

There are two basic differences.First,a bond issued in the United States will generally have a fixed interest rate,while a Eurobond will usually have a floating interest rate tied to LIBOR.Second,bonds sold in the United States are almost always registered,which means that the company's registrar records the owner's name; most Eurobonds are sold in bearer form.

Question 3

The recovery rate on defaulting debt is the least for the following type of debt:

Accepted Answer

A) bank debt. 
B) senior secured bonds. 
C) senior subordinated bonds. 
D) junior subordinated bonds. 
A) bank debt. 
B) senior secured bonds. 
C) senior subordinated bonds. 
D) junior subordinated bonds. D

Question 4

Briefly explain the restrictive covenants in a bond indenture.

Accepted Answer

The restrictive covenants,also called pr

Question 5

According to SEC Rule 144A:

Accepted Answer

A) bonds issued through private placements can be bought and sold by institutional investors. 
B) SEC registration is not needed for privately placed bonds. 
C) SEC registration is required of all securities issued in the U.S. 
D) (
A) and (
B) only. 
A) bonds issued through private placements can be bought and sold by institutional investors. 
B) SEC registration is not needed for privately placed bonds. 
C) SEC registration is required of all securities issued in the U.S. 
D) (
A) and (
B) only.

Question 6

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:

Accepted Answer

A) the effects of risk are opposite on the two value components and tend to cancel each other out. 
B) if the firm is high risk,the option premium will be higher while the straight bond value is fixed. 
C) only risky companies issued these instruments. 
D) the equity value is dependent on current risks only,not the future risk at conversion. 
A) the effects of risk are opposite on the two value components and tend to cancel each other out. 
B) if the firm is high risk,the option premium will be higher while the straight bond value is fixed. 
C) only risky companies issued these instruments. 
D) the equity value is dependent on current risks only,not the future risk at conversion.

Question 7

What are LYONs?

Accepted Answer

LYONs (liquid yield option not

Question 8

A 5% debenture (face value = $1000)pays interest on June 30 and December 31.It is callable at a price of 105% together with accrued interest.Suppose the company decides to call the bonds on September 30.What amount must it pay for each bond?

Accepted Answer

A) $1000.00 
B) $1037.50 
C) $1062.50 
D) $1050.00 
A) $1000.00 
B) $1037.50 
C) $1062.50 
D) $1050.00

Question 9

Explain why firms issue convertible debt.

Accepted Answer

Smaller and more risky firms generally i

Question 10

What are PIK bonds?

Accepted Answer

PIK (pay-in-kind)bonds carry h

Question 11

Many times warrants may be issued on their own and do not have to be issued in conjunction with other securities.

Accepted Answer

A) True 
 B)False

Question 12

A "foreign" bond is a bond:

Accepted Answer

A) sold in the United States by a U.S.company. 
B) sold to investors in the local market but issued by a company from some other country. 
C) sold in Europe by a U.S.company. 
D) sold in Europe by a European company. 
A) sold in the United States by a U.S.company. 
B) sold to investors in the local market but issued by a company from some other country. 
C) sold in Europe by a U.S.company. 
D) sold in Europe by a European company.

Question 13

Very large bond issues that are marketed both internationally as well as in individual domestic markets are called:

Accepted Answer

A) Eurobonds. 
B) foreign bonds. 
C) global bonds. 
D) none of the options. 
A) Eurobonds. 
B) foreign bonds. 
C) global bonds. 
D) none of the options.

Question 14

Which of the following bonds is secured by assets?

Accepted Answer

A) A mortgage bond 
B) A floating rate bond 
C) A debenture 
D) An indenture 
A) A mortgage bond 
B) A floating rate bond 
C) A debenture 
D) An indenture

Question 15

What are the three elements of convertible bond value?

Accepted Answer

The value of a convertible bond is deter

Question 16

What are reverse floaters?

Accepted Answer

Reverse floaters are floating-

Question 17

Two major differences between a warrant and a call option are:
I.warrants are contracts outside of the firm while options are within the firm;
II.warrants have long maturities while options are usually short maturities;
III.warrant exercise dilutes the value of equity while options exercise usually does not

Accepted Answer

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

Question 18

A bond-warrant package:

Accepted Answer

A) always increases the risk of the common equity. 
B) always decreases the risk of the common equity. 
C) could either increase or decrease the risk of the common equity. 
D) does not affect the risk of common equity. 
A) always increases the risk of the common equity. 
B) always decreases the risk of the common equity. 
C) could either increase or decrease the risk of the common equity. 
D) does not affect the risk of common equity.

Question 19

A firm may prefer to issue a convertible bond,as opposed to issuing equity,because:
I.a convertible issue sends a better signal to investors than an issue of common stock;
II.an announcement of a stock issue generates worries of overvaluation and usually depresses the stock price;
III.a convertible issue shows the management's willingness to take a chance that the stock price will rise enough to lead to conversion and also signals management's confidence in the future

Accepted Answer

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

Question 20

Sinking funds reduce the average life of a bond and thereby reduce the risk of a default.

Accepted Answer

A) True 
 B)False

Exam 24: The Many Different Kinds of Debt

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.

Explain the differences between a bond issued only in the United States and Eurobond issues.

The recovery rate on defaulting debt is the least for the following type of debt:

Briefly explain the restrictive covenants in a bond indenture.

According to SEC Rule 144A:

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:

What are LYONs?

A 5% debenture (face value = $1000)pays interest on June 30 and December 31.It is callable at a price of 105% together with accrued interest.Suppose the company decides to call the bonds on September 30.What amount must it pay for each bond?

Explain why firms issue convertible debt.

What are PIK bonds?

Many times warrants may be issued on their own and do not have to be issued in conjunction with other securities.

A "foreign" bond is a bond:

Very large bond issues that are marketed both internationally as well as in individual domestic markets are called:

Which of the following bonds is secured by assets?

What are the three elements of convertible bond value?

What are reverse floaters?

A bond-warrant package:

Sinking funds reduce the average life of a bond and thereby reduce the risk of a default.

Introduction to Corporate Finance

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

Filters