Exam 24: The Many Different Kinds of Debt

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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.

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

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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.

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

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Briefly explain the restrictive covenants in a bond indenture.

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According to SEC Rule 144A:

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

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What are LYONs?

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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?

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Explain why firms issue convertible debt.

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What are PIK bonds?

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

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A "foreign" bond is a bond:

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

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Which of the following bonds is secured by assets?

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What are the three elements of convertible bond value?

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What are reverse floaters?

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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

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A bond-warrant package:

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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

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

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