Question 1

Convertible bonds can also have a call feature.

Accepted Answer

A) True 
 B)False

Question 2

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 3

A negative pledge clause states that the company may grant an exclusive lien or claim on any of its assets.

Accepted Answer

A) True 
 B)False

Question 4

If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be

Accepted Answer

A) callable. 
B) convertible. 
C) protected. 
D) None of the options are correct. 
A) callable. 
B) convertible. 
C) protected. 
D) None of the options are correct.

Question 5

The Alfa Co.has a 6 percent coupon bond outstanding that pays semiannual interest.Calculate the semiannual interest payment on a $1,000 face value bond.

Accepted Answer

A) $60 
B) $30 
C) $10 
D) $6 
A) $60 
B) $30 
C) $10 
D) $6

Question 6

The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock.Then the conversion ratio

Accepted Answer

A) is 40. 
B) is 25. 
C) is 100. 
D) depends on the current market price of the bond. 
A) is 40. 
B) is 25. 
C) is 100. 
D) depends on the current market price of the bond.

Question 7

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

Accepted Answer

A) indenture. 
B) collateral maintenance agreement. 
C) prospectus. 
D) debenture. 
A) indenture. 
B) collateral maintenance agreement. 
C) prospectus. 
D) debenture.

Question 8

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 9

Affirmative covenants impose certain duties on the company.

Accepted Answer

A) True 
 B)False

Question 10

A sinking fund may be useful to a corporation because

Accepted Answer

A) the corporation does not have to worry about paying the bondholders. 
B) it may provide the corporation with the option to acquire the bonds 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. 
A) the corporation does not have to worry about paying the bondholders. 
B) it may provide the corporation with the option to acquire the bonds 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.

Question 11

Which of the following is the most sensible reason for issuing convertibles?

Accepted Answer

A) Convertibles are convenient and flexible-they're usually unsecured and subordinated, and cash requirements for debt service are relatively low. 
B) Interest rates on convertible issues are significantly less than on straight debt. 
C) Firms that need equity capital use convertibles as a roundabout way of issuing stock. 
D) Firms prefer to issue convertibles when their shares are undervalued. 
A) Convertibles are convenient and flexible-they're usually unsecured and subordinated, and cash requirements for debt service are relatively low. 
B) Interest rates on convertible issues are significantly less than on straight debt. 
C) Firms that need equity capital use convertibles as a roundabout way of issuing stock. 
D) Firms prefer to issue convertibles when their shares are undervalued.

Question 12

Corporations often have the right to repurchase a debt issue prior to maturity at a fixed price.Such debt issues are said to be

Accepted Answer

A) indentured. 
B) protected. 
C) convertible. 
D) callable. 
A) indentured. 
B) protected. 
C) convertible. 
D) callable.

Question 13

A convertible bond is selling for $993.It has 15 years to maturity, $1,000 face value, and pays 8 percent coupon interest payments annually.Similar straight bonds (nonconvertible) are priced to yield 8.5 percent.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 
C) $7 
D) $58.48 
A) $34.52 
B) $93 
C) $7 
D) $58.48

Question 14

The largest market for foreign bonds is

Accepted Answer

A) the United States. 
B) Japan. 
C) Switzerland. 
D) Russia. 
A) the United States. 
B) Japan. 
C) Switzerland. 
D) Russia.

Question 15

A bond-warrant package has different effects on the firm's cash flow and capital structure than a convertible bond.

Accepted Answer

A) True 
 B)False

Question 16

A Yankee bond is a bond

Accepted Answer

A) sold by a company from the United States. 
B) sold in the United States by a foreign firm. 
C) sold in the United States by a local company. 
D) sold in Japan by a company from some other country. 
A) sold by a company from the United States. 
B) sold in the United States by a foreign firm. 
C) sold in the United States by a local company. 
D) sold in Japan by a company from some other country.

Question 17

Issuing convertible debt makes sense whenever investors have difficulty estimating the risk of the company's bond.

Accepted Answer

A) True 
 B)False

Question 18

A puttable provision in a bond allows the

Accepted Answer

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

Question 19

Project finance is generally provided by

Accepted Answer

A) the U.S.government. 
B) foreign governments. 
C) international banks. 
A) the U.S.government. 
B) foreign governments. 
C) international banks.

Question 20

PIKs are

Accepted Answer

A) pay-in-kind bonds. 
B) pay interest kicker bonds. 
C) pay interest in Krugerrands. 
D) pay interest in kroner. 
A) pay-in-kind bonds. 
B) pay interest kicker bonds. 
C) pay interest in Krugerrands. 
D) pay interest in kroner.

Exam 24: The Many Different Kinds of Debt

Convertible bonds can also have a call feature.

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

A negative pledge clause states that the company may grant an exclusive lien or claim on any of its assets.

If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be

The Alfa Co.has a 6 percent coupon bond outstanding that pays semiannual interest.Calculate the semiannual interest payment on a $1,000 face value bond.

The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock.Then the conversion ratio

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

A bond-warrant package

Affirmative covenants impose certain duties on the company.

A sinking fund may be useful to a corporation because

Which of the following is the most sensible reason for issuing convertibles?

Corporations often have the right to repurchase a debt issue prior to maturity at a fixed price.Such debt issues are said to be

The largest market for foreign bonds is

A bond-warrant package has different effects on the firm's cash flow and capital structure than a convertible bond.

A Yankee bond is a bond

Issuing convertible debt makes sense whenever investors have difficulty estimating the risk of the company's bond.

A puttable provision in a bond allows the

Project finance is generally provided by

PIKs are

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 Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters