Question 1

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 2

The owner of a convertible bond owns both a straight bond and a call option.

Accepted Answer

A) True 
 B)False

Question 3

Project finance is extensively used in developing countries to finance

Accepted Answer

A) power projects. 
B) telecommunications projects. 
C) transportation projects. 
D) All of the options are correct. 
A) power projects. 
B) telecommunications projects. 
C) transportation projects. 
D) All of the options are correct.

Question 4

Loan guarantees are valuable methods for propping up the value of debt without up-front cash.

Accepted Answer

A) True 
 B)False

Question 5

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) SEC registration is necessary. 
D) there are usually fewer restrictive covenants and SEC registration is necessary. 
A) there are usually fewer restrictive covenants. 
B) there is direct contact with the lender and renegotiations can be handled more easily. 
C) SEC registration is necessary. 
D) there are usually fewer restrictive covenants and SEC registration is necessary.

Question 6

Which of the following are included in the typical bond indenture?

Accepted Answer

A) The basic terms of the bond 
B) Details of the protective covenants 
C) Details of the protective covenants and sinking fund arrangements 
D) The basic terms of the bond, details of the protective covenants, sinking fund arrangements, and call provisions 
A) The basic terms of the bond 
B) Details of the protective covenants 
C) Details of the protective covenants and sinking fund arrangements 
D) The basic terms of the bond, details of the protective covenants, sinking fund arrangements, and call provisions

Question 7

Briefly explain the restrictive covenants in a bond indenture.

Accepted Answer

The restrictive covenants, also called p

Question 8

Floating-rate bonds have adjustable rates to protect real rates of return against inflation.The rates paid are limited by

Accepted Answer

A) the put provisions of the issues. 
B) a floor rate that sets the minimum. 
C) a cap rate that sets the maximum. 
D) a floor rate that sets the minimum and a cap rate that sets the maximum. 
A) the put provisions of the issues. 
B) a floor rate that sets the minimum. 
C) a cap rate that sets the maximum. 
D) a floor rate that sets the minimum and a cap rate that sets the maximum.

Question 9

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 United States. 
D) bonds issued through private placements can be bought and sold by institutional investors and SEC registration is not needed for privately placed bonds. 
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 United States. 
D) bonds issued through private placements can be bought and sold by institutional investors and SEC registration is not needed for privately placed bonds.

Question 10

LYONs are bonds that are

Accepted Answer

A) callable and puttable. 
B) callable, puttable, and convertible. 
C) callable, puttable, convertible, and zero-coupon. 
D) puttable, convertible, and zero-coupon. 
A) callable and puttable. 
B) callable, puttable, and convertible. 
C) callable, puttable, convertible, and zero-coupon. 
D) puttable, convertible, and zero-coupon.

Question 11

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

Accepted Answer

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

Question 12

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

Question 13

In general, which of the following statements is true?

Accepted Answer

A) Bonds issued in the United States pay interest annually, while bonds issued in other countries pay interest semiannually. 
B) Bonds issued in the United States and other countries pay interest semiannually. 
C) Bonds issued in the United States and other countries pay interest annually. 
D) Bonds issued in the United States pay interest semiannually, while bonds issued in other countries pay interest annually. 
A) Bonds issued in the United States pay interest annually, while bonds issued in other countries pay interest semiannually. 
B) Bonds issued in the United States and other countries pay interest semiannually. 
C) Bonds issued in the United States and other countries pay interest annually. 
D) Bonds issued in the United States pay interest semiannually, while bonds issued in other countries pay interest annually.

Question 14

The following are secured bonds except

Accepted Answer

A) mortgage bonds. 
B) debentures. 
C) collateral trust bonds. 
D) equipment trust certificates. 
A) mortgage bonds. 
B) debentures. 
C) collateral trust bonds. 
D) equipment trust certificates.

Question 15

A zero-coupon bond is also called a(n)

Accepted Answer

A) income bond. 
B) original issue discount bond. 
C) pure discount bond. 
D) premium bond. 
A) income bond. 
B) original issue discount bond. 
C) pure discount bond. 
D) premium bond.

Question 16

Warrants are sometimes issued

Accepted Answer

A) with private placement bonds, to investment bankers as compensation, to creditors in the event of bankruptcy, and to common stockholders. 
B) with private placement bonds and to investment bankers as compensation. 
C) with private placement bonds, to investment bankers as compensation, and to creditors in the event of bankruptcy. 
D) to investment bankers as compensation and to creditors in the event of bankruptcy. 
A) with private placement bonds, to investment bankers as compensation, to creditors in the event of bankruptcy, and to common stockholders. 
B) with private placement bonds and to investment bankers as compensation. 
C) with private placement bonds, to investment bankers as compensation, and to creditors in the event of bankruptcy. 
D) to investment bankers as compensation and to creditors in the event of bankruptcy.

Question 17

A loan guarantee provided by the government on a corporate bond acts like what kind of derivative security for the investor?

Accepted Answer

A) Long put 
B) Short put 
C) Long call 
D) Short call 
A) Long put 
B) Short put 
C) Long call 
D) Short call

Question 18

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

Accepted Answer

A) $60 
B) $30 
C) $10 
D) $120 
A) $60 
B) $30 
C) $10 
D) $120

Question 19

The following are some of the complications associated with call provisions of bonds:

Accepted Answer

A) The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt. 
B) The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, and the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders. 
C) The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders, and there may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond. 
D) The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders, there may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond, and there are costs and delays associated with calling and reissuing debt. 
A) The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt. 
B) The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, and the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders. 
C) The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders, and there may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond. 
D) The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders, there may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond, and there are costs and delays associated with calling and reissuing debt.

Question 20

The holders of ZZZ Corporation's bonds with a face value of $1,000 can exchange that bond for 35 shares of stock.The stock is selling for $25.What is the conversion value of the bond?

Accepted Answer

A) $1,000 
B) $875 
C) $1,200 
D) $965 
A) $1,000 
B) $875 
C) $1,200 
D) $965

Exam 24: The Many Different Kinds of Debt

A "foreign" bond is a bond

The owner of a convertible bond owns both a straight bond and a call option.

Project finance is extensively used in developing countries to finance

Loan guarantees are valuable methods for propping up the value of debt without up-front cash.

Privately placed loans are advantageous because

Which of the following are included in the typical bond indenture?

Briefly explain the restrictive covenants in a bond indenture.

Floating-rate bonds have adjustable rates to protect real rates of return against inflation.The rates paid are limited by

According to SEC Rule 144A,

LYONs are bonds that are

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

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.

In general, which of the following statements is true?

The following are secured bonds except

A zero-coupon bond is also called a(n)

Warrants are sometimes issued

A loan guarantee provided by the government on a corporate bond acts like what kind of derivative security for the investor?

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

The following are some of the complications associated with call provisions of bonds:

The holders of ZZZ Corporation's bonds with a face value of $1,000 can exchange that bond for 35 shares of stock.The stock is selling for $25.What is the conversion value of the bond?

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

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