Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving. 
B) When yields have risen, the issuer will not choose to exercise the call on the callable bond. 
C) The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond. 
D) A callable bond is relatively less attractive to the bondholder than the identical non-callable bond. 
A) The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving. 
B) When yields have risen, the issuer will not choose to exercise the call on the callable bond. 
C) The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond. 
D) A callable bond is relatively less attractive to the bondholder than the identical non-callable bond. C

Question 2

Which of the following statements regarding the private debt market is FALSE?

Accepted Answer

A) Private debt has the advantage that it avoids the cost of registration. 
B) Bank loans are an example of private debt, debt that is not publicly traded. 
C) Private debt has the disadvantage of being illiquid. 
D) The public debt market is larger than the private debt market. 
A) Private debt has the advantage that it avoids the cost of registration. 
B) Bank loans are an example of private debt, debt that is not publicly traded. 
C) Private debt has the disadvantage of being illiquid. 
D) The public debt market is larger than the private debt market. D

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant. 
B) On the maturity date of the bond, the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is, the conversion price. 
C) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders. 
D) If the stock price is low so that the embedded warrant is deep out-of-the-money, the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision. 
A) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant. 
B) On the maturity date of the bond, the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is, the conversion price. 
C) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders. 
D) If the stock price is low so that the embedded warrant is deep out-of-the-money, the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision. C

Question 4

Packaging a portfolio of financial securities and issuing an asset-backed security backed by this portfolio is known as:

Accepted Answer

A) asset securitization. 
B) revenue securitization. 
C) backup securitization. 
D) payment securitization. 
A) asset securitization. 
B) revenue securitization. 
C) backup securitization. 
D) payment securitization.

Question 5

Rearden Metal has just issued a callable, $1000 par value, twenty-year, 8% coupon bond with semiannual coupon payments. The bond can be called at par in five years or anytime thereafter on a coupon payment date. If the bond is currently trading for $1040.79, then its yield to call is closest to:

Accepted Answer

A) 3.8% 
B) 7.0% 
C) 7.6% 
D) 8.0% 
A) 3.8% 
B) 7.0% 
C) 7.6% 
D) 8.0%

Question 6

In January 2010, the U.S. Treasury issued a $1000 par, ten-year, inflation-indexed note with a coupon of 4%. On the date of issue, the consumer price index (CPI)was 200. By January 2020, the CPI had increased to 300. The coupon payment that was made in January 2020 is closest to:

Accepted Answer

A) $20 
B) $30 
C) $40 
D) $50 
A) $20 
B) $30 
C) $40 
D) $50

Question 7

Galt Industries has just issued a callable, $1000 par value, five-year, 6% coupon bond with semiannual coupon payments. The bond can be called at par in three years or anytime thereafter on a coupon payment date. If the bond is currently trading for $978.94, then its yield to call is closest to:

Accepted Answer

A) 3.4% 
B) 6.0% 
C) 6.5% 
D) 6.8% 
A) 3.4% 
B) 6.0% 
C) 6.5% 
D) 6.8%

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) The assumption that underlies the yield calculation of a callable bond-that it will not be called-is not always realistic, so bond traders often quote the yield to call. 
B) The yield to call (YT
C) is the annual yield of a callable bond assuming that the bond is called at the earliest opportunity. 
C) We can think of the yield to maturity of a callable bond as the interest rate the bondholder receives if the bond is not called and repaid in full. 
D) Because the price of a callable bond is higher than the price of an otherwise identical non-callable bond, the yield to maturity of a callable bond will be lower than the yield to maturity for its non-callable counterpart. 
A) The assumption that underlies the yield calculation of a callable bond-that it will not be called-is not always realistic, so bond traders often quote the yield to call. 
B) The yield to call (YT
C) is the annual yield of a callable bond assuming that the bond is called at the earliest opportunity. 
C) We can think of the yield to maturity of a callable bond as the interest rate the bondholder receives if the bond is not called and repaid in full. 
D) Because the price of a callable bond is higher than the price of an otherwise identical non-callable bond, the yield to maturity of a callable bond will be lower than the yield to maturity for its non-callable counterpart.

Question 9

You own a bond with a face value of $1,000 and a conversion price of $40. The conversion ratio is closest to:

Accepted Answer

A) 15 
B) 20 
C) 25 
D) 40 
A) 15 
B) 20 
C) 25 
D) 40

Question 10

What kind of corporate debt can be secured by any specified assets?

Accepted Answer

A) Mortgage bonds 
B) Notes 
C) Asset-backed bonds 
D) Debentures 
A) Mortgage bonds 
B) Notes 
C) Asset-backed bonds 
D) Debentures

Question 11

Which of the following statements regarding municipal bonds is FALSE?

Accepted Answer

A) A single municipal bond issue will often contain a number of different maturity dates. Such issues are often called multi-muni bonds because the bonds are scheduled to mature over a multiple number of years. 
B) Revenue bonds are where the local government pledges specific revenues generated by projects that were initially financed by the bond issue. 
C) Municipal bonds are sometimes also referred to as tax-exempt bonds. 
D) Bonds backed by the full faith and credit of a local government are known as general obligation bonds and are not as secure as bonds backed by the full faith and credit of the federal government. 
A) A single municipal bond issue will often contain a number of different maturity dates. Such issues are often called multi-muni bonds because the bonds are scheduled to mature over a multiple number of years. 
B) Revenue bonds are where the local government pledges specific revenues generated by projects that were initially financed by the bond issue. 
C) Municipal bonds are sometimes also referred to as tax-exempt bonds. 
D) Bonds backed by the full faith and credit of a local government are known as general obligation bonds and are not as secure as bonds backed by the full faith and credit of the federal government.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) By including more covenants, issuers increase their costs of borrowing. 
B) Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders. 
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital. 
D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative NPV actions that exploit debt holders, then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants. 
A) By including more covenants, issuers increase their costs of borrowing. 
B) Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders. 
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital. 
D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative NPV actions that exploit debt holders, then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants.

Question 13

Which of the following does NOT issue asset-backed securities?

Accepted Answer

A) Government National Mortgage Association 
B) Federal National Mortgage Association 
C) Student Loan Marketing Association 
D) Federal Reserve 
A) Government National Mortgage Association 
B) Federal National Mortgage Association 
C) Student Loan Marketing Association 
D) Federal Reserve

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) Zero-coupon Treasury securities with maturities longer than one year also trade in the bond market. 
B) Treasury securities are initially sold to the public through dealers. 
C) Municipal bonds ("munis")are issued by state and local governments. 
D) Municipal bonds' distinguishing characteristic is that the income on municipal bonds is not taxable at the federal level. 
A) Zero-coupon Treasury securities with maturities longer than one year also trade in the bond market. 
B) Treasury securities are initially sold to the public through dealers. 
C) Municipal bonds ("munis")are issued by state and local governments. 
D) Municipal bonds' distinguishing characteristic is that the income on municipal bonds is not taxable at the federal level.

Question 15

Which of the following statements is FALSE regarding a call provision?

Accepted Answer

A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue. 
B) A call provision allows the issuer to repurchase the bonds at a predetermined price. 
C) The call price is generally set at or below, and expressed as a percentage of, the bond's face value. 
D) A call feature allows the issuer of the bond the right (but not the obligation)to retire all outstanding bonds on (or after)a specific date (the call date), for the call price. 
A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue. 
B) A call provision allows the issuer to repurchase the bonds at a predetermined price. 
C) The call price is generally set at or below, and expressed as a percentage of, the bond's face value. 
D) A call feature allows the issuer of the bond the right (but not the obligation)to retire all outstanding bonds on (or after)a specific date (the call date), for the call price.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) Mortgage-backed securities, such as GNMAs, are pass-through securities. That is, each security is backed by an underlying portfolio or pool of mortgages. 
B) The Government National Mortgage Association (GNMA, or "Ginnie Mae")is an example of an enterprise; the Student Loan Marketing Association ("Sallie Mae")is an example of a government-sponsored agency. 
C) Sovereign debt is debt issued by national governments. 
D) Agency securities are issued by agencies of the U.S. government or by U.S. government sponsored enterprises. 
A) Mortgage-backed securities, such as GNMAs, are pass-through securities. That is, each security is backed by an underlying portfolio or pool of mortgages. 
B) The Government National Mortgage Association (GNMA, or "Ginnie Mae")is an example of an enterprise; the Student Loan Marketing Association ("Sallie Mae")is an example of a government-sponsored agency. 
C) Sovereign debt is debt issued by national governments. 
D) Agency securities are issued by agencies of the U.S. government or by U.S. government sponsored enterprises.

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) The registered bond system also facilitates tax collection because the government can easily keep track of all interest payments made. 
B) Asset backed bonds and mortgage bonds are secured debt: Specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy. 
C) Notes typically have longer maturities (more than ten years)than debentures. 
D) Although the word "bond" is commonly used to mean any kind of debt security, technically a corporate bond must be secured. 
A) The registered bond system also facilitates tax collection because the government can easily keep track of all interest payments made. 
B) Asset backed bonds and mortgage bonds are secured debt: Specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy. 
C) Notes typically have longer maturities (more than ten years)than debentures. 
D) Although the word "bond" is commonly used to mean any kind of debt security, technically a corporate bond must be secured.

Question 18

Asset securitization is the process of creating a(n):

Accepted Answer

A) collateralized security. 
B) asset-backed security. 
C) municipal security. 
D) payment security. 
A) collateralized security. 
B) asset-backed security. 
C) municipal security. 
D) payment security.

Question 19

Mortgages that do not meet certain credit criteria and have a high probability of default are know as ________ mortgages.

Accepted Answer

A) prepayment 
B) pooled 
C) under-water 
D) subprime 
A) prepayment 
B) pooled 
C) under-water 
D) subprime

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously. 
B) In a leveraged buyout (LBO), a group of private investors purchases all the equity of a public corporation. 
C) A term loan is a bank loan that lasts for a specific term. 
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued. 
A) Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously. 
B) In a leveraged buyout (LBO), a group of private investors purchases all the equity of a public corporation. 
C) A term loan is a bank loan that lasts for a specific term. 
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued.

Exam 24: Debt Financing

Which of the following statements is FALSE?

Which of the following statements regarding the private debt market is FALSE?

Which of the following statements is FALSE?

Packaging a portfolio of financial securities and issuing an asset-backed security backed by this portfolio is known as:

Rearden Metal has just issued a callable, $1000 par value, twenty-year, 8% coupon bond with semiannual coupon payments. The bond can be called at par in five years or anytime thereafter on a coupon payment date. If the bond is currently trading for $1040.79, then its yield to call is closest to:

In January 2010, the U.S. Treasury issued a $1000 par, ten-year, inflation-indexed note with a coupon of 4%. On the date of issue, the consumer price index (CPI)was 200. By January 2020, the CPI had increased to 300. The coupon payment that was made in January 2020 is closest to:

Galt Industries has just issued a callable, $1000 par value, five-year, 6% coupon bond with semiannual coupon payments. The bond can be called at par in three years or anytime thereafter on a coupon payment date. If the bond is currently trading for $978.94, then its yield to call is closest to:

Which of the following statements is FALSE?

You own a bond with a face value of $1,000 and a conversion price of $40. The conversion ratio is closest to:

What kind of corporate debt can be secured by any specified assets?

Which of the following statements regarding municipal bonds is FALSE?

Which of the following statements is FALSE?

Which of the following does NOT issue asset-backed securities?

Which of the following statements is FALSE?

Which of the following statements is FALSE regarding a call provision?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Asset securitization is the process of creating a(n):

Mortgages that do not meet certain credit criteria and have a high probability of default are know as ________ mortgages.

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, Managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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