Question 1

The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in the bond contract.

Accepted Answer

A) True 
 B)False  False

Question 2

The face value of bonds are denominated most commonly in which of the following standard increments?

Accepted Answer

A) $10 
B) $100 
C) $1000 
D) $10,000 
E) $100,000 
A) $10 
B) $100 
C) $1000 
D) $10,000 
E) $100,000 C

Question 3

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm makes a final payment of $145 million on the tenth and final coupon date.If the firm uses a sinking fund to repurchase some of the bond issue on each coupon payment date,what percentage of the issue must they repurchase each year?

Accepted Answer

A) 4% 
B) 3.7% 
C) 3.8% 
D) 3.9% 
E) 4.1% 
A) 4% 
B) 3.7% 
C) 3.8% 
D) 3.9% 
E) 4.1% A

Question 4

The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.

Accepted Answer

A) True 
 B)False

Question 5

Alberta Energy issues $110 million in straight bonds at par with a coupon rate of 8%.The firm also pays underwriting fees of 1.5% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

Accepted Answer

A) $99.55 million 
B) $110 million 
C) $108.35 million 
D) $101.2 million 
E) $99.68 million 
A) $99.55 million 
B) $110 million 
C) $108.35 million 
D) $101.2 million 
E) $99.68 million

Question 6

Which of the following statements is most accurate?

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 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 more attractive to the bondholder than the identical non-callable bond. 
E) The issuer will exercise the call option only when the call price exceeds the prevailing market price of the 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 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 more attractive to the bondholder than the identical non-callable bond. 
E) The issuer will exercise the call option only when the call price exceeds the prevailing market price of the bond.

Question 7

When would it make sense for a firm to call a bond issue and refinance?

Accepted Answer

A) when the market price of the bond exceeds the call price,and market interest rates are greater than the bond's coupon rate 
B) when the market price of the bond exceeds the call price,and market interest rates are less than the bond's coupon rate 
C) when the market price of the bond is less than the call price,and market interest rates are greater than the bond's coupon rate 
D) when the market price of the bond is less than the call price,and market interest rates are less than the bond's coupon rate 
E) when the market price of the bond equals the call price,and market interest rates are equal to the bond's coupon rate 
A) when the market price of the bond exceeds the call price,and market interest rates are greater than the bond's coupon rate 
B) when the market price of the bond exceeds the call price,and market interest rates are less than the bond's coupon rate 
C) when the market price of the bond is less than the call price,and market interest rates are greater than the bond's coupon rate 
D) when the market price of the bond is less than the call price,and market interest rates are less than the bond's coupon rate 
E) when the market price of the bond equals the call price,and market interest rates are equal to the bond's coupon rate

Question 8

A bond has a face value of $10,000 and a conversion price of $37.74.The stock is currently trading at $38.80.What is the conversion ratio?

Accepted Answer

A) 231 
B) 246 
C) 281 
D) 258 
E) 265 
A) 231 
B) 246 
C) 281 
D) 258 
E) 265

Question 9

Which of the following is a typical bond covenant restriction on dividends and share repurchases?

Accepted Answer

A) Payouts can be made only once existing debt has been paid. 
B) Payouts can be made only if earnings exceed some threshold. 
C) Payouts cannot exceed interest payments to existing bondholders. 
D) Shares can only be repurchased by issuing new debt. 
E) Payouts cannot be made until existing debt is within one year of maturity. 
A) Payouts can be made only once existing debt has been paid. 
B) Payouts can be made only if earnings exceed some threshold. 
C) Payouts cannot exceed interest payments to existing bondholders. 
D) Shares can only be repurchased by issuing new debt. 
E) Payouts cannot be made until existing debt is within one year of maturity.

Question 10

What is the difference between Eurobonds and Foreign bonds?

Accepted Answer

Foreign bonds are issued by a foreign co

Question 11

Which of the following is a type of call provision?

Accepted Answer

A) sinking fund 
B) balloon payment 
C) conversion feature 
D) indenture 
E) bond covenant 
A) sinking fund 
B) balloon payment 
C) conversion feature 
D) indenture 
E) bond covenant

Question 12

Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?

Accepted Answer

A) a debenture 
B) a mortgage bond 
C) an asset-backed bond 
D) a foreign bond 
E) a Eurobond 
A) a debenture 
B) a mortgage bond 
C) an asset-backed bond 
D) a foreign bond 
E) a Eurobond

Question 13

Kruller A.G.issues a bond that is offered for sale simultaneously in Europe,the United States,and Japan.Which of the following best describes this bond?

Accepted Answer

A) a domestic bond 
B) a foreign bond 
C) a Eurobond 
D) a global bond 
E) a corporate bond 
A) a domestic bond 
B) a foreign bond 
C) a Eurobond 
D) a global bond 
E) a corporate bond

Question 14

Which of the following would be most likely to have the lowest price?

Accepted Answer

A) a straight senior bond 
B) a convertible senior bond 
C) a callable subordinated bond 
D) a straight subordinated bond 
E) a callable senior bond 
A) a straight senior bond 
B) a convertible senior bond 
C) a callable subordinated bond 
D) a straight subordinated bond 
E) a callable senior bond

Question 15

What kind of unsecured corporate debt has a maturity of greater than ten years?

Accepted Answer

A) mortgage bonds 
B) asset-back bonds 
C) term loans 
D) notes 
E) debentures 
A) mortgage bonds 
B) asset-back bonds 
C) term loans 
D) notes 
E) debentures

Question 16

Which of the following terms best describes a credit commitment for a specific time period which a company can use as needed?

Accepted Answer

A) a term loan 
B) a revolving line of credit 
C) a syndicated bank loan 
D) a private placement 
E) an asset-backed line of credit 
A) a term loan 
B) a revolving line of credit 
C) a syndicated bank loan 
D) a private placement 
E) an asset-backed line of credit

Question 17

Which of the following is a typical bond covenant restriction on mergers and acquisitions?

Accepted Answer

A) Funding for acquisitions cannot include new debt. 
B) Acquisitions can be made only once existing debt has been paid. 
C) Mergers are allowed only if the combined firm's earnings exceed some threshold. 
D) Mergers are allowed only if the combined firm has a minimum ratio of net tangible assets to debt. 
E) Mergers are allowed only if the combined firm has a lower cost of issuing new debt. 
A) Funding for acquisitions cannot include new debt. 
B) Acquisitions can be made only once existing debt has been paid. 
C) Mergers are allowed only if the combined firm's earnings exceed some threshold. 
D) Mergers are allowed only if the combined firm has a minimum ratio of net tangible assets to debt. 
E) Mergers are allowed only if the combined firm has a lower cost of issuing new debt.

Question 18

What is a sinking fund?

Accepted Answer

A sinking fund is a method for repaying

Question 19

BC Brewery issues $50 million in straight bonds at an original issue discount of 1% and a coupon rate of 7.5%.The firm also pays underwriting fees of 3.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

Accepted Answer

A) $49.5 million 
B) $50 million 
C) $47.75 million 
D) $48.25 million 
E) $44 million 
A) $49.5 million 
B) $50 million 
C) $47.75 million 
D) $48.25 million 
E) $44 million

Question 20

In which of the following situations does the value of a convertible bond exceed the value of straight debt or equity by the greatest amount?

Accepted Answer

A) when the price of the stock is high 
B) when the price of the stock is close to the conversion price 
C) when the price of the stock is low 
D) when the price of the stock much lower than the conversion price 
E) when the price of the stock is much higher than the conversion price 
A) when the price of the stock is high 
B) when the price of the stock is close to the conversion price 
C) when the price of the stock is low 
D) when the price of the stock much lower than the conversion price 
E) when the price of the stock is much higher than the conversion price

Exam 15: Debt Financing

The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in the bond contract.

The face value of bonds are denominated most commonly in which of the following standard increments?

The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.

Alberta Energy issues $110 million in straight bonds at par with a coupon rate of 8%.The firm also pays underwriting fees of 1.5% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

Which of the following statements is most accurate?

When would it make sense for a firm to call a bond issue and refinance?

A bond has a face value of $10,000 and a conversion price of $37.74.The stock is currently trading at $38.80.What is the conversion ratio?

Which of the following is a typical bond covenant restriction on dividends and share repurchases?

What is the difference between Eurobonds and Foreign bonds?

Which of the following is a type of call provision?

Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond rating?

Kruller A.G.issues a bond that is offered for sale simultaneously in Europe,the United States,and Japan.Which of the following best describes this bond?

Which of the following would be most likely to have the lowest price?

What kind of unsecured corporate debt has a maturity of greater than ten years?

Which of the following terms best describes a credit commitment for a specific time period which a company can use as needed?

Which of the following is a typical bond covenant restriction on mergers and acquisitions?

What is a sinking fund?

BC Brewery issues $50 million in straight bonds at an original issue discount of 1% and a coupon rate of 7.5%.The firm also pays underwriting fees of 3.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

In which of the following situations does the value of a convertible bond exceed the value of straight debt or equity by the greatest amount?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

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