Question 1

Which of the following statements is most accurate?

Accepted Answer

A) Before the call date,investors anticipate the optimal strategy that the issuer will follow,and the bond price reflects this strategy. 
B) The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity. 
C) A callable bond will trade at a higher price (and therefore a lower yield)than an otherwise equivalent non-callable bond. 
D) A firm raising capital by issuing callable bonds instead of non-callable bonds will be able to pay a lower coupon rate. 
E) When the bond's coupon rate is below the yield for similar securities,the bond is likely to be called. 
A) Before the call date,investors anticipate the optimal strategy that the issuer will follow,and the bond price reflects this strategy. 
B) The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity. 
C) A callable bond will trade at a higher price (and therefore a lower yield)than an otherwise equivalent non-callable bond. 
D) A firm raising capital by issuing callable bonds instead of non-callable bonds will be able to pay a lower coupon rate. 
E) When the bond's coupon rate is below the yield for similar securities,the bond is likely to be called.

Question 2

A company issues a callable (at par)ten-year coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $102.50 per $100 of face value,and has a yield to call of 4.8%.What is the bond's coupon rate?

Accepted Answer

A) 5.12% 
B) 4.8% 
C) 7.10% 
D) 7.42% 
E) 8.54% 
A) 5.12% 
B) 4.8% 
C) 7.10% 
D) 7.42% 
E) 8.54%

Question 3

A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm makes a final payment of $68 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) 10% 
B) 7.2% 
C) 7.33% 
D) 6% 
E) 8% 
A) 10% 
B) 7.2% 
C) 7.33% 
D) 6% 
E) 8%

Question 4

If a bond covenant is not met,then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.

Accepted Answer

A) True 
 B)False

Question 5

Bond covenants tend to increase a bond issuer's borrowing costs.

Accepted Answer

A) True 
 B)False

Question 6

A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm uses a sinking fund to repurchase 8% of the bonds on each coupon payment date.What payment must they make on the first coupon payment date?

Accepted Answer

A) $6 million 
B) $12 million 
C) $16 million 
D) $22 million 
E) $28 million 
A) $6 million 
B) $12 million 
C) $16 million 
D) $22 million 
E) $28 million

Question 7

Which of the following statements regarding a call provision is most accurate?

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 the market 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 forces the issuer of the bond to retire all outstanding bonds on (or after)a specific date for the call price if the call price exceeds the market price. 
E) A call feature gives the bondholder the option to convert each bond owned into a fixed number of shares of common stock. 
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 the market 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 forces the issuer of the bond to retire all outstanding bonds on (or after)a specific date for the call price if the call price exceeds the market price. 
E) A call feature gives the bondholder the option to convert each bond owned into a fixed number of shares of common stock.

Question 8

Alberta Energy issues $85 million in straight bonds at par with a coupon rate of 6.5%.The firm also pays underwriting fees of 3.5% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

Accepted Answer

A) $80 million 
B) $79.5 million 
C) $76.5 million 
D) $85 million 
E) $82 million 
A) $80 million 
B) $79.5 million 
C) $76.5 million 
D) $85 million 
E) $82 million

Question 9

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $14.40.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Accepted Answer

A) par plus 6.66% 
B) par plus 7.50% 
C) par plus 8.46% 
D) par plus 12.32% 
E) par plus 15.00% 
A) par plus 6.66% 
B) par plus 7.50% 
C) par plus 8.46% 
D) par plus 12.32% 
E) par plus 15.00%

Question 10

Smithfield Enterprises issues debt with a maturity of 7 years.In the case of bankruptcy,holders of this debt may only claim those assets of the firm that are not already pledged as collateral on other debt.Which of the following best describes this type of corporate debt?

Accepted Answer

A) a note 
B) a mortgage bond 
C) an asset-backed bond 
D) unsecured debt 
E) a debenture 
A) a note 
B) a mortgage bond 
C) an asset-backed bond 
D) unsecured debt 
E) a debenture

Question 11

Which of the following is an advantage of private debt over public debt?

Accepted Answer

A) It is liquid. 
B) It does not need to be registered with the securities commission. 
C) It does not require interest and principal payments made upon it. 
D) It dilutes the ownership of the firm. 
E) It is sold to a wider group of investors. 
A) It is liquid. 
B) It does not need to be registered with the securities commission. 
C) It does not require interest and principal payments made upon it. 
D) It dilutes the ownership of the firm. 
E) It is sold to a wider group of investors.

Question 12

Supreme Industries issues the following announcement to holders of an issue of callable,convertible notes: "Prior to the close of business on May 17,2011,holders may convert their Notes into shares of Supreme Industries common stock at 28.45 shares of Supreme Industries common stock per $1000 principal amount of the Notes.Cash will be paid in lieu of fractional shares.On April 16,20011,the last reported sale price of Supreme Industries common stock on the NYSE was $22.51 per share."
If on May 17,Supreme Industries is trading as $24.80,what is the value of common stock a holder of a $1,000 note would receive?

Accepted Answer

A) $787.51 
B) $791.21 
C) $694.40 
D) $871.70 
E) $1,000 
A) $787.51 
B) $791.21 
C) $694.40 
D) $871.70 
E) $1,000

Question 13

Which of the following terms best describes a loan where a larger line of credit or lower interest rate has been obtained by providing collateral to back that loan?

Accepted Answer

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

Question 14

When a callable bond sells at a premium,the likelihood of a call is ________ and the yield to worst is the yield to ________.

Accepted Answer

A) high,call 
B) low,call 
C) low,maturity 
D) high,maturity 
E) high,par 
A) high,call 
B) low,call 
C) low,maturity 
D) high,maturity 
E) high,par

Question 15

Alberta Energy issues $150 million in straight bonds at par with a coupon rate of 6%.The firm also pays underwriting fees of 2% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

Accepted Answer

A) $141 million 
B) $147 million 
C) $150 million 
D) $138 million 
E) $144 million 
A) $141 million 
B) $147 million 
C) $150 million 
D) $138 million 
E) $144 million

Question 16

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $4.95.If the bonds are called on this date,which of the following is the action most likely to be taken by a holder of bond of face value of $10,000?

Accepted Answer

A) Convert the bond and accept shares with a value of $10,000. 
B) Convert the bond and accept shares with a value of $10,128.00. 
C) Convert the bond and accept shares with a value of $10,239.13. 
D) Convert the bond and accept shares with a value of $10,246.50. 
E) Accept the call price and receive $10,000. 
A) Convert the bond and accept shares with a value of $10,000. 
B) Convert the bond and accept shares with a value of $10,128.00. 
C) Convert the bond and accept shares with a value of $10,239.13. 
D) Convert the bond and accept shares with a value of $10,246.50. 
E) Accept the call price and receive $10,000.

Question 17

A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.

Accepted Answer

A) True 
 B)False

Question 18

Explain the difference between notes and debentures.

Accepted Answer

Notes are a type of unsecured

Question 19

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the twentieth and final coupon payment date?

Accepted Answer

A) $25 million 
B) $120 million 
C) $145 million 
D) $160 million 
E) $200 million 
A) $25 million 
B) $120 million 
C) $145 million 
D) $160 million 
E) $200 million

Question 20

What is a Canada call?

Accepted Answer

A Canada call is a callable bo

Exam 15: Debt Financing

Which of the following statements is most accurate?

If a bond covenant is not met,then the bond goes into technical default and the bondholder can demand immediate repayment or force the company to renegotiate the terms of the bond.

Bond covenants tend to increase a bond issuer's borrowing costs.

A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm uses a sinking fund to repurchase 8% of the bonds on each coupon payment date.What payment must they make on the first coupon payment date?

Which of the following statements regarding a call provision is most accurate?

Alberta Energy issues $85 million in straight bonds at par with a coupon rate of 6.5%.The firm also pays underwriting fees of 3.5% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $14.40.What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Smithfield Enterprises issues debt with a maturity of 7 years.In the case of bankruptcy,holders of this debt may only claim those assets of the firm that are not already pledged as collateral on other debt.Which of the following best describes this type of corporate debt?

Which of the following is an advantage of private debt over public debt?

Which of the following terms best describes a loan where a larger line of credit or lower interest rate has been obtained by providing collateral to back that loan?

When a callable bond sells at a premium,the likelihood of a call is ________ and the yield to worst is the yield to ________.

Alberta Energy issues $150 million in straight bonds at par with a coupon rate of 6%.The firm also pays underwriting fees of 2% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

A firm issues the convertible debt shown above.The price of stock in this company on July 1,2008 is $4.95.If the bonds are called on this date,which of the following is the action most likely to be taken by a holder of bond of face value of $10,000?

A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.

Explain the difference between notes and debentures.

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the twentieth and final coupon payment date?

What is a Canada call?

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

Filters

When a callable bond sells at a premium,the likelihood of a call is and the yield to worst is the yield to .