Question 1

An investment-grade rating on a bond is a rating of _____.

Accepted Answer

A) Aa3 and above by Moody's,and AA- and above for S&P and Fitch ratings. 
B) A1 and above by Moody's,and A- and above for S&P and Fitch ratings. 
C) Baa and above by Moody's,and CCC and above for S&P and Fitch ratings. 
D) Baa and above by Moody's,and BBB and above for S&P and Fitch ratings. 
A) Aa3 and above by Moody's,and AA- and above for S&P and Fitch ratings. 
B) A1 and above by Moody's,and A- and above for S&P and Fitch ratings. 
C) Baa and above by Moody's,and CCC and above for S&P and Fitch ratings. 
D) Baa and above by Moody's,and BBB and above for S&P and Fitch ratings. D

Question 2

Which of the following is defined in the lease contract between the lessor and the lessee?

Accepted Answer

A) Whether the lease should be expensed or capitalized 
B) Time period for which the lessee can use the asset 
C) Depreciation method of the leased asset. 
D) Retention ratio of the firm. 
A) Whether the lease should be expensed or capitalized 
B) Time period for which the lessee can use the asset 
C) Depreciation method of the leased asset. 
D) Retention ratio of the firm. B

Question 3

Operating leases are more complicated to value than financial leases because _____.

Accepted Answer

A) the lessee cannot return the asset except with substantial penalties 
B) it is difficult to find the appropriate discount rate 
C) of the uncertainty about the length of the lease 
D) it is difficult to predict the cash flows. 
A) the lessee cannot return the asset except with substantial penalties 
B) it is difficult to find the appropriate discount rate 
C) of the uncertainty about the length of the lease 
D) it is difficult to predict the cash flows. C

Question 4

Which of the following means the discount rate that makes the discounted value of the promised future bond payments equal to the market price of the bond?

Accepted Answer

A) Cash flow yield 
B) Current yield 
C) Yield to maturity 
D) Bond-equivalent yield 
A) Cash flow yield 
B) Current yield 
C) Yield to maturity 
D) Bond-equivalent yield

Question 5

Which of the following is true of Eurobonds?

Accepted Answer

A) They are zero-coupon bonds issued by the European Central Bank. 
B) They are sold outside the country in whose currency it is denominated. 
C) They are sovereign bonds issued by European countries. 
D) They are Euro-denominated bonds issued by corporations. 
A) They are zero-coupon bonds issued by the European Central Bank. 
B) They are sold outside the country in whose currency it is denominated. 
C) They are sovereign bonds issued by European countries. 
D) They are Euro-denominated bonds issued by corporations.

Question 6

Financing covenants:

Accepted Answer

A) are beneficial in preventing a manager from leaving bondholders penniless by liquidating the firm and paying out the proceeds to themselves and shareholders. 
B) prevent the firm from promiscuously issuing new debt,which would dilute the claims of existing bondholders to the firm?s assets. 
C) are beneficial to bondholders as they require that a certain portion of the bonds be retired before maturity. 
D) give the bondholder the option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond. 
A) are beneficial in preventing a manager from leaving bondholders penniless by liquidating the firm and paying out the proceeds to themselves and shareholders. 
B) prevent the firm from promiscuously issuing new debt,which would dilute the claims of existing bondholders to the firm?s assets. 
C) are beneficial to bondholders as they require that a certain portion of the bonds be retired before maturity. 
D) give the bondholder the option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond.

Question 7

What are the features that characterize long-term Eurocurrency loans?

Accepted Answer

1.They are issued on a floating-rate bas

Question 8

Which of the following is true of a line of credit?

Accepted Answer

A) It is a short-term,zero-coupon note issued by major corporations. 
B) It is an arrangement in which the firm is allowed to pay down the loan and then subsequently increase the amount of borrowing. 
C) It is an arrangement where the bank will lend up to a maximum pre-specified loan amount at a pre-specified interest rate,as long as the firm meets the requirements established initially. 
D) It is an arrangement with a bank whereby the bank authorizes the maximum loan amount,but not the interest rate,when commitment was drawn up. 
A) It is a short-term,zero-coupon note issued by major corporations. 
B) It is an arrangement in which the firm is allowed to pay down the loan and then subsequently increase the amount of borrowing. 
C) It is an arrangement where the bank will lend up to a maximum pre-specified loan amount at a pre-specified interest rate,as long as the firm meets the requirements established initially. 
D) It is an arrangement with a bank whereby the bank authorizes the maximum loan amount,but not the interest rate,when commitment was drawn up.

Question 9

_____ are contracts containing a promise to pay a future stream of cash to investors who hold the contracts.

Accepted Answer

A) Debt instruments 
B) Futures 
C) Option contracts 
D) Swap contracts 
A) Debt instruments 
B) Futures 
C) Option contracts 
D) Swap contracts

Question 10

The ex-coupon date is:

Accepted Answer

A) the date on which the bondholder becomes entitled to the coupon. 
B) the last day on which a bond can be traded on the secondary market. 
C) is the preceding day of the first principal payment to the bondholder. 
D) is the date of legal exchange of cash for bonds. 
A) the date on which the bondholder becomes entitled to the coupon. 
B) the last day on which a bond can be traded on the secondary market. 
C) is the preceding day of the first principal payment to the bondholder. 
D) is the date of legal exchange of cash for bonds.

Question 11

Treasury bonds are:

Accepted Answer

A) the zero-coupon Treasury issues,with maturities that range from one month to one year at issue. 
B) the coupon-paying issues with maturities from one year to 10 years at their initial issue date. 
C) the coupon-paying issues with maturities from one year to 5 years at their initial issue date. 
D) the coupon-paying issues with maturities greater than 10 years at their issue date. 
A) the zero-coupon Treasury issues,with maturities that range from one month to one year at issue. 
B) the coupon-paying issues with maturities from one year to 10 years at their initial issue date. 
C) the coupon-paying issues with maturities from one year to 5 years at their initial issue date. 
D) the coupon-paying issues with maturities greater than 10 years at their issue date.

Question 12

A bond is said to be issued at premium when:

Accepted Answer

A) the coupon rate is set lower than the coupon rate of par bonds of same maturity and credit risk. 
B) the quoted price exceeds the face value of the bond. 
C) the quoted price equals the face value of the bond. 
D) the face value exceeds the quoted price of the bond. 
A) the coupon rate is set lower than the coupon rate of par bonds of same maturity and credit risk. 
B) the quoted price exceeds the face value of the bond. 
C) the quoted price equals the face value of the bond. 
D) the face value exceeds the quoted price of the bond.

Question 13

Write a short note about bond covenants.
Virtually all debt contracts contain covenants to restrict equity holders who control the firm from putting the bondholders' funds at risk.In the absence of such covenants,the incentives of equity holders to expropriate bondholder wealth would be reflected in the bond's coupon or price,resulting in higher borrowing rates.

Accepted Answer

Asset covenants Dividend coven

Question 14

_____ of a bond is the maximum length of time the borrower has to pay off the bond principal in full.

Accepted Answer

A) Maturity 
B) Duration 
C) Covenant 
D) Convexity 
A) Maturity 
B) Duration 
C) Covenant 
D) Convexity

Question 15

Which of the following is true of the convertible type of bond option?

Accepted Answer

A) It gives the bondholder the option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond. 
B) It gives the issuing firm an option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond. 
C) It mandates a conversion of the regular bonds into another security,typically the ordinary equity of the firm issuing the convertible bond,on maturity. 
D) It is similar to a perpetuity and mandates a conversion of the regular bonds into another bond subsequently issued by the firm immediately after maturity. 
A) It gives the bondholder the option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond. 
B) It gives the issuing firm an option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond. 
C) It mandates a conversion of the regular bonds into another security,typically the ordinary equity of the firm issuing the convertible bond,on maturity. 
D) It is similar to a perpetuity and mandates a conversion of the regular bonds into another bond subsequently issued by the firm immediately after maturity.

Question 16

Which of the following is an unsecured bond?

Accepted Answer

A) Mortgage bond 
B) Equipment trust certificate 
C) Debenture 
D) Collateral trust bond 
A) Mortgage bond 
B) Equipment trust certificate 
C) Debenture 
D) Collateral trust bond

Question 17

Comment on the growth of the Eurobond Market.

Accepted Answer

The Eurobond market has seen spectacular

Question 18

What are asset-backed securities?

Accepted Answer

Asset-backed securities (ABS) are financ

Question 19

The process of packaging tiny investments into a larger portfolio and selling a security backed by the portfolio's cash flows is called _____.

Accepted Answer

A) securitization 
B) portfolio management 
C) amortization 
D) collateralization 
A) securitization 
B) portfolio management 
C) amortization 
D) collateralization

Exam 2: Debt Financing

An investment-grade rating on a bond is a rating of _____.

Which of the following is defined in the lease contract between the lessor and the lessee?

Operating leases are more complicated to value than financial leases because _____.

Which of the following means the discount rate that makes the discounted value of the promised future bond payments equal to the market price of the bond?

Which of the following is true of Eurobonds?

Financing covenants:

What are the features that characterize long-term Eurocurrency loans?

Which of the following is true of a line of credit?

_____ are contracts containing a promise to pay a future stream of cash to investors who hold the contracts.

The ex-coupon date is:

Treasury bonds are:

A bond is said to be issued at premium when:

_____ of a bond is the maximum length of time the borrower has to pay off the bond principal in full.

Which of the following is true of the convertible type of bond option?

Which of the following is an unsecured bond?

Comment on the growth of the Eurobond Market.

What are asset-backed securities?

The process of packaging tiny investments into a larger portfolio and selling a security backed by the portfolio's cash flows is called _____.

Raising Capital

Equity Financing

Portfolio Tools

Mean-Variance Analysis and the Capital Asset Pricing Model

Factor Models and the Arbitrage Pricing Theory

Pricing Derivatives

Options

Discounting and Valuation

Investing in Risk-Free Projects

Investing in Risky Projects

Allocating Capital and Corporate Strategy

Corporate Taxes and the Impact of Financing on Real Asset Valuation

How Taxes Affect Financing Choices

How Taxes Affect Dividends and Share Repurchases

Bankruptcy Costs and Debt Holder-Equity Holder Conflicts

Capital Structure and Corporate Strategy

How Managerial Incentives Affects Financial Decisions

The Information Conveyed by Financial Decisions

Mergers and Acquisitions

Risk Management and Corporate Strategy

The Practice of Hedging

Interest Rate Risk Management

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