Deck 16: Long-Term Debt and Lease Financing

Question 1

The "call" provision on some bonds allows:

A) the bondholder to redeem the bond earlier than maturity, but usually involves a call premium.
B) the corporation to request additional capital contributions from the bondholder.
C) the corporation to redeem the bonds earlier than maturity but usually for a premium over the par value.
D) the bondholder to convert the bond into preferred stock.

Answer 1

C

Question 2

A junk bond is:

A) a low yield AAA rated security.
B) a fraudulent security.
C) rated below investment grade.
D) unsecured bond.

Answer 2

C

Question 3

A "subordinated debenture":

A) must be transferred with the bond to which it is attached.
B) is used mainly by railroad companies and usually specifies equipment as collateral.
C) entitles the bondholder to purchase shares of common stock at a specific price.
D) is an unsecured bond with an inferior claim on assets in the event of liquidation.

Answer 3

D

Question 4

A bond with a coupon rate of 7.5%, maturing in 10 years at a value of $1,000, and current market price of $776 will have a current yield to maturity of:

A) 11.3%.
B) 10.4%.
C) 9.7%.
D) 7.5%.

Question 5

A bond "Call Feature" allows:

A) the corporation to call in or force in the debt issue before maturity.
B) at the option of the bondholder, bonds can be changed into common stock.
C) the bond holder to call the issuer for a change of interest payments.
D) the corporation to call the holder in order to pay off the bond in installments.

Question 6

The term debenture refers to:

A) long-term, secured debt.
B) long-term, unsecured debt.
C) the after-acquired property clause.
D) a 100-page document covering the specific terms of the offering.

Question 7

During poor economic conditions, the spread between yields on high-grade and low-grade bonds:

A) decreases.
B) stays the same.
C) increases.
D) are inversely related.

Question 8

Which of the following is the lowest in priority of claims against a bankrupt firm?

A) A junior mortgage bond
B) A senior debenture
C) Common stock
D) A subordinated debenture

Question 9

The initial value of a bond is its:

A) par value.
B) coupon value.
C) bond indenture.
D) market value.

Question 10

The value of the bond redeemed on the maturity date is the:

A) par value.
B) coupon value.
C) bond indenture.
D) market value.

Question 11

The underwriting cost on a new bond issue:

A) is an immediate outflow and immediate tax write-off.
B) is an immediate tax write-off with a deferred outflow.
C) is a deferred outflow and deferred tax write-off.
D) is an immediate outflow and deferred tax write-off.

Question 12

Prices of existing bonds move _________ as market interest rates move _________.

A) down; down
B) up; up
C) up; down
D) Bond prices don't move as market interest rates move.

Question 13

An indenture is:

A) the section of a corporation's bylaws pertaining to bond issues.
B) the summary of the essential features of a share issue.
C) the contract between a corporation and a trustee acting for bondholders.
D) the underwriting contract.

Question 14

Which of the following best represents the hierarchy of creditor and shareholder claims?

A) Common stock, senior secured debt, subordinated debentures.
B) Senior debentures, subordinated debentures, junior secured debt.
C) Senior secured debt, subordinated debentures, common stock.
D) Preferred stock, secured debt, debentures.

Question 15

Short-term bond yields are generally __________________ than long-term bond yields whereas long-term bond prices are generally _________________ than short-term bond prices.

A) more volatile; less volatile
B) less volatile; more volatile
C) less volatile; less volatile
D) more volatile; more volatile

Question 16

Which of the following is considered to be the most significant measure in determining the return on a bond?

A) Yield to maturity
B) Coupon rate
C) Present value
D) Current yield

Question 17

A bond with a call provision would generally be sold to yield:

A) less than a non-callable bond of similar character.
B) the same as a similar non-callable bond.
C) more than a non-callable bond of similar character.
D) the same as similar convertible bonds.

Question 18

The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called:

A) an indenture.
B) a debenture.
C) secured debt.
D) protective covenants.

Question 19

A serial bond repayment plan involves a:

A) lump-sum payment at maturity.
B) conversion of debt to common stock.
C) an early redemption of all debt.
D) series of installments to retire the debt over the life of the issue.

Question 20

Leasing is a popular form of financing because:

A) lease provisions are generally less restrictive than a bond indenture.
B) the lessor likely does not have experience with the equipment being leased.
C) the lessee may be financially able to purchase.
D) the lease is slower to finalize then a bond.

Question 21

Which of the following are advantages of leasing?

A) A lease obligation may be substantially more restrictive than the provisions of a bond indenture.
B) There is a down payment like a purchase.
C) The negative effects of obsolescence may be reduced.
D) The ability to use the leased asset as collateral in a bond.

Question 22

Which of the following is not a characteristic of a zero-coupon bond?

A) It doesn't pay interest.
B) It is sold at a deep discount from face value.
C) The annual increase in the bond's price is not taxable as ordinary income.
D) It provides a means for corporations to take annual deductions without current cash outflow.

Question 23

Which of the following is an advantage of floating rate to investors?

A) They allow for locking in a multiplier of the initial investment.
B) Their prices tend to be highly stable regardless of interest rate changes.
C) They are sold at a deep discount.
D) Investors always earn greater returns.

Question 24

An operating lease:

A) has a lease term equal to 75% or more of the estimated property.
B) is usually short-term and is often cancellable at the option of the lessee.
C) must show up on the balance sheet.
D) must be classified as current assets and flow through operating expenses.

Question 25

Strip bonds:

A) provide no annual interest payments.
B) have highly stable prices even with changing interest rates.
C) provide an investor with tax-free income until maturity.
D) eliminate the risk of default to the holder.

Question 26

Janex Corp. is refunding $8 million worth of 13% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium?

A) $260,000
B) $400,000
C) $468,000
D) $720,000

Question 27

Floating rate bonds:

A) have interest payments based on coupon rates.
B) have no capacity for constant market value.
C) usually have very broad limits that interest payments cannot exceed.
D) have a floating maturity date.

Question 28

With regards to interest rates and bond prices it can be said that:

A) a 1% change in interest rates will cause a greater change in long-term bond prices than short-term prices.
B) a 1% change in interest rates will cause a greater change in short-term bond prices than long-term prices.
C) long-term rates are more volatile than short-term rates.
D) a decrease in interest rates will cause bond prices to fall.

Question 29

Bond refunding occurs when:

A) interest rates in the market are sufficiently less than the coupon rate on the old bond.
B) interest rates in the market have risen over the coupon rates on the old bond.
C) the price of the old bond is less than par.
D) the sinking fund has accumulated enough money to retire the bond issue.

Question 30

Many bonds have some orderly preplanned system of repayment. Which of the following apply?

A) Sinking funds
B) No coupon bonds
C) Income bonds
D) Common funds

Question 31

Which of the following bonds offers the most security to the bondholder?

A) Junior mortgage bonds
B) Senior mortgage bonds
C) Debenture bond
D) Income bond

Question 32

Which of the following does not represent a tax implication in the bond refunding decision?

A) Call premium
B) Cost savings in lower interest rates.
C) Underwriting costs of new issue.
D) Interest charges

Question 33

A bond's rating can depend on all of the following except:

A) the corporation's debt-equity ratio.
B) the corporation's size.
C) the ability of the firm to make interest payments.
D) the coupon rate on the bond.

Question 34

In the bond refunding decision, which of the following represents an inflow?

A) Call premium
B) Interest savings
C) The underwriting cost on the new issue.
D) Interest charges

Question 35

Which one of these conditions must be met for a lease to qualify as a capital lease?

A) The lease contains a bargain purchase price at the end of the lease.
B) The lease must have a value of at least $10 million.
C) The lease must have a life of 10 years.
D) The lease is a buyback lease.

Question 36

A bond with a coupon rate of 8.2% paid semi-annually, maturing in 5 years at a value of $1,000 and a current market price of $720, will have a yield to maturity of:

A) 25.8%.
B) 16.7%.
C) 11.4%.
D) 8.2%.

Question 37

In the event of a bankruptcy, the priority of claims (highest to lowest) on the assets of the company is:

A) secured senior debt, unsecured senior debt, preferred shareholders, common shareholders.
B) common shareholders, preferred shareholders, unsecured senior debt, secured senior debt.
C) unsecured senior debt, secured junior debt, preferred shareholders, common shareholders.
D) unsecured subordinate debt, secured junior debt, preferred shareholders, common shareholders.

Question 38

Long-term financing leases currently:

A) show up on the balance sheet.
B) appear in the footnotes to the annual report.
C) appear on the company's income statement.
D) do not appear on any financial statements.

Question 39

The dollar interest received divided by the market price of the bond is called the:

A) par value.
B) coupon rate.
C) current yield.
D) yield to maturity.

Question 40

In the net present value of the refunding decision, what discount rate is used?

A) The after-tax cost of capital.
B) The after-tax cost of new debt.
C) The after-tax cost of the old debt.
D) The before tax cost of the new debt.

Question 41

The disadvantages of debt include all but which of the following?

A) Debt may have to be paid back with "cheaper" dollars.
B) Interest and principal payments must be met.
C) Indenture agreements may place burdensome restrictions on the firm.
D) Too much debt may depress the firm's share price.

Question 42

A call feature allows:

A) the bondholder to redeem the bond before the maturity date.
B) the corporation to redeem the bond before the maturity date.
C) the corporation to convert the bond to common shares.
D) the bondholder to demand increased collateral.

Question 43

The higher the bond rating:

A) the higher the interest rate on a bond.
B) the lower the interest rate on the bond.
C) the higher the call premium.
D) the lower the call premium.

Question 44

Which of the following is not a form of yield on a bond?

A) Coupon rate (nominal yield)
B) Current yield
C) Dividend yield
D) Yield to maturity

Question 45

A call provision, which allows the corporation to force an early maturity on a bond issue, usually contains all but which of the following characteristics?

A) Most bonds must be outstanding at least 5 years before being called.
B) After the call date, the call premium tends to decline over time.
C) The provision typically calls for debt conversion into common stock.
D) The corporation will pay a premium over par for the bonds.

Question 46

Floating rate bonds are most likely to be popular when it is anticipated that:

A) interest rates will stay the same.
B) interest rates will go down.
C) interest rates will go up.
D) short-term interest rates will be higher than long-term interest rates.

Question 47

Which of the following is not an advantage of debt?

A) Debt is paid back in "cheaper" dollars during inflationary periods.
B) Bondholders have no control over the actions of management.
C) Cost of debt can lower the weighted overall cost of capital.
D) All of these are advantages.

Question 48

AA bond is rated lower than a _____ bond.

A) AAA
B) A
C) A(low)
D) A(high)

Question 49

The best measure of an investor's rate of return is:

A) the coupon rate.
B) the current yield.
C) the yield to maturity.
D) nominal yield.

Question 50

In the lease-versus-purchase decision, one of the advantages is:

A) the tax shield provided by the lease payment.
B) the lower interest rate on the lease than on a loan to buy the asset.
C) the ability to use the after-tax cost of debt rather than the weighted average cost of capital in the decision.
D) the ability to savings from purchasing the equipment.

Question 51

In general, floating rate bonds have their interest rate payment adjusted:

A) daily.
B) weekly.
C) quarterly.
D) annually.

Question 52

A bond with a $114 annual coupon, maturing in 10 years at a value of $1,000 has a current market price of $920. What is the yield to maturity of the bond?

A) 9.5%
B) 11.4%
C) 12.9%
D) 13.4%

Question 53

To prevent the weakening of debt holder claims, an indenture includes:

A) a maturity date.
B) a call provision.
C) a conversion option.
D) restrictive covenants.

Question 54

Which independent bond rating company is a leader in the United States?

A) Royal Bank Dominion Securities
B) TD Waterhouse
C) S&P
D) Canadian Rating

Question 55

A Eurobond is a:

A) bond payable in the investor's currency but sold outside the borrower's country.
B) bond payable in the investor's currency but sold inside the borrower's country.
C) bond payable in the borrower's currency and sold inside the borrower's country.
D) bond payable in the borrower's currency but sold outside the borrower's country.

Question 56

Ajax Corp. has a bond with a coupon rate of 12%, maturing in 15 years at $1,000 per bond. The current market price is $960. What is the current yield?

A) 12.8%
B) 12.6%
C) 12.0%
D) 11.5%

Question 57

The higher the tax rate, the ______ the net underwriting cost on the new bond issue.

A) higher
B) lower
C) higher or lower
D) substantially higher

Question 58

Under the reporting rules for leasing, the lease-versus-purchase decision is appropriate for:

A) a financing lease.
B) a short-term operating lease.
C) a capital lease.
D) all kinds of leases.

Question 59

From the corporate issuer viewpoint, a zero-coupon bond allows the firm to:

A) receive deferred income for tax purposes.
B) reduce the multiplier of the initial investment.
C) defer payment obligations.
D) take advantage of low volatility.

Question 60

Investment grade bonds are rated:

A) A and above.
B) BBB and above.
C) BB and above.
D) B and above.

Question 61

Under the term of a composition,:

A) all creditors must agree.
B) small dissenting creditors may be paid in full immediately.
C) a creditor committee may be formed.
D) a new share class is composed.

Question 62

The first priority in liquidation under the bankruptcy laws is to pay:

A) senior debt.
B) cost of administering the bankruptcy procedures.
C) secured debt.
D) trade creditors.

Question 63

Formal liquidation is recommended when reorganization is not feasible and out-of-court settlements cannot be reached. Which is the order of priority for claims against the firm?

A) Secured creditors, taxes, wages, lawyer's fees, unsecured creditors.
B) Secured creditors, lawyer's fees, source deductions, wages, unsecured creditors.
C) Lawyer's fees, wages, source deductions, secured creditors, unsecured creditors.
D) Source deductions, lawyer's fees, secured creditors, wages, unsecured creditors.

Question 64

If an out-of-court settlement cannot be reached, the reorganization alternative can be examined. Under this alternative:

A) capital structure is redesigned by replacing equity accounts with debt.
B) a creditor committee may run the business.
C) creditors may accept a fraction of their original loans.
D) a merger partner may be found for the firm.

Question 65

If the liquidation value of the assets is less than the creditor claims, then the:

A) common shareholders will receive partial payment.
B) preferred shareholders will receive partial payment.
C) general creditors will receive partial payment.
D) general creditors will receive complete payment.

Question 66

An external reorganization:

A) is a frequently used form of out-of-court settlement.
B) often calls for old creditors and shareholders to make concessions to insure that a feasible arrangement is established.
C) often calls for a creditor committee to be established.
D) is necessary for a successful liquidation.

Question 67

Which of the following is a form of an in-court settlement?

A) Assignment
B) Extension
C) Composition
D) Bankruptcy

Question 68

Which of the following is a likely combination of activities in the handling of a financially distressed firm?

A) Merger, composition, liquidation.
B) Internal reorganization, merger, liquidation.
C) Composition, extension, creditor committee.
D) Extension, liquidation, reverse takeover.

Question 69

When a financially distressed firm is experiencing technical insolvency:

A) it has a negative net worth.
B) it cannot sell its assets.
C) it cannot meet its obligations as they come due.
D) it cannot negotiate with its creditors.

Question 70

A bankrupt firm:

A) has a negative net worth.
B) cannot sell its assets.
C) can meet its obligations as they come due.
D) may continue operating, as if it were solvent.

Question 71

Under an extension settlement:

A) creditors agree to accept a fractional settlement on their original claim.
B) creditors run the business.
C) a new schedule of repayment is developed.
D) assets are liquidated by going through formal court action.

Question 72

A debenture represents:

A) unsecured debt.
B) secured debt.
C) a long document covering every detail of a bond issue.
D) debt that is subordinate.

Question 73

An internal reorganization means that:

A) a possible redesign of management and the capital structure may be necessary.
B) a merger partner may be found.
C) is frequently carried out in the banking industry.
D) a liquidation is likely to follow.

Question 74

When a reorganization plan requires a merger partner, it is likely that:

A) no strong, financially sound firm will assume the management and financial obligations of the bankrupt firm.
B) the bankrupt firm's capital structure will be redesigned.
C) old creditors and shareholders will be asked to make concessions.
D) the new partner will accept the status quo.

Question 75

Financial failure of a firm may be assessed when:

A) the firm's liabilities are greater than the market value of its assets.
B) a firm can pay its bills but has a positive net worth.
C) the firm's cash flow is declining.
D) the firm's equity is greater than the liabilities.

Question 76

One type of out-of-court settlement in which creditors are requested to accept a new repayment schedule is called a(an):

A) composition.
B) extension.
C) arrangement.
D) expansion.

Question 77

In order for an assignment to take place:

A) creditors must agree on liquidation values.
B) the court must determine claims priorities.
C) formal bankruptcy proceedings must have begun.
D) More than one of these are true.

Question 78

Which of the following is not a form of out-of-court settlement for a financially distressed firm?

A) Extension
B) Composition
C) Assignment
D) Reversion

Question 79

In an internal reorganization, current management will be evaluated and:

A) a merger partner may be found.
B) the debt to total assets ratio of the firm may be reduced.
C) income bonds may be replaced with longer-term bonds.
D) additional managers will be hired.

Question 80

A bond with a coupon rate of 8.0%, maturing in 10 years at a value of $1,000, and current market price of $753 will have a current yield to maturity of:

A) 2.9%.
B) 12.5%.
C) 9.7%.
D) 8.0%.