Deck 15: Debt Financing

Question 1

A firm issues $200 million in straight bonds at par and a coupon rate of 7%. The firm pays fees of 2.5% on the face value of the bonds. What is the net amount of funds that the debt issue will provide for the firm?

A) $195 million
B) $186 million
C) $205 million
D) $200 million

Answer 1

$195 million

Question 2

Which of the following statements is FALSE?

A) In a public offering, the indenture lays out the terms of the bond issue.
B) The face value or principal amount of the bond is denominated in standard increments, most often $10,000.
C) If a coupon bond is issued at a discount, it is called an original issue discount bond.
D) With registered bonds, on each coupon payment date, the bond issuer consults its list of registered owners and mails each owner a cheque (or directly deposits the coupon payment into the owner's brokerage account).

Answer 2

The face value or principal amount of the bond is denominated in standard increments, most often $10,000.

Question 3

Coupon:Conversion Ratio: 78 shares per $1000 principal amount Call Date: 1 July 2012 Maturity: 1 July 2019 A firm issues the convertible debt shown above. The price of stock in this company on 1 July 2012 is $14.40. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

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

Answer 3

par plus 12.32%

Question 4

A company issues a callable (at par) five-year, 7% 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 $110 per $100 of face value. What is the yield to maturity of this bond when it is released?

A) 2.80%
B) 1.40%
C) 5.66%
D) 4.71%

Question 5

Which of the following is a type of call provision?

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

Question 6

Which of the following statements is FALSE?

A) 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.
B) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders.
C) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant.
D) 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.

Question 7

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?

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

Question 8

A company issues a 20-year, callable bond at par with 6% annual coupon payments. The bond canbe called at par in three years or any time after that on a coupon payment date. The call price is $110 per $100 of face value. What is the yield to call?

A) 4%
B) 12%
C) 9%
D) 6%

Question 9

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

A) notes
B) mortgage bonds
C) asset-backed bonds
D) debentures

Question 10

What is a call provision?

A) the periodic repurchasing of issued bonds through a sinking fund by the issuer
B) the option for the bondholder to convert each bond owned into a fixed number of ordinary shares
C) a clause in a bond contract that restricts the actions of the issuer that might harm the interests of the bondholders
D) an option to the issuer to repurchase the bonds at a predetermined price

Question 11

Which of the following statements regarding sinking fund provisions is FALSE?

A) Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund.
B) With a sinking fund, instead of repaying the entire principal balance on the maturity date, the company makes regular payments into a sinking fund administered by a trustee over the life of the bond.
C) With a sinking fund, if a bond is trading at below its face value, because the bonds are repurchased at par, the decision as to which bonds to repurchase is made by lottery.
D) Because the sinking fund allows the issuer to repurchase the bonds at par, the option to accelerate the payments is another form of call provision.

Question 12

Which of the following statements concerning the use of sinking funds to repurchase a bond issueis NOT true?

A) Payments from the sinking fund are used to repurchase bonds.
B) The firm makes regular payments into a sinking fund administered by a trustee over the life of the bond.
C) The firm can reduce the amount of outstanding debt without affecting the cash flows of the remaining bonds.
D) Bonds can be issued with a sinking fund provision or a call provision, but not both.

Question 13

Coupon: 0% Conversion Ratio: 285 shares per $10,000 principal amount Call Date: 1 July 2012 Maturity: 1 July 2019 A firm issues the convertible debt shown above. The price of stock in this company on 1 July 2012 is $36.00. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

A) par
B) par plus 3.4%
C) par plus 2.6%
D) par plus 4.1%

Question 14

Supreme Industries issues the following announcement to holders of an issue of callable, convertible notes: "Prior to the close of business on 17 May 2012, holders may convert their Notes into Supreme Industries ordinary shares at 28.45 shares per $1000 principal amount of the Notes. Cash will be paid in lieu of fractional shares. On 16 April 2012, the last reported sale price of Supreme Industries shares on the ASX was $22.51 per share." If on 17 May, Supreme Industries is trading as $24.80, what is the value of ordinary shares a holder of a $1,000 note would receive?

A) $868.00
B) $787.51
C) $791.21
D) $871.70

Question 15

Clearview Corporation, a company that deals mainly with the financing and distribution of music, issues debt with a maturity of 15 years. In the case of bankruptcy, holders of this debt will have claim to the intellectual property of Clearview. Which of the following best describes this type of corporate debt?

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

Question 16

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

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 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.
C) The call price is generally set at or below, and expressed as a percentage of, the bond's face value.
D) A call provision allows the issuer to repurchase the bonds at a predetermined price.

Question 17

Which of the following best describes a bond that is issued by a local entity and traded in a localmarket, but may be purchased by foreigners?

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

Question 18

Which of the following statements is FALSE?

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

Question 19

A firm issues $160 million in straight bonds at par and a coupon rate of 8.5%. The firm pays fees of 2% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

A) $157 million
B) $146 million
C) $160 million
D) $154 million

Question 20

A firm issues $250 million in straight bonds at an original issue discount of 1.5% and a coupon rateof 6%. The firm pays fees of 3% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

A) $225 million
B) $250 million
C) $239 million
D) $261 million

Question 21

A firm issues $500 million in straight bonds at par and a coupon rate of 5%. The firm pays fees of 3% on the face value of the bonds. What is the net amount of funds that the debt issue will provide for the firm?

A) $485 million
B) $500 million
C) $505 million
D) $475 million

Question 22

In terms of public offerings of bonds, what is a prospectus?

A) a formal contract that specifies the firm's obligations to the bondholders
B) a schedule of the fees charged by the underwriting company
C) a list of the duties of the trust company representing the bondholders' interests
D) a memorandum that must be produced to describe the details of a bond offering

Question 23

When a callable bond sells at a discount, the bond's coupon rate is _ than market yields and the yield to worst is the yield to .

A) lower, maturity
B) lower, call
C) high, maturity
D) higher, call

Question 24

In which of the following situations would the yield to worst for a certain bond be that bond's yield to call? I. The bond's coupon payments are high relative to market yields. II. The bond price is at a discount. III. The likelihood of the bond being called is high.

A) I only
B) II only
C) I and II
D) I and III

Question 25

A company issues a callable (at par) ten-year, 6% 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 $104 per $100 of face value. What is the yield to worst of this bond when it is released?

A) 5.47%
B) 1.92%
C) 4.00%
D) 0.60%

Question 26

Coupon: 0% Conversion Ratio: 158 shares per $1000 principal amount Call Date: 1 July 2012 Maturity: 1 July 2019 A firm issues the convertible debt shown above. The price of stock in this company on 1 July 2012 is $6.58. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

A) par plus 6%
B) par plus 0.6%
C) par
D) par plus 4%

Question 27

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?

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

Question 28

A company issues a callable (at par) 20-year, 5% 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 per $100 of face value. What is the yield to maturity of this bond when it is released?

A) 6.66%
B) 5.60%
C) 4.84%
D) 2.40%

Question 29

Which of the following statements is FALSE?

A) Because more than one debenture might be outstanding, the bondholder's priority in claiming assets in the event of default, known as the bond's seniority, is important.
B) In the event of default, the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off.
C) When a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt, the new debt is known as a subordinated debenture.
D) Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt.

Question 30

Which of the following is NOT an advantage of private debt over public debt?

A) It does not dilute the ownership of the firm.
B) It need not be registered with ASIC.
C) It has to have interest and principal payments made upon it.
D) It is liquid.

Question 31

Which of the following statements is FALSE?

A) To understand how call provisions affect the price of a bond, we first need to consider when an issuer will exercise its right to call the bond.
B) If the call provision offers a cheaper way to retire the bonds, the issuer will forgo the option of purchasing the bonds in the open market and call the bonds instead.
C) When bond yields have increased, by exercising the call on the callable bond and then immediately refinancing, the issuer can lower its borrowing costs.
D) An issuer can always retire one of its bonds early by repurchasing the bond in the open market.

Question 32

A bond has a face value of $100 and a conversion ratio of 28. What is the conversion price?

A) $28.00
B) $2.80
C) $3.57
D) $0.28

Question 33

Which of the following statements about bonds that are both convertible and callable is NOT true?

A) If these bonds are called by the issuer, the holder can choose to convert them rather than let them be called.
B) The decision to be made by the bondholder when the bonds are called is the same as she would have to make at maturity.
C) The issuer can force bondholders to decide whether or not to convert at a time of the issuer's choosing.
D) Prior to maturity, the value of such a bond will be greater than the shares that bond can be converted into.

Question 34

Which of the following is usually a form of public debt?

A) a revolving line of credit
B) a private placement
C) a bond issue
D) a bank loan

Question 35

Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy, holders of this debt may claim the property held by Athelstone Realty. Which of the following best describes this type of corporate debt?

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

Question 36

What is a bond's seniority?

A) the yield to maturity of a bond as compared to bonds of comparable rating
B) the issue price of the bond as compared to its face value
C) clauses restricting a company from issuing new debt
D) the bondholder's priority in claiming assets in the event of default

Question 37

A bond has a face value of $10,000 and a conversion ratio of 560. The stock is currently trading at $16.30. What is the conversion price?

A) $6.13
B) $56.00
C) $16.30
D) $17.86

Question 38

Which of the following statements is FALSE?

A) The trust company represents the bondholders and makes sure that the terms of the indenture are enforced.
B) For private placements, the prospectus must include an indenture, a formal contract between the bond issuer and a trust company.
C) In the case of default, the trust company represents the bondholders' interests.
D) Almost all bonds that are issued today are registered bonds.

Question 39

A company issues a callable (at par) ten-year, 6% 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 $104 per $100 of face value. What is the yield to call of this bond when it is released?

A) 0.60%
B) 1.50%
C) 5.47%
D) 1.92%

Question 40

A company issues a callable (at par) 20-year, 5% 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 per $100 of face value. What is the yield to worst of this bond when it is released?

A) 4.84%
B) 2.94%
C) 5.60%
D) 6.66%

Question 41

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?

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

Question 42

Tompkinson's PLC., a British company, issues a bond in Australian dollars in Australia which is intended for Australian investors. Which of the following best describes this bond?

A) a kangaroo bond
B) a global bond
C) a foreign bond
D) a Eurobond

Question 43

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

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

Question 44

A callable bond will typically have a yield than an otherwise identical bond without a call feature because .

A) lower, the firm loses flexibility with a callable bond
B) higher, the option to call a bond is valuable
C) lower, the option to call a bond is valuable
D) higher, the firm loses flexibility with a callable bond

Question 45

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

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

Question 46

Bonds issued by a foreign company in a local market, intended for local investors, and denominated in the local currency are known as

A) foreign bonds.
B) domestic bonds.
C) kangaroo bonds.
D) Eurobonds.

Question 47

A company issues a callable (at par) five-year, 7% 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 $110 per $100 of face value. What is the yield to worst of this bond when it is released?

A) 4.71%
B) 2.73%
C) 1.40%
D) 3.00%

Question 48

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

A) notes
B) mortgage bonds
C) asset-backed bonds
D) debentures

Question 49

Gepps Cross Industries issues debt with a maturity of 25 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?

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

Question 50

What kind of corporate debt must be secured by real property?

A) debentures
B) notes
C) mortgage bonds
D) asset-backed bonds

Question 51

Eurobonds issued in France could NOT be issued in which of the following denominations?

A) yen
B) U.S. dollars
C) pounds sterling
D) euros

Question 52

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

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

Question 53

Which of the following statements is FALSE?

A) 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.
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) By including more covenants, issuers increase their costs of borrowing.

Question 54

A bond has a face value of $10,000 and a conversion ratio of 265. The stock is currently trading at $38.80. What is the conversion price?

A) $37.74
B) $1.56
C) $5.84
D) $25.73

Question 55

A covenant that restricts a company from making loans or otherwise providing credit is best viewed as a restriction on which of the following?

A) issuing new debt
B) mergers and acquisitions
C) dividends and share repurchases
D) asset disposition

Question 56

Coupon: 0% Call Date: 1 July 2012 Call Price: 104.32% Maturity: 1 July 2019 A firm issues the convertible debt shown above. The price of stock in this company on 1 July 2012 is $28.20. What is the minimum conversion ratio that would make a bondholder prefer to convert rather than accept the call price?

A) 37 shares per $1000 principal amount
B) 32 shares per $1000 principal amount
C) 41 shares per $1000 principal amount
D) 35 shares per $1000 principal amount

Question 57

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?

A) when the share price is much lower than the conversion price
B) when the share price is close to the conversion price
C) when the share price is high
D) when the share price is low

Question 58

Which of the following statements is FALSE?

A) The yield to call (YTC) is the annual yield of a callable bond assuming that the bond is called at the earliest opportunity.
B) 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.
C) 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.
D) 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.

Question 59

A company issues a 10-year, callable bond at par with 8% annual coupon payments. The bond can be called at par in one year after issue or any time after that on a coupon payment date. The call price is $105 per $100 of face value. What is the yield to call if this bond is called in one year?

A) 13%
B) 5%
C) 8%
D) 11%

Question 60

In terms of public offerings of bonds, what is an indenture?

A) a schedule of the fees charged by the underwriting company
B) a formal contract that specifies the firm's obligations to the bondholders
C) a memorandum that must be produced to describe the details of a bond offering
D) a list of the duties of the trust company representing the bondholders' interests

Question 61

What are debentures?

Question 62

A company issues a callable (at par) five-year, 7% 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 $110 per $100 of face value. What is the yield to call of this bond when it is released?

A) 4.71%
B) 2.73%
C) 5.66%
D) 1.40%

Question 63

Which of the following statements is FALSE?

A) If the issuer fails to live up to any covenant, the issuer goes into bankruptcy.
B) The stronger the covenants in the bond contract, the less likely the issuer will default on the bond, and so the lower the interest rate investors will require to buy the bond.
C) Bond agreements often contain covenants that restrict the ability of management to pay dividends.
D) Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds.

Question 64

A bond with a face value of $1000 is convertible to ordinary shares at a conversion ratio of 60. If the shares are currently trading at $8.20 per share, the value of the bond is probably closest in value to which of the following?

A) about $492
B) about $1000
C) less than $492
D) above $1666

Question 65

Which of the following is an advantage of a public bond issue over private placement?

A) It is less costly to issue.
B) It can be tailored to the particular situation.
C) It is freely tradable on the bond market.
D) It does not need to be registered with ASIC.

Question 66

Why do the issuers of bonds not seek to minimise the strength and number of covenants in a bond agreement?

A) Covenants favor the equity holders that managers work for.
B) Covenants lower the interest rate investors will require to buy the bond.
C) Covenants force the company to renegotiate the terms of the bond if they are broken.
D) Covenants can increase the flexibility of the company issuing the bond.

Question 67

$$\begin{array} { l l } \text { Couporc } & 0 \% \\\text { Conversion Ratio } & 20 \% \text { shanes per } \$ 1000 \text { principol amount } \\\text { Call Dates } & \text { 1 July } 2012 \\\text { Call Prick: } & \text { Par } \\\text { MSaturity: } & \text { 1 July } 2019\end{array}$$ A firm issues the convertible debt shown above. The share price of this company on 1 July 2012 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 a bond of face value $10,000?

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

Question 68

Which of the following best describes an international bond that is NOT denominated in the local currency of the country in which it is issued?

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

Question 69

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

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

Question 70

What are notes?

Question 71

What is secured debt?

Question 72

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

Question 73

A company issues a callable (at par) 20-year, 5% 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 per $100 of face value. What is the yield to call of this bond when it is released?

A) 6.66%
B) 5.60%
C) 2.94%
D) 4.11%

Question 74

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

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

Question 75

A firm issues $500 million in straight bonds at an original issue discount of 1% and a coupon rate of 5%. The firm pays fees of 3% on the face value of the bonds. What is the net amount of funds that the debt issue will provide for the firm?

A) $480 million
B) $500 million
C) $495 million
D) $485 million

Question 76

Convertible bonds have a provision that gives the bondholder an option to convert each bond owned into a fixed number of ordinary shares.

Question 77

What is an original issue discount bond?

Question 78

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

A) 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
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 exceeds 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

Question 79

A company issues a callable (at par) ten-year, 6% 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 $104 per $100 of face value. What is the yield to maturity of this bond when it is released?

A) 5.47%
B) 0.60%
C) 1.92%
D) 4.00%

Question 80

A firm issues $200 million in straight bonds at an original issue discount of 0.75% and a coupon rate of 7%. The firm pays fees of 2.5% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

A) $193,500,000
B) $180,375,000
C) $178,257,200
D) $185,000,000