Deck 24: The Many Different Kinds of Debt

Question 1

A type of bond that has the advantage of secrecy of ownership, but has the disadvantage of ownership not recorded by the registrar is:

A) A registered bond
B) A premium bond
C) A par bond
D) A bearer bond

Answer 1

A bearer bond

Question 2

In general which of the following statement(s) is (are) true:
I. Bonds issued in the United States are registered
II. Bonds issued in the United States are bearer bonds
III. Eurobonds are registered
IV. Eurobonds are bearer bonds

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

Answer 2

I and IV only

Question 3

Which of the following would not generally be included in the typical bond indenture? I) The basic terms of the bond
II) Details of the protective covenants
III) Sinking fund arrangements
IV) Call provisions

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

Answer 3

I, II, III, and IV

Question 4

The bonds that are sold to local investors issued by a firm from another country are called:

A) Private placement
B) Foreign bonds
C) Junk bonds
D) Investment grade bonds

Question 5

Very large bond issues that are marketed both internationally as well as in individual domestic markets are called:

A) Eurobonds
B) Foreign bonds
C) Global bonds
D) none of the above

Question 6

Recently a high proportion of international bond issues are denominated in

A) U.S. dollars
B) British pounds
C) Yens
D) Euros

Question 7

Any bond that is issued at a discount is known as:

A) Pure discount bond
B) Zero-coupon bond
C) Original issue discount bond
D) Premium bond

Question 8

The written agreement between a corporation and the bondholder's representative is called:

A) The indenture
B) The collateral maintenance agreement
C) The prospectus
D) The debenture

Question 9

A "foreign" bond is a bond:

A) Sold in the United States by a company in the USA
B) Sold to investors in the local market issued by a company from some other country
C) Sold in Europe by a company from the United States
D) None of the above

Question 10

A "samurai bond" is a bond:

A) Sold by a company from Japan
B) Sold in the United States by a company from Japan
C) Sold in Japan by a local company
D) Sold in Japan by a company from some other country

Question 11

The Alfa Co. has a 6% coupon bond outstanding that pays semiannual interest. Calculate the semi-annual interest payment:

A) $60
B) $30
C) $10
D) None of the above

Question 12

According to SEC Rule 144A:

A) Bonds issued through private placements can be bought and sold by institutional investors
B) SEC registration is not needed for privately placed bonds
C) SEC registration is required of all securities issued in the U.S.A.
D) (A) and (B) only

Question 13

The Alfa Co. has a 6% coupon bond outstanding that pays annual interest. Calculate the annual interest payment:

A) $60
B) $30
C) $10
D) None of the above

Question 14

LIBOR means:

A) London Interbank Offered Rate
B) London International Bank Offered Rate
C) Long-term International Bank Offered Rate
D) None of the above

Question 15

The Alfa Co. has a 12% bond outstanding that pays interest on February 1st and July 1st. Today is March 1st and you are planning to purchase one of these bonds. How much will you pay in accrued interest?

A) $10
B) $20
C) $30
D) $60

Question 16

In case of Eurobond issues, the entity that carries out similar functions of a bond trustee is called:

A) a bond trustee
B) an international bank
C) underwriter
D) a fiscal agent

Question 17

A zero-coupon bond is also called:

A) an Income bond
B) original issue discount bond
C) pure discount bond
D) none of the above

Question 18

The largest market for foreign bonds is

A) U.S.A
B) Japan
C) Switzerland
D) none of the above

Question 19

In general which of the following statements is true?

A) Bonds issued in the United States pay interest annually, while bonds issued in other countries pay interest semiannually
B) Bonds issued in the United States and other countries pay interest semi-annually
C) Bonds issued in the United States and other countries pay interest annually
D) Bonds issued in the United States pay interest semi-annually, while bonds issued in other countries pay interest annually

Question 20

A "yankee bond" is a bond

A) Sold by a company from the U.S.A.
B) Sold in the United States by a foreign firm
C) Sold in the U.S.A. by a local company
D) Sold in Japan by a company from some other country

Question 21

The following are various types of secured debt:
I. Mortgage bonds
II. Collateral trust bonds
III. Equipment trust certificate
IV. Debentures

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

Question 22

A sinking fund is useful to a corporation because:

A) The corporation does not have to worry about paying the bondholders
B) It provides the corporation with the option to buy the bonds back at the lower of face value or market price
C) The payments to the sinking fund are not necessary when the firm is in financial difficulty
D) They are simple and easy to monitor

Question 23

The following are secured bonds except:

A) Mortgage bonds
B) Debentures
C) Collateral trust bonds
D) Equipment trust certificate

Question 24

Long-term Bonds that are unsecured obligations of a company are called:

A) Indentures
B) Debentures
C) Mortgage bonds
D) Bearer bonds

Question 25

Firms often bundle up a group of assets and then sell the cash flows from these assets in the form of securities. They are called:

A) Debentures
B) Subordinated issues
C) Asset-backed securities
D) All of the above

Question 26

An 8% debenture has 5 years of call protection and is thereafter callable at 100%, except that it is non-refundable below interest cost. Which of the following statements is correct?

A) The debenture may be called any time during the next 5 years
B) The debenture may not be called during the next 5 years
C) The lender has the option to demand early repayment
D) The bond should be called when the yield on similar non-callable bonds falls to 8%

Question 27

Corporations typically have the right to repurchase a debt issue prior to maturity at a fixed price.
Such debt issues are said to be:

A) Indentured
B) Protected
C) Convertible
D) Callable

Question 28

Floating-rate bonds have adjustable rates to protect real rates of return against inflation. The rates paid are limited by:

A) The put provisions of the issues
B) A floor rate which sets the minimum
C) A cap rate which sets the maximum
D) B and C

Question 29

Puttable provision in bonds allows:

A) The issuer to call the bond at par on the coupon payment date
B) The holder to redeem the bond at par before maturity
C) The issuer to extend the maturity of the bond
D) The holder to extend the maturity of the bond

Question 30

Which of the following provisions would often be included in the indenture for a first- mortgage bond?

A) A limit on officer salaries
B) A negative pledge clause
C) A limit on new issues of subordinated debt
D) A limit on the amount of senior debt that can be issued

Question 31

Which of the following bonds is secured by assets?

A) A mortgage bond
B) A floating rate bond
C) A debenture
D) All of the above

Question 32

Even though many bonds have deferred sinking funds, the sinking fund has the following effects on bondholders:
I. Provides extra protection to bondholders as both an early warning system and perhaps some collateral cash
II. Provides an option to the firm to buy bonds at the lower of market or face value
III. Puts the bondholders at added risk due to potential inability to meet sinking fund payments

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

Question 33

Which of the following is not an example of an affirmative (positive) covenant?

A) Requirement to maintain a minimum level of working capital
B) Requirement to furnish bondholders with a copy of the firm's annual accounts
C) Requirement to limit dividends to net income
D) Requirement to maintain a minimum level of net worth

Question 34

A 5% debenture (face value = $1000) pays interest on June 30 and December 31. It is callable at a price of 105% together with accrued interest. Suppose the company decides to call the bonds on September 30. What price must it pay for each bond?

A) $1000.00
B) $1037.50
C) $1062.50
D) $1050.00

Question 35

The recovery rate on defaulting debt is the highest for the following type of debt:

A) Bank debt
B) Senior secured bonds
C) Senior subordinated bonds
D) Junior subordinated bonds

Question 36

The following are some of the complications associated with call provisions of bonds:
I. the firm may be prevented from calling bond because of non-refunding clause from issuing new debt.
II. the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders.
III. there may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond.
IV. there are costs and delays associated with calling and reissuing debt.

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

Question 37

Which of the following bonds is typically not secured?

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

Question 38

Which of the following bonds is typically secured?

A) Sinking fund debenture
B) Mortgage bond
C) Floating rate note
D) Eurobond
E) None of the above

Question 39

The recovery rate on defaulting debt is the least for the following type of debt:

A) Bank debt
B) Senior secured bonds
C) Senior subordinated bonds
D) Junior subordinated bonds

Question 40

The call policy that maximizes shareholder wealth is to call a bond issue when:

A) The bond's price is above par
B) The bond's price is above par, but below the call price
C) The bond's price exceeds the call premium
D) The bond's price equals or exceeds the call price

Question 41

A convertible bond issue by a firm can be thought of as:

A) selling straight bonds
B) selling straight bond and a call option
C) selling put options
D) selling common stock

Question 42

Which of the following statements about convertible bonds is (are) true?

A) A convertible bond cannot have call feature.
B) A callable bond cannot have a convertible feature.
C) A convertible bond can also have call feature.
D) all of the above statements about convertible bonds are false

Question 43

A convertible bond issue by a firm can be thought of as:

A) selling straight bonds
B) selling a call options
C) selling the common stock plus a put option
D) selling common stock

Question 44

The exercise of warrants creates new shares which:

A) Increases the total number of shares but does not affect share value.
B) Increases the total number of shares that reduces the individual share value.
C) Does not change the number of shares outstanding similar to options.
D) Increases share value because cash is paid into the firm at the time of warrant exercise.

Question 45

The holder of a $1,000 face value bond can be exchanged any time for 25 shares of stock. Then the conversion price is:

A) $40
B) $25
C) $100
D) None of the above.

Question 46

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because

A) The effects of risk are opposite on the two value components and tend to cancel each other out.
B) If the firm is high risk, the option premium will be higher while the straight bond value is fixed.
C) Only risky companies issued these instruments.
D) The equity value is dependent on current risks only, not the future risk at conversion.

Question 47

The holder of a $1,000 face value bond has the right to exchange the bond anytime before maturity for shares of stock priced at $50 per share. The $50 is called the:

A) Conversion price.
B) Stated price.
C) Exercise price.
D) Striking price.

Question 48

A convertible bond is selling for $993. It has 15 years to maturity, $1,000 face value, and pays 8% coupon interest payments annually. Similar straight bonds (non-convertible) are priced to yield 8.5%. The conversion ratio is 20. The stock is currently selling for $45. Calculate the convertible bond's option value.

A) $34.52
B) $93.00
C) $7.00
D) None of the above

Question 49

Which of the following could be a sensible reason for issuing convertibles?

A) Convertibles are convenient and flexible - they're usually unsecured and subordinated, and cash requirements for debt service are relatively low
B) Interest rates on convertible issues are significantly less than on straight debt
C) Firms that need equity capital use convertibles as a roundabout way of issuing stock
D) Firms prefer to issue convertibles when their shares are under-valued

Question 50

Two major differences between a warrant and a call option are:
I. Warrant are contracts outside of the firm while options are within the firm. II) Warrants have long maturities while options are usually short maturities.
III. Warrant exercise dilutes the value of equity while option exercise does not.

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

Question 51

Generally, convertible bonds are issued by:

A) smaller and more speculative firms
B) mature and profitable firms
C) very large firms
D) none of the above

Question 52

The holders of ZZZ Corporation's bond with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $25.00. What is the conversion value of the bond?

A) $1,000
B) $875
C) $1,200
D) None of the above

Question 53

The holders of ZZZ Corporation's bond with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $25.00. What is the conversion price?

A) $35
B) $7.70
C) $28.57
D) None of the above

Question 54

The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. Then the conversion ratio:

A) is $40
B) is $25
C) is $100
D) depends on the current market price of the bond.

Question 55

Issuing convertible bond is better than issuing equity by a firm because:
I. a convertible issue sends a better signal to investors than an issue of common stock.
II. an announcement of a stock issue generates worries of overvaluation and usually depresses stock price.
III. a convertible issue shows the management's willingness to take chance that the stock price will rise enough to lead to conversion also signals management's confidence in the future.

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

Question 56

Warrants are sometimes issued:
I. With private placement bonds.
II. To investment bankers as compensation.
III. To creditors in the event of bankruptcy.
IV. To common stock holders.

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

Question 57

The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay. This limitation is:

A) A non-recourse covenant
B) A recourse covenant
C) A positive covenant
D) A negative covenant

Question 58

A bond-warrant package:

A) Always increases the risk of the common equity.
B) Always decreases the risk of the common equity.
C) Could either increase or decrease the risk of the common equity.
D) All of the above.

Question 59

If a corporate security can be exchange for a fixed number of shares of stock, the security is said to be:

A) Callable
B) Convertible
C) Protected
D) None of the above

Question 60

The following are problems specific to valuation of convertible bonds:

A) dividends
B) dilution
C) changing bond value|
D) all of the above

Question 61

The owner of a convertible bond owns both a straight bond and a call option.

Question 62

Sinking funds reduce the average life of a bond and thereby reduce the risk of a default.

Question 63

PIKs are:

A) Pay-In-Kind bonds
B) Pay Interest Kicker bonds
C) Paid Interest in Krugerand
D) None of the above

Question 64

Privately placed loans are advantageous because:

A) There are usually fewer restrictive covenants
B) There is direct contact with the lender and renegotiations can be handled more easily
C) SEC registration is necessary
D) Both B and C

Question 65

What happens to the value of a convertible bond as the total value of the firm increases?

A) Goes up
B) Goes down
C) Stays the same
D) May go up or down

Question 66

Many times warrants may be issued on their own and do not have to be issued in conjunction with other securities.

Question 67

Project finance requires a capital investment that can be clearly separated from the parent that offers tangible security to lenders.

Question 68

Convertible bonds can also have a call feature.

Question 69

Affirmative covenants impose certain duties on the company.

Question 70

Bond-warrant package has different effects on the firm's cash flow and capital structure than the convertible bond.

Question 71

Issuing convertible debt makes sense whenever investors have difficulty estimating the risk of the company's bond.

Question 72

A negative pledge clause states that the company may grant an exclusive lien or claim on any of its assets.

Question 73

Project finance is generally provided by:

A) US Government
B) Foreign governments
C) International banks
D) World bank

Question 74

Bonds issued in the United States are usually registered.

Question 75

The term "Yankee bond" refers to any bond sold in the United States.

Question 76

A warrant holder is not entitled to vote but receives dividends.

Question 77

A loan guarantee provided by the government on a corporate bond acts like what kind of derivative security for the investor?

A) Long put
B) Short put
C) Long call
D) Short call

Question 78

The difference between the price of callable and non-callable bonds is greatest when bond prices are lowest.

Question 79

Project finance is extensively used in developing countries to finance:

A) Power projects
B) Telecommunications projects
C) Transportation projects
D) All of the above

Question 80

LYONs are bonds that are:
I. Callable
II. Puttable
III. Convertible
IV. Zero-coupon

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