Deck 15: Debt Financing

Question 1

The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

The public debt market is substantially larger than the private debt market.

Answer 3

False

Question 4

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

Question 5

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

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

Question 6

Private debt cannot be in the form of bonds.

Question 7

Different classes of securities that make up a single bond issuance are called

A) subordinated debentures.
B) unsecured debt.
C) sen ior debt.
D) secured debt.
E) tranches.

Question 8

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

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

Question 9

What is a bond's seniority?

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

Question 10

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

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

Question 11

Which of the following terms best describes a credit commitment for a specific time period which a company can use as needed?

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

Question 12

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

Question 13

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

A) It can be tailored to the particular situation.
B) It is less costly to issue.
C) It does not need to be registered with the securities commission.
D) It is freely tradable on the bond market.
E) It is sold to a small group of investors.

Question 14

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

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 15

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

Question 16

A bond issue that does not trade on the public market but instead is sold to a small group of investors is called a(n)

A) private placement.
B) syndicated bond.
C) revolving line of credit.
D) syndicated bank loan.
E) Eurobond.

Question 17

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

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

Question 18

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

Question 19

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

Question 20

By definition,a corporate bond is any form of debt security.

Question 21

BC Brewery issues $50 million in straight bonds at an original issue discount of 1% and a coupon rate of 7.5%.The firm also pays underwriting fees of 3.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

A) $49.5 million
B) $50 million
C) $47.75 million
D) $48.25 million
E) $44 million

Question 22

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

Question 23

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

A) domestic bonds.
B) Yankee bonds.
C) Eurobonds.
D) foreign bonds.
E) global bonds.

Question 24

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
E) a corporate bond

Question 25

Which of the following statements is most accurate?

A) In the event of default, the assets not pledged as collateral for outstanding bonds can be used to pay off the holders of subordinated debentures before more senior debt has been paid off.
B) Even though more than one debenture might be outstanding, the bondholders all have the same priority in claiming assets in the event of default.
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.
E) Debentures are a type of secured corporate debt with maturities greater than 10 years.

Question 26

What is the difference between secured and unsecured debt?

Question 27

Alberta Energy issues $110 million in straight bonds at par with a coupon rate of 8%.The firm also pays underwriting fees of 1.5% on the face value of the bonds.What are the net proceeds to Alberta Energy from the bond issue?

A) $99.55 million
B) $110 million
C) $108.35 million
D) $101.2 million
E) $99.68 million

Question 28

BC Brewery issues $30 million in straight bonds at an original issue discount of 2% and a coupon rate of 6%.The firm also pays underwriting fees of 2.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

A) $27.45 million
B) $26.85 million
C) $29.25 million
D) $30 million
E) $28.65 million

Question 29

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

A) mortgage bonds
B) asset-back bonds
C) term loans
D) notes
E) debentures

Question 30

Which of the following statements regarding bonds is most accurate?

A) Foreign bonds are bonds issued by a local entity and traded in a local market, but purchased by foreigners.
B) Domestic bonds are bonds issued by a foreign company in a local market and are intended for local investors.
C) Debentures are a type of secured corporate debt in which specific assets are pledged as collateral.
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued.
E) Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously.

Question 31

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

A) a foreign bond
B) a Eurobond
C) a global bond
D) a Yankee bond
E) a Maple bond

Question 32

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
E) a corporate bond

Question 33

BC Brewery issues $120 million in straight bonds at an original issue discount of 1.5% and a coupon rate of 5%.The firm also pays underwriting fees of 3% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?

A) $114.6 million
B) $118.2 million
C) $116.4 million
D) $108.6 million
E) $110.4 million

Question 34

Explain the difference between notes and debentures.

Question 35

What is bond seniority?

Question 36

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

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

Question 37

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

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

Question 38

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

A) mortgage bonds
B) notes
C) asset-backed bonds
D) debentures
E) revolving line of credit

Question 39

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

Question 40

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

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

Question 41

If a company issues both a straight bond and a convertible bond simultaneously,at par,then the straight bond will have a higher interest rate.

Question 42

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) III only
D) I and II
E) I and III

Question 43

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 mortgage bond
C) an asset-backed bond
D) a foreign bond
E) a Eurobond

Question 44

Which of the following is a typical bond covenant restriction on mergers and acquisitions?

A) Funding for acquisitions cannot include new debt.
B) Acquisitions can be made only once existing debt has been paid.
C) Mergers are allowed only if the combined firm's earnings exceed some threshold.
D) Mergers are allowed only if the combined firm has a minimum ratio of net tangible assets to debt.
E) Mergers are allowed only if the combined firm has a lower cost of issuing new debt.

Question 45

Covenants in a bond contract restrict the actions that management of a firm can take that would benefit the debt holders of the firm at the expense of the equity holders of that firm.

Question 46

What is a call provision?

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

Question 47

What is the difference between Eurobonds and Foreign bonds?

Question 48

Which of the following statements regarding bond covenants is most accurate?

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 higher the interest rate investors will require to buy the bond.
C) Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds.
D) Bond agreements seldom contain covenants that restrict the ability of management to pay dividends.
E) Equity holders try to include as few covenants as possible in a bond agreement.

Question 49

Why are bond covenants necessary?

Question 50

Which of the following is a typical bond covenant restriction on the issuance of new debt?

A) New debt must have a lower coupon payment than existing debt.
B) No new debt can be issued until existing debt has been paid.
C) New debt cannot mature before existing debt.
D) New debt must be offered at a discount.
E) New debt must be subordinate to existing debt.

Question 51

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.

Question 52

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) dividends and share repurchases
C) mergers and acquisitions
D) asset disposition
E) investment opportunities

Question 53

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

A) when the market price of the bond exceeds 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 is less than 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
E) when the market price of the bond equals the call price, and market interest rates are equal to the bond's coupon rate

Question 54

How might equity holders benefit from bond covenants?

Question 55

Why do the issuers of bonds seek to increase the strength and number of covenants in a bond agreement?

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

Question 56

The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in the bond contract.

Question 57

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) 1.92%
D) 5.47%
E) 6.00%

Question 58

A firm raising capital by issuing callable bonds instead of non-callable bonds will either have to pay a higher coupon rate or accept lower proceeds.

Question 59

Which of the following is a typical bond covenant restriction on dividends and share repurchases?

A) Payouts can be made only once existing debt has been paid.
B) Payouts can be made only if earnings exceed some threshold.
C) Payouts cannot exceed interest payments to existing bondholders.
D) Shares can only be repurchased by issuing new debt.
E) Payouts cannot be made until existing debt is within one year of maturity.

Question 60

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

Question 61

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?

A) 10%
B) 7.2%
C) 7.33%
D) 6%
E) 8%

Question 62

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 price of the stock is high
B) when the price of the stock is close to the conversion price
C) when the price of the stock is low
D) when the price of the stock much lower than the conversion price
E) when the price of the stock is much higher than the conversion price

Question 63

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) 1.40%%
B) 2.73%
C) 4.71%
D) 5.66%
E) 7.00%

Question 64

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 bond issue on each coupon payment date.What payment must they make on the tenth and final coupon payment date?

A) $40 million
B) $52 million
C) $56 million
D) $62 million
E) $68 million

Question 65

A callable bond with the call price set equal to the present value of the bond's remaining payments is a

A) convertible bond.
B) straight bond.
C) par call.
D) Yankee call.
E) Canada call.

Question 66

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 $107 per $100 of face value,and has a yield to call of 3.5%.What is the bond's coupon rate?

A) 4.34%
B) 3.5%
C) 7.00%
D) 10.75%
E) 3.27%

Question 67

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) 1.40%%
B) 2.80%
C) 4.71%
D) 5.66%
E) 7.00%

Question 68

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) 1.40%
B) 2.73%
C) 3.00%
D) 4.71%
E) 5.66%

Question 69

A company issues a callable (at par)ten-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 yield to call of 3.1%.What is the price of this bond per $100 of face value when it is released?

A) $103.78
B) $100.00
C) $107.00
D) $96.36
E) $133.10

Question 70

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 first coupon payment date?

A) $20 million
B) $25 million
C) $35 million
D) $45 million
E) $145 million

Question 71

A company issues a callable (at par)ten-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 yield to maturity of 3.1%,which is below the yield to call.What is the price of this bond per $100 of face value when it is released?

A) $103.78
B) $100.00
C) $107.00
D) $96.36
E) $133.10

Question 72

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) 0.60%
B) 1.92%
C) 4.00%
D) 5.47%
E) 6.00%

Question 73

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 yield to maturity of 4.8%,which is below the yield to call.What is the price of this bond per $100 of face value when it is released?

A) $101.15
B) $109.36
C) $100.00
D) $104.80
E) $95.42

Question 74

Which of the following statements concerning the use of sinking funds to repurchase a bond issue is most correct?

A) The firm makes a single payment into a sinking fund administered by a trustee at the beginning of the life of the bond.
B) The firm can reduce the amount of outstanding debt without affecting the cash flows of the remaining bonds.
C) Payments into the sinking fund are held in reserve to protect the firm from default.
D) Bonds can be issued with a sinking fund provision or a call provision, but not both.
E) Sinking fund provisions require the issuer to repay the entire principal balance on the maturity date.

Question 75

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 yield to call of 4.8%.What is the price of this bond per $100 of face value when it is released?

A) $101.15
B) $109.36
C) $100.00
D) $104.80
E) $95.42

Question 76

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?

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

Question 77

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) 0.60%
B) 1.92%
C) 4.00%
D) 5.47%
E) 6.00%

Question 78

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?

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

Question 79

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?

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

Question 80

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm makes a final payment of $145 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?

A) 4%
B) 3.7%
C) 3.8%
D) 3.9%
E) 4.1%