Deck 10: Sources of Finance: Debt

Question 1

The interest rate charged on the overdraft is normally on the basis of a margin above:

A)the call rate.
B)the LIBOR.
C)an indicator rate.
D)the cash rate.

Answer 1

an indicator rate.

Question 2

A loan for general business purposes secured against the inventory of the borrower is known as:

A)floor plan finance.
B)wholesale finance.
C)revolving facility finance.
D)bridging finance.

Answer 2

revolving facility finance.

Question 3

An alternative to issuing a commercial bill is to:

A)take out a long-term loan.
B)issue a promissory note.
C)buy a promissory note.
D)buy government securities.

Answer 3

issue a promissory note.

Question 4

The size of a commercial paper program will depend on which of the following factors?

A)The borrower's need for funds
B)The borrower's credit rating.
C)The cost of commercial paper compared with other forms of debt.
D)All of the given options.

Question 5

A discounting agreement under which the discounter and the company share responsibility for managing the company's debtors is known as:

A)cooperation discounting.
B)full service discounting.
C)invoice discounting.
D)debtor finance without recourse discounting.

Question 6

Which statement best describes accounts receivable?

A)An arrangement in which a seller allows the purchaser a period of time before requiring payment.
B)The equivalent to a short-term loan made by the seller to a purchaser of an amount equal to the purchase price.
C)A sum of money owed to the seller as a result of having sold goods on credit.
D)An arrangement in which the purchasing company delays paying until after the due date.

Question 7

Which of the following statements about yields on short-term securities is true?

A)The yield on a Treasury note is generally higher than the interest rate on a bank overdraft.
B)The interest rate on a bank overdraft is generally less than on an inter-company loan.
C)The interest rate on an inter-company loan is generally higher than the yield on a Treasury note.
D)The yield on a Treasury note is generally higher than the interest rate on an inter-company loan.

Question 8

A discounting agreement under which the discounter manages the company's debtors is known as:

A)undisclosed discounting.
B)full service discounting.
C)recourse discounting.
D)invoice discounting.

Question 9

The interbank cash rate is also known as the:

A)indicator rate.
B)margin rate.
C)at call rate.
D)cash rate.

Question 10

Accounts receivable is an asset that arises when a company:

A)purchases goods or services on credit.
B)sells goods or services on credit.
C)purchases goods or services for cash.
D)sells goods or services for cash.

Question 11

Which of the following statements will not result in the flow of funds from cash surplus companies to companies that require cash?

A)Investment by companies in commercial bills.
B)Investments by companies in government securities.
C)Investment by companies in cash deposits at a bank.
D)Investment by companies in short-term deposits at a financial institution.

Question 12

A promissory note is also known as a:

A)commercial paper.
B)floor plan paper.
C)wholesale paper.
D)secondary transaction paper.

Question 13

The interest rate on overnight loans between a bank and other banks is:

A)the cash rate.
B)the LIBOR.
C)the interbank cash rate.
D)the interbank cash rate or simply the cash rate.

Question 14

To invest funds,available only in the short term,a company can:

A)buy out a company.
B)issue a commercial bill.
C)issue a promissory note.
D)buy a promissory note.

Question 15

Which form of finance allows a company to raise funds by selling its accounts receivable?

A)Trade credit finance.
B)Invoice finance.
C)Recourse finance.
D)Debtor finance.

Question 16

A debtor finance agreement under which the discounter is not reimbursed by the selling company if the debtor defaults is known as:

A)debtor finance without recourse.
B)debtor finance with recourse.
C)confidential discounting.
D)cooperation discounting.

Question 17

What is the price of a commercial paper with a face value of $100 000 and 120 days until maturity that is issued at a yield of 5% p.a.?

A)$84 251.50
B)$91 843.10
C)$97 685.46
D)$98 382.75

Question 18

In order to discount a commercial bill:

A)a buyer must be found.
B)a seller must be found.
C)the Reserve Bank must be willing to lend.
D)the borrower must pay back the loan within a specified time.

Question 19

Which of the following permits a company to run its current account into deficit up to an agreed date?

A)Direct loan.
B)Overdraft.
C)Secured loan.
D)Short-term loan.

Question 20

The cost of a bank overdraft:

A)does not include the interest cost.
B)includes interest cost but not fees.
C)includes interest cost and fees.
D)does not include interest cost but includes bank fees.

Question 21

Which of the following statements with regard to factoring is true?

A)When the customer makes payment,the money initially goes to the factor,which then passes it to the company,plus a factor charge.
B)The discount charged by the factor is generally calculated at a rate approximately equal to the secured overdraft rate.
C)From the factor's viewpoint,the company accelerates its cash inflow from accounts receivable.
D)Some banks and bank subsidiaries may provide factoring.
E)None of the given options.

Question 22

A non-bank bill may be more difficult to discount than a bank bill because:

A)the interest rate is recalculated each time a new bill is issued.
B)bank bills are regarded as inferior quality.
C)there is a cost associated with the bill facility.
D)the financial stature of the acceptor or endorser is not well regarded.

Question 23

Disintermediation can be best defined as movement of funds from accounts with:

A)deposit-taking financial intermediaries and the reinvestment of those funds in bonds.
B)deposit-taking financial intermediaries and the reinvestment of those funds in international equities.
C)deposit-taking financial intermediaries and the reinvestment of those funds in higher yielding securities.
D)non-deposit-taking financial intermediaries and the reinvestment of those in high-yielding securities.

Question 24

In a bill acceptance facility:

A)the bank undertakes to accept bills drawn by the borrower up to a specified total amount.
B)the borrower undertakes to accept bills drawn by the bank for an unspecified total amount,usually determined by demand and supply.
C)the borrower undertakes to accept bills drawn by the bank up to a specified total amount.
D)none of the given options.

Question 25

The difference between commercial paper and a bill of exchange is that:

A)a bill of exchange is a short-term debt instrument whereas commercial paper is not.
B)in a bill of exchange,the issuer and an acceptor are parties to the instrument,as opposed to only the issuer to a commercial paper instrument.
C)only a bill of exchange can be traded in an active secondary market.
D)none of the given options.

Question 26

A revolving credit bill facility is:

A)similar to a fully drawn facility in that the company is permitted to draw on the facility as the funds are required,provided that it does not borrow more than the agreed total amount.
B)different from a bank overdraft in that the company is permitted to draw on the facility as the funds are required,provided that it does not borrow more than the agreed total amount.
C)different from a bank overdraft in that there is an agreed total amount up to which the company can borrow.
D)none of the given options.

Question 27

What is the implicit effective annual interest rate on a company transaction to raise $100 000 finance by drawing a commercial bill with face value of $105 000 payable in 180 days?

A)9.746%
B)4.76%
C)9.65%
D)None of the given options.

Question 28

The acceptance fee in relation to a commercial bill is the:

A)fee for drawing up the bill facility.
B)discounter's fee for taking on risks associated with the bill facility.
C)drawer's fee for taking on risks associated with the bill facility.
D)acceptor's fee for taking on risks associated with the bill facility.

Question 29

Why will banks permit the use of an overdraft as suitable for funding the purchase of inventory that will quickly be converted into cash?

A)To assist a company in meeting unexpected short-term cash flow problems.
B)To assist a company in exploiting short-term opportunities.
C)To assist a company through seasonal downturns in liquidity.
D)All of the given options.

Question 30

In a bill discount facility:

A)the borrower undertakes to buy bills of exchange drawn by the bank up to a specified total amount.
B)the bank undertakes to sell bills of exchange drawn by the borrower up to a specified total amount.
C)the bank undertakes to sell bills of exchange drawn by the borrower for an unspecified total amount,usually determined by demand and supply.
D)none of the given options.

Question 31

Which of the following statements is true?

A)A bank bill is extremely marketable.
B)A non-bank bill may be regarded as almost equivalent to a bank bill.
C)A bank bill that is regarded as being very risky will easily be discounted in the bills market.
D)A bank bill is extremely marketable and a non-bank bill may be regarded as almost equivalent to a bank bill.

Question 32

The interbank overnight rate is:

A)well below the indicator rate for business lending;otherwise,a company could draw on its overdraft to borrow profitably in the cash market.
B)well above the indicator rate for business lending;otherwise,a company could draw on its overdraft to borrow profitably in the cash market.
C)well below the indicator rate for business lending;otherwise,a company could draw on its overdraft to lend profitably in the cash market.
D)well above the indicator rate for business lending;otherwise,a company could draw on its overdraft to lend profitably in the cash market.

Question 33

Promissory notes have an advantage over commercial bills in that:

A)they are marketable.
B)a borrower with a low credit rating will find bank endorsement unnecessary.
C)they are non-negotiable.
D)an entity selling a promissory note does not incur a contingent liability.

Question 34

An advantage of promissory notes over some other forms of finance is that:

A)entities selling a promissory note incur a contingent liability and are marketable.
B)they are marketable.
C)entities selling a promissory note incur a contingent liability.
D)they can be long-term as well as short-term.

Question 35

With an effective annual interest rate of 10.04%,how much finance can a company raise by drawing a commercial bill with a face value of $100 000,maturing in 180 days?

A)$96 400
B)$95 121
C)$90 580
D)$81 822

Question 36

A fully drawn bill facility:

A)provides a company with an unspecified amount for a specified period.
B)provides a company with a specified amount for a specified period.
C)provides a company with an unspecified amount for an unspecified period.
D)provides a company with a specified amount for an unspecified period.

Question 37

A bill either accepted or endorsed by a bank is referred to as a:

A)trade bill.
B)bill of exchange.
C)bank bill.
D)commercial bill.

Question 38

Endorsement means that:

A)if the acceptor is unable to pay the face value on the maturity date,then it is obliged to draw a bill to meet its initial obligations.
B)an agreement between the acceptor and an endorser is reached,whereby the acceptor is obliged to pay the face value on the maturity date if the endorser is unable to pay the subsequent holder of the bill.
C)the endorser has a contingent liability until the bill matures and is paid.
D)none of the given options.

Question 39

A bank bill:

A)is accepted by institutions other than banks.
B)is regarded as a lower quality bill than a non-bank bill.
C)includes both bank-accepted and bank-endorsed bills.
D)is not normally endorsed if it is sold after being bought in the secondary market.

Question 40

The role of an acceptor in relation to bills of exchange is to:

A)act as a negotiator.
B)provide the funds.
C)write up the documents.
D)repay the face value of the debt at maturity.

Question 41

When comparing debentures and unsecured notes,it can be said that:

A)they are identical securities.
B)a debenture holder is an unsecured creditor whereas an unsecured note holder is a secured creditor.
C)both are an example of unsecured debt.
D)a debenture holder is a secured creditor whereas an unsecured note holder is an unsecured creditor.

Question 42

The number of ordinary shares received by the holder of each converting preference share is known as the:

A)converting ratio.
B)share ratio.
C)conversion ratio.
D)perpetual ratio.

Question 43

Bonds issued outside the borrower's country and denominated in the currency of the country in which it is issued are known as:

A)foreign bonds.
B)domestic bonds.
C)eurobonds.
D)Australian bonds.

Question 44

Which of the following statements best describes a swap?

A)It is a contract in which two parties agree to exchange financial securities.
B)It is a contract in which two parties agree to exchange a series of future cash flows over a specified period of time.
C)It is a contract in which two parties agree to exchange assets.
D)Swap is an acronym for 'savings with annual payments'.

Question 45

It is expected that the interest rates on debentures will be greater than on commercial bills because:

A)a bank may not endorse commercial bills.
B)of the liquidity preference of investors.
C)debentures are typically unsecured.
D)debentures are readily marketable.

Question 46

Subordinated debt-holders will demand higher compensation than unsubordinated debt-holders because:

A)unsubordinated debt is riskier.
B)subordinated debt ranks ahead of unsubordinated debt.
C)unsubordinated debt ranks ahead of subordinated debt.
D)the interest rate on subordinated debt tends to be fixed rather than variable.

Question 47

A characteristic of redeemable preference shares is that:

A)the company is required to pay any accumulated preference dividends before a distribution can be made to ordinary shareholders.
B)they may be re-purchased by the company out of profits or the proceeds of a new share issue.
C)they may be converted into ordinary shares.
D)such shareholders may be entitled to a return in excess of the stated preference dividend rate.

Question 48

If a company is in financial distress,the existence of debentures and the associated trust deed can compound difficulties.Which of the following statements is unlikely to be a difficulty for a company in financial distress?

A)Publicity resulting from any actions taken by the trustee.
B)Borrowing restrictions.
C)Interest payments on the debentures.
D)None of the given options.

Question 49

Which type of debt takes the form of loans arranged privately between two parties where the lender is usually a bank or other financial institution?

A)Covenant.
B)Debenture.
C)Marketable debt.
D)Non-marketable debt.

Question 50

Which type of debt ranks below other debt in the event that a company is wound up?

A)Subordinated debt.
B)Unsubordinated debt.
C)Marketable debt.
D)Non-marketable debt.

Question 51

An advantage of interest rate swaps is the ability to:

A)swap a fixed loan to a flexible loan.
B)borrow flexible-rate funds,which otherwise would not be available.
C)borrow overseas at a fixed exchange rate.
D)borrow fixed-rate funds,which otherwise would not be available.

Question 52

A company that issues debentures is required to draw up:

A)the listing rules.
B)a trust deed.
C)a covenant.
D)all of the given options.

Question 53

Co-op Ltd issues converting preference shares with a face value of $15,which convert to ordinary shares on 30 June.The conversion ratio is determined by dividing the face value of the preference share by an amount equal to the price of Co-op ordinary shares on 30 June,less 10 per cent.If the market value of ordinary shares on the conversion is $5.35,at what value will each preference share convert into ordinary shares?

A)$15.00
B)$16.67
C)$5.35
D)$13.50

Question 54

Converting preference shares offer a guaranteed price prior to a specified conversion date:

A)so that the holder is effectively protected against a fall in the price of the ordinary shares prior to conversion.
B)so that the holder has the opportunity to profit from a fall in the price of the ordinary shares prior to conversion.
C)so that the holder has the opportunity to profit from an increase in the price of the ordinary shares prior to conversion.
D)so that the holder has the opportunity to profit from an increase in the price of the ordinary shares after the conversion.

Question 55

Which type of loan involves regular repayments which include principal and interest?

A)Bond.
B)Commercial Bill.
C)Principle-and-Interest loan.
D)Interest-Only Loan.

Question 56

Most marketable long-term debt securities have a fixed interest rate known as the:

A)risk-free rate.
B)coupon rate.
C)yield to maturity.
D)default rate.

Question 57

Interest rates are normally higher on unsecured notes than on debentures because:

A)debenture holders have a prior claim over company assets.
B)debentures are a riskier form of security.
C)unsecured notes are normally secured by a floating charge over assets.
D)unsecured notes are normally secured by a fixed charge over an asset.

Question 58

An advantage of using debt is that:

A)debt-holders have no control over the company's operations.
B)debt-holders usually exert no control over the company's operations.
C)interest payments are fixed.
D)a company may borrow without the security of an asset.

Question 59

Chameleon Ltd has a fixed interest rate borrowing of $1 million at 10% p.a.for five years and wishes to swap to a floating rate loan.In the swap,Chameleon pays the fixed interest payment of $100 000 on the loan and the final balloon payment.It agrees to pay a financial intermediary a variable amount at the bank-accepted bill interest rate on the $1 million and the financial intermediary pays Chameleon a fixed rate of 10% p.a.What is the result of this swap by Chameleon?

A)Chameleon has effectively borrowed $1 million at the bank-accepted bill rate.
B)Chameleon has effectively borrowed $1 million at the fixed interest rate.
C)Chameleon has effectively borrowed $100 000 at the bank-accepted bill rate.
D)Chameleon has effectively borrowed $100 000 at the fixed interest rate.

Question 60

The main difference between corporate bonds and debentures is that:

A)debentures are typically unsecured.
B)the trust deed for corporate bonds is normally less restrictive than that for debentures.
C)debentures are placed privately with institutional investors.
D)corporate bonds are normally for a longer term.

Question 61

Which of the following statements is false?

A)The holders of subordinated debt demand a lower interest rate than the holders of unsubordinated debt.
B)Marketable securities are normally issued at a lower interest rate than other types of debt,ceteris paribus.
C)A variable interest rate consists of a base rate plus a margin that reflects the risk of the borrower.
D)None of the given options.

Question 62

The following statement is not a feature of negative pledge lending:

A)The borrower undertakes not to pledge existing or future assets of the company or group to anyone else without the approval of the lender.
B)The company may be restricted from increasing its borrowing and total external liabilities beyond a specified proportion of total tangible assets,including overseas assets.
C)The loan agreement may contain a covenant that restricts the payment of dividends to a specified percentage of each period's profit.
D)None of the given options.

Question 63

Unsecured notes are essentially the same as debentures,but differ in that holders rank above debenture holders for the repayment of debt.

Question 64

A covenant is a provision in a loan agreement to protect lenders' interests by requiring certain actions to be taken and others refrained from.

Question 65

Yebuzz Ltd has just raised $100 million by an issue of 10 million converting preference shares.Each CPS converts into five ordinary shares.If the ordinary share price immediately prior to conversion is $2 per share,calculate the rate of the conversion discount.

A)0.5%
B)0.9%
C)0%
D)5%

Question 66

Koppen Ltd has just raised $1 billion by an issue of converting preference shares on the following terms:
An investor,W.Street,currently owns 500 000 Koppen Ltd CPS.The ordinary share price immediately prior to conversion is expected to be $2.00 per share.Calculate the total value of ordinary shares expected to be received by W.Street on conversion.

A)$25 000 000
B)$12 500 000
C)$50 000 000
D)$5 000 000

Question 67

Bridging finance is a long-term loan usually used to fund investments in large scale infrastructure.

Question 68

The effect of increasing financial risk through borrowing is that:

A)the risk of financial distress increases.
B)the shareholders are more assured of receiving dividends because the amount they are entitled to is lower.
C)the variability of returns to shareholders increases.
D)the risk of financial distress increases and the variability of returns to shareholders increases.

Question 69

Which of the following statements is not a role of the trustee?

A)To ensure that the borrower does not breach any of the covenants in the trust deed.
B)The trustee has to act to protect the debenture holders in the event of any breach.
C)The trustee has to ensure that the borrower does not breach any of the covenants in the trust deed and to act to protect the debenture holders in the event of any breach.
D)None of the given options.

Question 70

Which of the following statements best describes the main difference(s)between corporate bonds and debentures?

A)Corporate bonds are typically issued as secured notes.
B)The trust deed is less restrictive than a debenture trust deed.
C)Corporate bonds are placed privately with institutional investors rather than issued publicly.
D)The trust deed is less restrictive than a debenture trust deed and corporate bonds are placed privately with institutional investors rather than issued publicly.

Question 71

Which of the following statements with regards to debentures is false?

A)Most debenture issues involve a fixed charge because a floating charge impedes the company's freedom to deal in its own assets.
B)Debenture holders rank as unsecured creditors on the portion of the financial obligations,on a fixed-charge debenture,that is not raised through the sale of the pledged assets.
C)The interest rates attached to a debenture issue normally remain unchanged for the life of the issue.
D)None of the given options.

Question 72

Which of the following statements with regards to fixed-rate term loans is false?

A)The term of the loan can be up to 25 years for non-rural loans.
B)The loan can be on an interest-only basis for up to five years.
C)It can be repaid early without penalty.
D)The term of the loan can be up to 25 years for non-rural loans and it can be repaid early without penalty.

Question 73

Nosam Ltd has just raised $100 million by an issue of 5 million converting preference shares.If each CPS converts into 20 ordinary shares on conversion,calculate the value of the ordinary shares received in exchange for each converting preference share.Assume the conversion discount is 5 per cent.

A)$20.00
B)$21.05
C)$105.20
D)$101.00

Question 74

A convertible note:

A)can be issued by a rights issue to existing shareholders or by a placement to institutions,which is restricted by the '10 per cent rule' under ASX listing rule 7.1.
B)is attractive to issuers requiring long-term,fixed-rate debt finance.
C)offers a higher interest rate than a straight unsecured note.
D)all of the given options.

Question 75

Nosam Ltd has just raised $100 million by an issue of 5 million converting preference shares.If each CPS converts into 20 ordinary shares on conversion,calculate the expected ordinary share price immediately prior to conversion.Assume the conversion discount is 5 per cent.

A)$1.05 per share.
B)$5.26 per share.
C)$1.00 per share.
D)$5.05 per share.

Question 76

The features of convertible notes include:

A)being treated as equity for tax purposes,but as debt for the purpose of calculating balance sheet ratios used in loan agreements.
B)undated notes which can be converted to ordinary shares at any time.
C)being issued on international markets.
D)all of the given options.

Question 77

Which of the following statements with regards to mortgage loans is false?

A)Mortgage loans are usually made on a credit foncier basis.
B)A 'balloon' payment may be necessary at maturity.
C)Most life insurance companies specify a minimum amount for mortgage finance,usually upwards of $200 000.
D)The main source of mortgage finance for companies has traditionally been superannuation funds.

Question 78

Koppen Ltd has just raised $1 billion by an issue of converting preference shares on the following terms:
An investor,W.Street,currently owns 500 000 Koppen Ltd CPS.If the ordinary share price immediately prior to conversion is expected to be $2.00 per share,calculate the number of ordinary shares that W.Street expects to receive on conversion.

A)625 000 ordinary shares.
B)6 250 000 ordinary shares.
C)12 500 000 ordinary shares.
D)1 250 000 ordinary shares.

Question 79

In a fixed-for-floating interest rate swap:

A)Counter-party A pays Counter-party B an amount calculated according to a floating interest rate in return for an amount calculated on the basis of a fixed interest rate.
B)The amounts payable depend on the notional principal.
C)Only interest flows are involved until maturity,when the principal is exchanged based on the difference in the amounts calculated according to a floating interest rate and a fixed interest rate.
D)Counter-party A pays Counter-party B an amount calculated according to a floating interest rate in return for an amount calculated on the basis of a fixed interest rate and the amounts payable depend on the notional principal.

Question 80

Which of the following statements is false?

A)Issuing long-term debt securities is an important way for Australian borrowers to raise funds from overseas.
B)Governments are the main domestic issuers of long-term debt securities to the public.
C)Most of the long-term debt securities issued by Australian borrowers are issued by governments and financial institutions rather than by non-financial corporations.
D)None of the given options.