Deck 10: Medium-To-Long-Term Debt

Question 1

A bank charge on any part of a loan that has not been fully drawn down by a company is called a/an:

A) establishment fee.
B) commitment fee.
C) line fee.
D) service fee.

Answer 1

B

Question 2

A company can borrow from a bank at a margin to the bank's base rate.According to the text,all of the following factors affect this margin except:

A) the credit risk of the company.
B) the term of the loan.
C) the term structure of interest rates.
D) the loan repayment schedule.

Answer 2

C

Question 3

Long-term debt can be categorised as financing with an initial maturity:

A) over 180 days and less than a year.
B) between 1 and 3 years.
C) over 1 year.
D) between 3 and 12 years.

Answer 3

C

Question 4

Which of the following rates serves as a reference interest rate in Australia?

A) BBSW
B) LIBOR
C) USCP
D) SIBOR

Question 5

Term loans where each periodic loan payment consists of interest payments and then the principal is repaid in full at maturity are:

A) fully drawn advances.
B) amortised loans.
C) interest-only loans.
D) credit foncier loans.

Question 6

Compared with an amortised loan,a deferred repayment loan involves:

A) periodic interest and principal repayments.
B) periodic interest and principal repayments when positive cash flows begin.
C) periodic interest payments and principal repaid at maturity.
D) periodic principal payments and interest repaid at maturity.

Question 7

In relation to long-term financing,a fully drawn advance is a:

A) a bank loan advanced for a precise period for an unspecified purpose.
B) A term loan where the full amount is provided at the start of the loan, usually for a specified purpose.
C) A term loan where the borrower has the option of putting its operating account in deficit up to an agreed limit.
D) A term loan where the bank does not pay out the loan until after a specified period.

Question 8

All of the following affect interest rates charged on term loans except:

A) default risk.
B) the maturity.
C) the repayment schedule.
D) refinancing risk.

Question 9

Which of the following statements best describes a fully amortised term loan?

A) A fully amortised term loan is an interest-only loan with principal repayable at maturity.
B) A fully amortised term loan has periodic repayments, including interest and principal reduction.
C) Interest repayments on a fully amortised term loan are fixed for the period of the loan.
D) A fully amortised term loan is a 'low-start' loan whose repayments are increased over the term.

Question 10

If a company wished to structure its financing so it repaid funds borrowed only when a project begins to have positive cash flows,it would choose a/an:

A) fully drawn advance.
B) term loan.
C) interest-only loan.
D) deferred payment loan.

Question 11

________ granted by banks generally have maturities of three to 15 years and are often made to finance capital expenditure such as building construction and the purchase of real estate.

A) Debentures
B) Mortgage bonds
C) Term loans
D) Capital leases

Question 12

If the interest rates on shorter term-to-maturity deposits are higher than those of longer term deposits,it is likely that the costs for the longer term financing for a company are:

A) higher.
B) lower.
C) the same.
D) not related.

Question 13

In relation to long-term financing,an amortised loan involves:

A) periodic payments principal and interest repaid at maturity.
B) periodic interest and principal repayments when positive cash flows begin.
C) periodic interest payments and principal repaid at maturity.
D) periodic equal repayments of interest and principal throughout the term.

Question 14

The fees charged by banks onto the total amount of the loan facility and are normally payable in advance are:

A) commitment fees.
B) establishment fees.
C) line fees.
D) service fees.

Question 15

The fees that represent bank costs in considering loan applications and document preparation are called:

A) commitment fees.
B) establishment fees.
C) line fees.
D) service fees.

Question 16

Banks usually charge a/an _______ for any portion of a term loan that has not been drawn down.

A) establishment fee
B) service fee
C) commitment fee
D) term fee

Question 17

One of the advantages of a prime rate set by a financial institution is that it is less likely to be affected by:

A) changes in the bank bill swap rate.
B) short-term market illiquidity.
C) short-term credit fluctuations.
D) all of the given answers.

Question 18

A term loan is:

A) a bill issued to finance a specific trade transaction.
B) a bill issued to raise funds for general purposes.
C) a flexible funding arrangement for companies.
D) when funds are borrowed for a set period.

Question 19

If a company wishes to finance a printing press with a five-year life,it would be advisable to finance it with a/an:

A) overdraft.
B) bank bill.
C) commercial paper.
D) fully drawn advance.

Question 20

The main longer-term finance provided by financial intermediaries is/are:

A) certificates of deposit.
B) commercial paper.
C) corporate bonds.
D) term loans.

Question 21

Which of the following is NOT an example of negative debt covenants?

A) Specifying what activities the business can enter into
B) Restrictions on amalgamation with other companies
C) Supplying creditors with annual audited reports
D) Limiting annual dividend payments to shareholders

Question 22

The purpose of debt covenants that ban borrowers from entering into certain types of leases is to:

A) limit the amount of fixed-interest payments.
B) prevent the firm from supplying too many cars to employees.
C) protect the lender in their claim over pledged assets in the event of failure.
D) protect the shareholders' claims over assets.

Question 23

The type of loan where a company pays periodic interest payments over its term and the principal at maturity to a lender is called:

A) amortised.
B) a debit foncier.
C) deferred payment.
D) interest-only.

Question 24

A company borrows $75 000 from a bank,to be amortised over five years at 8.5% per annum.The annual instalment is:

A) $12 657.43
B) $16 275.00
C) $19 032.43
D) none of the given answers

Question 25

All of the following financial institutions arrange mortgage finance for companies except:

A) commercial banks.
B) insurance companies.
C) building societies.
D) investment banks.

Question 26

Which of the following is NOT usually an example of restrictive debt covenants?

A) Limitations on additional borrowing
B) Constraints on disposal of non-current assets
C) Minimum levels of cash flow
D) Supplying the creditors with annual, audited financial statements

Question 27

A ________ is provided to a business by a financial institution and has a maturity of more than one year.

A) debenture
B) mortgage bond
C) term loan
D) zero-coupon bond

Question 28

In Australia which of the following long-term debt markets are the largest?

A) The corporate bond market
B) The mortgage market
C) The unsecured note market
D) The leasing market

Question 29

Which of the following is a positive loan covenant?

A) A minimum working capital ratio
B) A maximum gearing ratio
C) A maximum level of unsecured debt
D) All of the given answers

Question 30

The borrower who issues a mortgage with real property as collateral to the bank is the:

A) mortgagor.
B) mortgagee.
C) mortgager.
D) mortgage.

Question 31

Compared with a company with a strong financial rating,a company with a weaker rating is likely to be charged:

A) LIBOR.
B) LIBOR plus 10 basis points.
C) LIBOR plus 25 basis points.
D) LIBOR plus 50 basis points.

Question 32

A key difference between a positive covenant and a negative covenant is,for a:

A) positive covenant, a company must comply with restrictions on its financial structure.
B) negative covenant, a company must maintain a minimum level of working capital.
C) negative covenant, a company must provide annual audited financial statements.
D) positive covenant, a company must maintain a minimum debt to gross cash flow ratio.

Question 33

Which of the following is NOT an example of a positive debt covenant?

A) The company has to maintain a minimum level of working capital.
B) The company is restricted from doing mergers and acquisitions.
C) The company has to supply periodic cash flow statements to the lender.
D) The company has to supply annual audited statements to the lender.

Question 34

The purpose of debt covenants that require the firm to rank any subsequent borrowing below the original loan is to:

A) limit the amount of fixed-interest payments.
B) make sure that any cash restraints do not affect current obligations.
C) protect the lender in their claim over pledged assets in the event of failure.
D) protect the shareholders' claims over assets.

Question 35

A company borrows $125 000 from a bank at 7.2% per annum to be amortised over six years.The monthly instalment is:

A) $1861.11
B) $2143.15
C) $7274.21
D) $26 386.61

Question 36

When illiquid assets are transformed into new asset-backed securities,the process is called:

A) conversion.
B) liquidisation.
C) securitisation.
D) transformation.

Question 37

When a lender includes conditions in a loan agreement to protect its loan,these are known as:

A) loan agreements.
B) loan covenants.
C) loan terms.
D) loan actions.

Question 38

When a loan agreement contains actions for a borrowing company to comply with,such as supplying financial statements,these are called:

A) accounting ratios.
B) negative covenants.
C) positive covenants.
D) loan options.

Question 39

A breach of any specified loan covenant by the borrower generally gives the lender the right to do all of the following,except:

A) increase the interest rate.
B) demand immediate repayment of the loan.
C) alter the term of the agreement, such as by reducing the maturity date.
D) insist the company hand over its assets.

Question 40

The lender who registers a mortgage as a security for a loan is the:

A) mortgagor.
B) mortgagee.
C) mortgager.
D) mortgage.

Question 41

Compared with unsecured notes,a debenture can offer:

A) a fixed charge over the issuer's already pledged assets.
B) a floating charge over the issuer's unpledged assets.
C) less chance of sale before maturity, as they are not usually traded.
D) provisions for interest rate changes.

Question 42

If a bond investor pays $1030 for an annual coupon bond with a face value of $1000,it follows that:

A) the coupon rate is higher than the current market yield.
B) the current market yield and coupon rate are equal.
C) the current market yield is higher than the coupon rate.
D) not enough information is given to compare the coupon rate and current market yield.

Question 43

The value of a bond is the present value of the:

A) dividends and coupon payments.
B) dividends and maturity value.
C) maturity value.
D) coupon payments and maturity value.

Question 44

All of the following are examples of long-term debt instruments except:

A) term loans.
B) debentures.
C) promissory notes.
D) bonds.

Question 45

A debt security supported or secured by mortgage assets held by a bank is a/an:

A) debenture.
B) income bond.
C) mortgage bond.
D) fixed-charge debenture.

Question 46

Corporations and governments use long-term debt financing called:

A) retained earnings.
B) bonds.
C) shares.
D) preferred stock.

Question 47

A company issues a long-term debt security with specified interest payments and fixed charges over unpledged assets.What type of security has been issued?

A) Subordinated debt
B) Unsecured notes
C) Commercial mortgage
D) Debenture

Question 48

In the event of failure for a company that has issued a bond,the highest claims on the company's assets generally comes from:

A) floating-charge debenture holders.
B) fixed-charge debenture holders.
C) unsecured note holders.
D) the shareholders.

Question 49

A debenture is a/an:

A) unsecured bond that only best-name corporate borrowers can issue.
B) legal document stating the restrictive covenants on the loan.
C) bond secured by a charge over the assets of the issuer.
D) corporate bond with a credit enhancement.

Question 50

The coupon interest of a bond is calculated based on its _______,and is paid periodically.

A) market value
B) book value
C) face value
D) surrender value

Question 51

Which of the following types of bond generally has the lowest interest rate?

A) Treasury bonds
B) Corporate BAA bonds
C) Semi-government bonds
D) Corporate ABB bonds

Question 52

Which one of the following statements about bonds is correct?

A) Most bonds pay interest annually.
B) The yield on a bond for a bond investor is generally a fixed rate.
C) Bond prices vary inversely with interest rates.
D) Bond coupon rates vary with interest rates.

Question 53

Many securities contain an option that is included as part of a bond or preferred share,which allows the holder to convert the security into a predetermined number of shares.This feature is called a:

A) conversion feature.
B) put option.
C) repurchase agreement.
D) warrant.

Question 54

When a company defaults on interest payments for a debenture,the floating charge is said to ______ a fixed charge.

A) transform into
B) crystallise into
C) originate as
D) adjust to

Question 55

Many years ago,banks:

A) could make mortgage loans to households but not to businesses.
B) could make loans to businesses but not make mortgage loans.
C) held most loans on their books until they were paid off.
D) repackaged and sold most loans to investors.

Question 56

Bonds are:

A) a type of equity financing.
B) a short-term financial arrangement with periodic interest payments.
C) a debt instrument issued at discount with interest and principal repaid at maturity.
D) long-term debt instruments.

Question 57

A holder of ________ has generally no charge over the issuing company's unpledged assets.

A) a debenture
B) a subordinated debenture
C) a floating charge debenture
D) an unsecured note

Question 58

Which type of financial claim is not satisfied until those of the creditors holding certain senior debts have been fully satisfied?

A) Mortgage bonds
B) Unsecured notes
C) Subordinated debentures
D) Deferred interest debentures

Question 59

In relation to an issue of bonds,the method where the bond offer is made only to institutions that deal regularly in securities is called:

A) public issue.
B) family issue.
C) private placement.
D) institutional issue.

Question 60

An unsecured note differs from a debenture in that it has:

A) as security only unpledged assets.
B) as security a floating charge over assets.
C) as security a fixed charge over assets.
D) no supporting security.

Question 61

A $1000 face value bond,with coupon rate of 8% paid annually,has five years to maturity.If bonds of similar risk are currently earning 6%,what is the current price of the bond?

A) $920.15
B) $1000
C) $1084.25
D) None of the given answers

Question 62

A bond's price will be _______ when the coupon rate is higher than current market interest rates; _______ when the coupon rate is equal to the current market interest rates; and _______ when the coupon rate is less than the current market interest rates.

A) at a premium; equal to the face value; at a discount
B) at a premium; at a discount; equal to the face value
C) at a discount; at a premium; equal to the face value
D) equal to the face value; at a discount; at a premium

Question 63

When market interest rates increase after a bond is issued,the:

A) face value of the bond increases.
B) market value of the bond increases.
C) market value of the bond decreases.
D) bond price is at a premium.

Question 64

When the coupon rate of a bond is above the current market interest rates,a bond will sell at:

A) discount.
B) its original value.
C) premium.
D) face value.

Question 65

A $1000 face value bond,with coupon rate of 9% paid annually,has six years to maturity.If bonds of similar risk are currently earning 11%,what is the current price of the bond?

A) $915.39
B) $1000
C) $1089.72
D) None of the given answers

Question 66

The _______ value of a bond is also called its par value.Bonds with a current price greater than their par value sell at _______,while bonds with a current price less than their par value sell at _______.

A) premium; face value; a discount
B) discount; a premium; face value
C) face; a premium; a discount
D) premium; a reduction; a discount

Question 67

The market price of previously issued bonds is often different from face value because:

A) the coupon rate has altered.
B) the maturity date has altered.
C) the market rate of interest has altered.
D) previously issued bonds sell at a discount to new bonds.

Question 68

A $1000 face value bond,with a 7.5% coupon rate paid semi-annually and maturing in five years,is currently yielding 6.4% in the market.What is the current price of the bond?

A) $1000
B) $1045.84
C) $1046.44
D) $1079.45

Question 69

When the market interest rates decline after a bond is issued,the:

A) face value of the bond decreases.
B) market value of the bond increases.
C) market value of the bond decreases.
D) bond price is at a discount.

Question 70

A company has two outstanding bonds with the same features,apart from their coupon.Bond A has a coupon of 5%,while bond B has a coupon of 8%.If the market interest rate changes by 10%:

A) bond A will have the greater change in price.
B) bond B will have the greater change in price.
C) the price of the bonds will not alter.
D) the price of the bonds will change by the same amount.

Question 71

Which of the following statements is correct?

A) Short-term debt instruments are more volatile in price than long-term instruments.
B) Coupon rates are generally fixed when the bond is issued.
C) Bond prices and market interest rates move together.
D) The higher the coupon of a bond, the lower its price.

Question 72

The price of a bond with a fixed coupon has a/an _______ relationship with the market interest rates.

A) constant
B) linear
C) varying
D) inverse

Question 73

When the coupon rate of a bond is equal to the current market interest rates,a bond will sell at:

A) discount.
B) its original value.
C) premium.
D) book value.

Question 74

What happens to the coupon rate of a $100 face value bond that pays $7 coupon annually,if market interest rates change from 8 to 9%? The coupon rate:

A) increases to 8%.
B) increases to 9%.
C) remains at 7%.
D) increases to nearly 9%.

Question 75

If a bond's price is at a premium to face value,it has a:

A) yield below its coupon rate of interest.
B) yield equal to its coupon rate of interest.
C) yield above its coupon rate.
D) decreased risk premium.

Question 76

All of the following features of a bond are fixed except the:

A) coupon rate.
B) face value.
C) price.
D) interest payments.

Question 77

If a bond's price is at a discount to face value,it has a:

A) yield below its coupon rate of interest.
B) yield equal to its coupon rate of interest.
C) yield above its coupon rate.
D) decreased risk premium.

Question 78

A company has two outstanding bonds with the same features,apart from the maturity date.Bond A matures in five years,while bond B matures in 10 years.If the market interest rate changes by 5%:

A) bond A will have the greater change in price.
B) bond B will have the greater change in price.
C) the price of the bonds will not alter.
D) the price of the bonds will change by the same amount.

Question 79

What is the current price of a debenture with a $500 000 face value,a coupon rate of 9.5% paid semi-annually,six years remaining to maturity and market interest rates increased to 14%?

A) $320 149.12
B) $401 613.48
C) $410 644.78
D) $688 638.80

Question 80

When the coupon rate of a bond is below the current market interest rates,a bond will sell at:

A) discount.
B) its original value.
C) premium.
D) face value.