Deck 15: Debt Financing

Question 1

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)Unsecured debt
B)A note
C)A debenture
D)An asset-backed bond

Answer 1

A debenture

Question 2

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

Answer 2

An asset-backed line of credit

Question 3

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

Answer 3

A mortgage bond

Question 4

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

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

Question 5

Private debt can be in the form of bonds.

Question 6

An 'original issue discount bond' is a coupon bond issued at a discount.

Question 7

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.

Question 8

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 freely tradable on the bond market.
C)It does not need to be registered with ASIC.
D)It is less costly to issue.

Question 9

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.

Question 10

Smithfield Enterprises issues debt with a maturity of seven 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)Unsecured debt
B)A mortgage bond
C)An asset-backed bond
D)A note

Question 11

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

Question 12

'Debentures' are unsecured debt with maturities of seven years or longer.

Question 13

A bank loan is not a form of private debt.

Question 14

'Notes' are unsecured debt with typical maturities less than seven years.

Question 15

With 'secured debt', specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy.

Question 16

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

Question 17

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

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

Question 18

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 19

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

Question 20

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 21

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

A)$100
B)$1 000
C)$10
D)$10 000

Question 22

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

A)Mortgage bonds
B)Notes
C)Debentures
D)Asset-backed bonds

Question 23

Which of the following statements is FALSE?

A)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'.
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)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.
D)Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt.

Question 24

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

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

Question 25

Which of the following statements is FALSE?

A)The face value or principal amount of the bond is denominated in standard increments, most often $10 000.
B)In a public offering, the indenture lays out the terms of the bond issue.
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).

Question 26

A firm issues $250 million in straight bonds at an original discount of 0.75% and a coupon rate of 9%. 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)$246 million
B)$260 million
C)$241 million
D)$254 million

Question 27

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

Question 28

A firm issues $200 million in straight bonds at an original issue discount of 1.50% and a coupon rate of 4.5%. 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)$180 375 000
B)$185 000 000
C)$193 000 000
D)$178 257 200

Question 29

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

Question 30

What kind of unsecured corporate debt has a maturity of less than 10 years?

A)Asset-backed bonds
B)Debentures
C)Notes
D)Mortgage bonds

Question 31

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

A)Pounds sterling
B)Euros
C)Yen
D)US dollars

Question 32

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

A)Debentures
B)Mortgage bonds
C)Asset-backed bonds
D)Notes

Question 33

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

Question 34

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 issue price of the bond as compared to its face value
D)The yield to maturity of a bond as compared to bonds of comparable rating

Question 35

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

Question 36

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

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

Question 37

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 38

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

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

Question 39

Kruller AG 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 40

A firm issues $160 million in straight bonds at an original issue discount of 0.5% and a coupon rate of 7.5%. The firm pays fees of 1.75% 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)$161 million
B)$150 million
C)$125 million
D)$156 million

Question 41

The issuers of bonds do not seek to minimise the strength and number of covenants in a bond agreement because covenants can increase the flexibility of the company issuing the bond.

Question 42

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

Question 43

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 44

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 less than the bond's coupon rate
B)When the market price of the bond exceeds the call price, and market interest rates are greater 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

Question 45

What are 'bond covenants'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 46

A 'conversion feature' is a type of call provision.

Question 47

A callable bond will typically have a lower yield than an otherwise identical bond without a call feature because the option to call a bond is valuable.

Question 48

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 (call date)for a specific price (call price).

Question 49

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

Question 50

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)$485 million
C)$500 million
D)$495 million

Question 51

Which of the following statements is FALSE?

A)Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds.
B)If the issuer fails to live up to any covenant, the issuer goes into bankruptcy.
C)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.
D)Bond agreements often contain covenants that restrict the ability of management to pay dividends.

Question 52

An asset-backed bond will have the greatest need of strong bond covenants if it is to receive a high bond rating.

Question 53

A 'call provision' is an option to the issuer to repurchase the bonds at a predetermined price.

Question 54

Which of the following statements is FALSE?

A)Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders.
B)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.
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 55

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

Question 56

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)Asset disposition
B)Issuing new debt
C)Dividends and share repurchases
D)Mergers and acquisitions

Question 57

Which of the following statements is FALSE?

A)Asset-backed bonds and mortgage bonds are secured debt: Specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy.
B)The registered bond system also facilitates tax collection because the government can easily keep track of all interest payments made.
C)Although the word 'bond' is commonly used to mean any kind of debt security; technically, a corporate bond must be secured.
D)Notes typically have longer maturities (more than 10 years)than debentures.

Question 58

What are the implications of stronger bond covenants?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question 59

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 60

For callable bonds, yield to call is the annual yield earned by an investor assuming the bond is called at its latest opportunity.

Question 61

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

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

Question 62

A bond has a face value of $100 and a conversion ratio of 6. The stock is currently trading at $16.30. What is the conversion price?

A)$16.67
B)$16.00
C)$16.30
D)$16.13

Question 63

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

Question 64

A company issues a callable (at par)10-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)1.92%
B)4.00%
C)5.47%
D)0.60%

Question 65

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

Question 66

A company issues a callable (at par)10-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)5.47%
B)1.92%
C)1.50%
D)0.60%

Question 67

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

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

Question 68

A company issues a callable (at par)10-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)4.00%
D)1.92%

Question 69

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

Question 70

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

Question 71

A bond has a face value of $1 000 and a conversion ratio of 320. What is the conversion price closest to?

A)$2.80
B)$28.00
C)$3.13
D)$3.28

Question 72

A bond with a face value of $1 000 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 $1 000
B)Above $1 666
C)Less than $492
D)About $492

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 maturity of this bond when it is released?

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

Question 74

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

Question 75

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 76

A bond has a face value of $1 000 000 and a conversion ratio of 2 750. The stock is currently trading at $38.80. What is the conversion price?

A)$38.80
B)$35.84
C)$36.36
D)$25.73

Question 77

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

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

Question 78

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)5.66%
C)4.71%
D)1.40%

Question 79

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

A)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.
B)The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue.
C)A call provision allows the issuer to repurchase the bonds at a predetermined price.
D)The call price is generally set at or below, and expressed as a percentage of, the bond's face value.

Question 80

Supreme Industries issues the following announcement to holders of an issue of callable, convertible notes: 'Prior to the close of business on 17 May 2016, holders may convert their Notes into Supreme Industries ordinary shares at 28.45 shares per $1 000 principal amount of the Notes. Cash will be paid in lieu of fractional shares. On 16 April 2016, 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