Deck 2: Debt Financing

Question 1

Write a short note about bond covenants.
Virtually all debt contracts contain covenants to restrict equity holders who control the firm from putting the bondholders' funds at risk.In the absence of such covenants,the incentives of equity holders to expropriate bondholder wealth would be reflected in the bond's coupon or price,resulting in higher borrowing rates.

Answer 1

Asset covenants Dividend covenants Financing covenants Financial ratio covenants Sinking fund covenants

Question 2

Operating leases are more complicated to value than financial leases because _____.

A)the lessee cannot return the asset except with substantial penalties
B)it is difficult to find the appropriate discount rate
C)of the uncertainty about the length of the lease
D)it is difficult to predict the cash flows.

Answer 2

C

Question 3

Which of the following means the discount rate that makes the discounted value of the promised future bond payments equal to the market price of the bond?

A)Cash flow yield
B)Current yield
C)Yield to maturity
D)Bond-equivalent yield

Answer 3

C

Question 4

Treasury bonds are:

A)the zero-coupon Treasury issues,with maturities that range from one month to one year at issue.
B)the coupon-paying issues with maturities from one year to 10 years at their initial issue date.
C)the coupon-paying issues with maturities from one year to 5 years at their initial issue date.
D)the coupon-paying issues with maturities greater than 10 years at their issue date.

Question 5

Financing covenants:

A)are beneficial in preventing a manager from leaving bondholders penniless by liquidating the firm and paying out the proceeds to themselves and shareholders.
B)prevent the firm from promiscuously issuing new debt,which would dilute the claims of existing bondholders to the firm?s assets.
C)are beneficial to bondholders as they require that a certain portion of the bonds be retired before maturity.
D)give the bondholder the option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond.

Question 6

Which of the following is true of Eurobonds?

A)They are zero-coupon bonds issued by the European Central Bank.
B)They are sold outside the country in whose currency it is denominated.
C)They are sovereign bonds issued by European countries.
D)They are Euro-denominated bonds issued by corporations.

Question 7

Which of the following is defined in the lease contract between the lessor and the lessee?

A)Whether the lease should be expensed or capitalized
B)Time period for which the lessee can use the asset
C)Depreciation method of the leased asset.
D)Retention ratio of the firm.

Question 8

The ex-coupon date is:

A)the date on which the bondholder becomes entitled to the coupon.
B)the last day on which a bond can be traded on the secondary market.
C)is the preceding day of the first principal payment to the bondholder.
D)is the date of legal exchange of cash for bonds.

Question 9

_____ of a bond is the maximum length of time the borrower has to pay off the bond principal in full.

A)Maturity
B)Duration
C)Covenant
D)Convexity

Question 10

A bond is said to be issued at premium when:

A)the coupon rate is set lower than the coupon rate of par bonds of same maturity and credit risk.
B)the quoted price exceeds the face value of the bond.
C)the quoted price equals the face value of the bond.
D)the face value exceeds the quoted price of the bond.

Question 11

Comment on the growth of the Eurobond Market.

Question 12

The process of packaging tiny investments into a larger portfolio and selling a security backed by the portfolio's cash flows is called _____.

A)securitization
B)portfolio management
C)amortization
D)collateralization

Question 13

Which of the following is true of a line of credit?

A)It is a short-term,zero-coupon note issued by major corporations.
B)It is an arrangement in which the firm is allowed to pay down the loan and then subsequently increase the amount of borrowing.
C)It is an arrangement where the bank will lend up to a maximum pre-specified loan amount at a pre-specified interest rate,as long as the firm meets the requirements established initially.
D)It is an arrangement with a bank whereby the bank authorizes the maximum loan amount,but not the interest rate,when commitment was drawn up.

Question 14

An investment-grade rating on a bond is a rating of _____.

A)Aa3 and above by Moody's,and AA- and above for S&P and Fitch ratings.
B)A1 and above by Moody's,and A- and above for S&P and Fitch ratings.
C)Baa and above by Moody's,and CCC and above for S&P and Fitch ratings.
D)Baa and above by Moody's,and BBB and above for S&P and Fitch ratings.

Question 15

Which of the following is an unsecured bond?

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

Question 16

_____ are contracts containing a promise to pay a future stream of cash to investors who hold the contracts.

A)Debt instruments
B)Futures
C)Option contracts
D)Swap contracts

Question 17

Which of the following is true of the convertible type of bond option?

A)It gives the bondholder the option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond.
B)It gives the issuing firm an option to convert the bond into another security,typically the ordinary equity of the firm issuing the convertible bond.
C)It mandates a conversion of the regular bonds into another security,typically the ordinary equity of the firm issuing the convertible bond,on maturity.
D)It is similar to a perpetuity and mandates a conversion of the regular bonds into another bond subsequently issued by the firm immediately after maturity.

Question 18

What are the features that characterize long-term Eurocurrency loans?

Question 19

What are asset-backed securities?