Deck 24: Debt Financing

Question 1

Bonds issued by a local entity,denominated in the local currency,traded in a local market,but purchased by foreigners are called

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

Answer 1

domestic bonds.

Question 2

Which of the following statements is false?

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

Answer 2

For private placements, the prospectus must include an indenture, a formal contract between the bond issuer and a trust company.

Question 3

In Canada,the face value of most corporate bonds is denominated in standard increments,most often ________ and almost always pay coupons ________.

A) $100,000; quarterly
B) $10,000; annually
C) $1,000; monthly
D) $1,000; semiannually

Answer 3

$1,000; semiannually

Question 4

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

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

Question 5

Which of the following statements is false?

A) The registered bond system also facilitates tax collection because the government can easily keep track of all interest payments made.
B) 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.
C) Notes typically have longer maturities (more than ten years) than debentures.
D) Although the word "bond" is commonly used to mean any kind of debt security, technically a corporate bond must be secured.

Question 6

Which of the following statements is false?

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

Question 7

Which of the following statements is false?

A) 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.
B) 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.
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.

Question 8

Treasury securities that are standard coupon bonds where the outstanding principal is adjusted for inflation are called

A) Treasury notes.
B) Treasury bonds.
C) TIPS.
D) Treasury bills.

Question 9

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.

Question 10

Which of the following statements is false?

A) With registered bonds, on each coupon payment date, the bond issuer consults its list of registered owners and mails each owner a check (or directly deposits the coupon payment into the owner's brokerage account).
B) If a coupon bond is issued at a discount, it is called an original issue discount bond.
C) The face value or principal amount of the bond is denominated in standard increments, most often $10,000.
D) In a public offering, the indenture lays out the terms of the bond issue.

Question 11

Treasury securities that are semiannual-paying coupon bonds with maturities longer than 10 years are called

A) Treasury bonds.
B) TIPS.
C) Treasury bills.
D) Treasury notes.

Question 12

Treasury securities that are semi-annual coupon bonds with original maturities of between 1 and 10 years are called

A) Treasury bonds.
B) Treasury bills.
C) Treasury notes.
D) TIPS.

Question 13

Which of the following statements is false?

A) Canadian Crown corporations never use debt markets to raise capital.
B) Canadian provincial governments frequently use debt markets to raise funds.
C) Canadian municipal governments often use debt markets to raise funds.
D) The Canadian federal government uses debt markets to raise funds from time to time.

Question 14

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

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

Question 15

Treasury securities that are pure discount bonds with original maturities ranging from a few days to 26 weeks are called

A) TIPS.
B) Treasury bonds.
C) Treasury notes.
D) Treasury bills.

Question 16

Foreign bonds in Canada are known as ________.

A) registered bonds
B) maple bonds
C) bearer bonds
D) original issue discount bonds

Question 17

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

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

Question 18

Which of the following statements regarding private placements is false?

A) A private placement is a bond issue that does not trade on a public market but rather is sold to a small group of investors.
B) Privately placed debt need not conform to the same standards as public debt; as a consequence, it can be tailored to the particular situation.
C) Canadian governments never issue bonds to raise funds to meet their short-term cash flows.
D) Because a private placement does not need to be registered, it is less costly to issue.

Question 19

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

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

Question 20

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

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

Question 21

Which of the following statements regarding municipal bonds is false?

A) A single municipal bond issue will often contain a number of different maturity dates. Such issues are often called multi-muni bonds because the bonds are scheduled to mature over a multiple number of years.
B) Revenue bonds are where the local government pledges specific revenues generated by projects that were initially financed by the bond issue.
C) Municipal bonds are sometimes also referred to as tax-exempt bonds.
D) Bonds backed by the full faith and credit of a local government are known as general obligation bonds and are not as secure as bonds backed by the full faith and credit of the federal government.

Question 22

________ are issued by Crown corporations of the Canadian federal government.

A) Zero-coupon government securities
B) Separate tradings of registered interest and principals
C) Agency bonds
D) Real return bonds

Question 23

The Canadian government sells its domestic debt to financial market distributors and dealers through ________ run by ________.

A) auctions ; the Bank of Canada
B) contract sales; the Ministry of Finance
C) contract sales; the Bank of Canada
D) auctions; the Ministry of Finance

Question 24

Which of the following statements is false?

A) The Government of Canada frequently issues strip bonds.
B) The Government of Canada frequently issues bonds through multiple-price auctions.
C) The Government of Canada frequently issues bonds through single-price auctions.
D) The Government of Canada frequently issues bonds through auctions in bond markets.

Question 25

Which of the following statements is false?

A) The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate he or she is currently receiving.
B) When yields have risen, the issuer will not choose to exercise the call on the callable bond.
C) The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond.
D) A callable bond is relatively less attractive to the bondholder than the identical non-callable bond.

Question 26

Which of the following statements is false regarding a call provision?

A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue.
B) A call provision allows the issuer to repurchase the bonds at a predetermined price.
C) The call price is generally set at or below, and is expressed as a percentage of, the bond's face value.
D) A call feature allows the issuer of the bonds the right (but not the obligation) to retire all outstanding bonds on (or after) a specific date (the call date), for the call price.

Question 27

Two kinds of auctions are used by the Bank of Canada.The first type of auction is the ________,which is also called the discriminatory price auction and the second type of auction is the ________,which is used for real return bonds.

A) single price auction; multiple-price auction
B) multiple-price auction; single price auction
C) Dutch auction; multiple-price auction
D) single price auction; Dutch auction

Question 28

Suppose that in January 2001,the Canadian Treasury issued a ten-year inflation-indexed note with a coupon of 3 1/2%.On the date of issue the consumer price index (CPI)was 175.1.In January 2006,the CPI had increased to 198.3.What coupon payment was made on this bond in January 2006?

Question 29

Which of the following statements is false?

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 be to default on the bond, and so the lower 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 often contain covenants that restrict the ability of management to pay dividends.

Question 30

Which of the following statements is false?

A) Zero-coupon Treasury securities with maturities longer than one year also trade in the bond market.
B) Treasury securities are initially sold to the public through dealers.
C) Municipal bonds ("munis") are issued by provincial and local governments.
D) Municipal bonds' distinguishing characteristic is that the income on municipal bonds is not taxable at the federal level.

Question 31

Which of the following statements is false?

A) In the case of a Treasury note or Treasury bond offering, the stop-out yield determines the coupon of the bond and then all bidders pay the discounted value for the bond or note.
B) All competitive bidders submit sealed bids in terms of yields and the amount of bonds they are willing to purchase.
C) In the past, the Treasury has issued bonds with maturities of 30 years (often called long bonds) and 20 years.
D) Noncompetitive bidders (usually individuals) just submit the amount of bonds they wish to purchase and are guaranteed to have their orders filled at the auction.

Question 32

A ________ is a standard coupon bond and its outstanding principal is adjusted for ________.

A) real return bond; inflation
B) discounted bond; present value
C) strip bond; future value
D) real return bond; yield to maturity

Question 33

Which of the following statements is false?

A) When bond yields have increased, by exercising the call on the callable bond and then immediately refinancing, the issuer can lower its borrowing costs.
B) To understand how call provisions affect the price of a bond, we first need to consider when an issuer will exercise its right to call the bond.
C) If the call provision offers a cheaper way to retire the bonds the issuer will forgo the option of purchasing the bonds in the open market and will call the bonds instead.
D) An issuer can always retire one of its bonds early by repurchasing the bond in the open market.

Question 34

Fixed-coupon marketable bonds,more commonly known as ________,are ________ with original maturities of between 2 and 40 years.

A) Canada Savings bonds; semiannual coupon bonds
B) Government of Canada bonds; semiannual coupon bonds
C) Government of Canada bonds; annual coupon bonds
D) Canada Savings bonds; annual coupon bonds

Question 35

Which of the following statements is false?

A) By including more covenants, issuers increase their costs of borrowing.
B) Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders.
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital.
D) 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.

Question 36

The Government of Canada also issues ________ with maturities of up to ________ years.

A) discounted bonds; 30
B) strip bonds; 30
C) real return bonds; 30
D) real return bonds; 20

Question 37

One of the ways that issuers repay bonds is to exercise a ________ provision that allows the issuer to repurchase the bonds ________.

A) call; at a predetermined price
B) convertible; at a predetermined price
C) call; at a present price
D) call; at a discounted price

Question 38

________ and ________ are used by the Government of Canada.

A) Five kinds of domestic debt securities; four types of foreign debt securities
B) Six kinds of domestic debt securities; five types of foreign debt securities
C) Four kinds of domestic debt securities; three types of foreign debt securities
D) Three kinds of domestic debt securities; four types of foreign debt securities

Question 39

In addition to the tradable securities,the Canadian government also borrows directly from ________ through ________ and Canada Premium Bonds.

A) corporate investors; Canada Savings Bonds
B) venture capital investors; Government of Canada Bonds
C) institutional investors; Government of Canada Bonds
D) individuals; Canada Savings Bonds

Question 40

All income from Government of Canada securities is ________ at the federal and provincial levels.If an investor sells a security before it matures,there may be ________.

A) non-taxable; taxes on both interest income and capital gains
B) taxable; tax on capital gains
C) taxable; taxes on both interest income and capital gains
D) taxable; tax on interest income

Question 41

Which of the following statements is false?

A) The assumption that underlies the yield calculation of a callable bond-that it will not be called-is not always realistic, so bond traders often quote the yield to call.
B) The yield to call (YTC) is the annual yield of a callable bond assuming that the bond is called at the earliest opportunity.
C) We can think of the yield to maturity of a callable bond as the interest rate the bondholder receives if the bond is not called and repaid in full.
D) Because the price of a callable bond is higher than the price of an otherwise identical non-callable bond, the yield to maturity of a callable bond will be lower than the yield to maturity for its non-callable counterpart.

Question 42

The ________ provision sets the call price as the ________ of the remaining coupons.

A) Canada Call; current value
B) Canada Call; future value
C) Canada Call; adjusted value
D) Canada Call; present value

Question 43

Use the information for the question(s) below.
Luther Industries has just issued a callable (at 102) ten-year, 8% coupon bond with semi-annual coupon payments. The bond can be called at 102 in three years or anytime thereafter on a coupon payment date. It has a current price of 99.
What is the Yield to Maturity (YTM)on this bond?

Question 44

Which of the following statements is false?

A) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant.
B) On the maturity date of the bond, the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is, the conversion price.
C) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders.
D) If the stock price is low so that the embedded warrant is deep out-of-the-money, the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision.

Question 45

Use the information for the question(s) below.
Luther Industries has just issued a callable (at 102) ten-year, 8% coupon bond with semi-annual coupon payments. The bond can be called at 102 in three years or anytime thereafter on a coupon payment date. It has a current price of 99.
What is the Yield to Call (YTC)on this bond?

Question 46

Which of the following statements regarding sinking fund provisions is false?

A) With a sinking fund, if a bond is trading at below its face value, because the bonds are repurchased at par the decision as to which bonds to repurchase is made by lottery.
B) With a sinking fund, instead of repaying the entire principal balance on the maturity date, the company makes regular payments into a sinking fund administered by a trustee over the life of the bond.
C) Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund.
D) Because the sinking fund allows the issuer to repurchase the bonds at par, the option to accelerate the payments is another form of call provision.

Question 47

Which of the following statements is false?

A) Before the call date, investors anticipate the optimal strategy that the issuer will follow, and the bond price reflects this strategy.
B) The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity.
C) A callable bond will trade at a lower price (and therefore a higher yield) than an otherwise equivalent non-callable bond.
D) The price of a callable bond can be low when yields are high, but does not rise above the call value when the yield is low.

Question 48

Use the information for the question(s) below.
KT Enterprises has just issued a callable (at par) fifteen-year, 7% coupon bond with semi-annual coupon payments. The bond can be called at par in five years or anytime thereafter on a coupon payment date. It has a current price of 101.
What is the Yield to Call (YTC)on this bond?

Question 49

Use the information for the question(s) below.
KT Enterprises has just issued a callable (at par) fifteen-year, 7% coupon bond with semi-annual coupon payments. The bond can be called at par in five years or anytime thereafter on a coupon payment date. It has a current price of 101.
What is the Yield to Maturity (YTM)on this bond?