Question 1

A firm wishes to issue a perpetual callable bond.The current interest rate is 9%.Next year,there is a 40% chance that the interest rate will be 5% and a 60% chance that the rate will be 13.3333%.The bond is callable at €1,090,and it will be called if the interest rate drops to 5%. If the bond is priced at €1,000,what is the cost to the firm of the call provision?

Accepted Answer

A)  €118.67
B)  €292.43
C)  €300.00
D)  €318.56
E)  €350.00

Question 2

Corporations typically have the right to repurchase a debt issue prior to maturity by paying the face value of the bond plus:

Accepted Answer

A)  a call premium.
B)  the amortized value.
C)  the principal discount.
D)  a balloon payment.
E)  None of the above.

Question 3

Junk bond market financing became more important in mergers and corporate restructurings because:

Accepted Answer

A)  firms can issue only limited amounts of debt.
B)  there was a large supply of junk bonds.
C)  the marketability of junk bonds increased.
D)  this permitted firms to have much higher debt-equity ratios.
E)  None of the above.

Question 4

A firm wishes to issue a perpetual callable bond.The current interest rate is 7%.Next year,the interest rate will be 6.5% or 8.25% with equal probability.The bond is callable at €1,075,and it will be called if the interest rate drops to 6.5%. If the coupon were set to €70 what would the bond sell for?

Accepted Answer

A)  € 824.61
B)  € 898.82
C)  € 964.25
D)  €1,000.00
E)  €1,031.74

Question 5

A firm wishes to issue a perpetual callable bond.The current interest rate is 7%.Next year,the interest rate will be 6.5% or 8.25% with equal probability.The bond is callable at €1,075,and it will be called if the interest rate drops to 6.5%. What is the correct coupon amount if the bond is priced to sell at par?

Accepted Answer

A)  € 65.00
B)  € 75.42
C)  € 82.50
D)  € 87.86
E)  None of the above.

Question 6

Short-term debt is sometimes referred to as:

Accepted Answer

A)  secured debt.
B)  hybrid debt.
C)  unfunded debt.
D)  equity.
E)  None of the above.

Question 7

The call policy that maximizes shareholder wealth is to call a bond issue when the:

Accepted Answer

A)  bond's price is above par.
B)  bond's price is above par,but below the call price.
C)  bond's price exceeds the call premium.
D)  bond's price equals or exceeds the call price.
E)  None of the above.

Question 8

Income bonds provide the same tax advantage as regular coupon paying bonds but have an advantage of:

Accepted Answer

A)  not being in default if a coupon payment is omitted due to a lack of corporate income.
B)  lacking the "Smell of Death" from financial distress.
C)  being easier to sell in the marketplace given the lower risk of default.
D)  not having any agency costs between bondholders and shareholders.
E)  None of the above.

Question 9

A key difference between a direct placement and a public issue of debt:

Accepted Answer

A)  is there is no cost of registration with the Stock Exchange.
B)  issue costs are lower in the private placement market.
C)  direct placements usually have more restrictive covenants.
D)  All of the above.
E)  None of the above.

Question 10

A description of the property in security and the details of the protective covenants are:

Accepted Answer

A)  key terms in a rights agreement.
B)  the basic terms of a bond.
C)  key parts of a typical bond indenture.
D)  key parts of a typical bond debenture.
E)  None of the above.

Question 11

The length of time debt remains outstanding with some unpaid balance is called the:

Accepted Answer

A)  funded period.
B)  sinking fund period.
C)  deferred call period.
D)  maturity.
E)  None of the above. D

Question 12

Studies have shown that around the announcement of bond rating changes:

Accepted Answer

A)  bond values increase,and equity values decrease.
B)  bond values decrease,and equity values increase.
C)  bond values increase,and equity values do not change.
D)  bond values decrease,and equity values do not change.
E)  no unusual behavior occurs in bond or equity values.

Question 13

A sinking fund is useful to a corporation because:

Accepted Answer

A)  the corporation does not have to worry about paying the bondholders.
B)  it provides the corporation with the option to buy the bonds back at the lower of face value or market price.
C)  the payments to the sinking fund are not necessary when the firm is in financial difficulty.
D)  they are simple and easy to monitor.
E)  None of the above. B

Question 14

A bond has a call provision.The call provision allows the ________ to _________ the bonds before maturity.

Accepted Answer

A)  investor; sell back
B)  trustee; buyback
C)  issuer; call in
D)  investor; call in
E)  trustee; sell back

Question 15

Bonds below BBB or Baa are called:

Accepted Answer

A)  income bonds.
B)  deep-discount bonds.
C)  junk bonds.
D)  investment grade bonds.
E)  None of the above. C

Question 16

The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay.This limitation is:

Accepted Answer

A)  a nonrecourse covenant.
B)  a recourse covenant.
C)  a negative covenant.
D)  a positive covenant.
E)  more than one of the above.

Question 17

Chevalier Manufacturing issued a callable bond with a 2020 maturity date.The bond was sold at par and the call premium was set equal to the coupon rate of 20%.A declining call premium was also in place so that the premium declined evenly over the last ten years of premium to zero.What would be the call premium if the bond was called in 2011?

Accepted Answer

A)  € 18
B)  € 20
C)  €180
D)  €200
E)  Cannot calculate without market price.

Question 18

Bonds that sell for much less than face value and pay no coupon are called:

Accepted Answer

A)  original issue discount bonds.
B)  deep discount bonds.
C)  pure discount bonds.
D)  zero coupon bonds.
E)  All of the above.

Question 19

Aspen Divestiture Corporation,a firm speculating in corporate reorganizations,has bonds outstanding that were originally issued at par,but are now selling,on September 19,2006,for €1,050 per €1,000 face value.The bonds have a stated interest rate of 8% and mature on January 1,2016.The bonds pay interest semi-annually on July 1 and January 1 each year.Suppose that an investor buys a €1,000 face value bond on September 1,2006.What euro amount will the investor pay to the seller on September 1?
 How much interest will the investor receive on January 1,2007?

Accepted Answer

Accrued interest on Sept 1 = (.08/12)(2)...

Question 20

A firm wishes to issue a perpetual callable bond.The current interest rate is 6%.Next year,there is a 30% chance that the interest rate will be 4.5% and a 70% chance that the rate will be 8.0%.The bond is callable at €1,000 plus an additional coupon payment and it will be called if the interest rate drops to 4.5%. If the bond sells for par today,what is the coupon?

Accepted Answer

A)  €45.00
B)  €45.87
C)  €70.00
D)  €75.62
E)  €80.00

Exam 20: Debt Financing

Correct Answer
verified

Corporations typically have the right to repurchase a debt issue prior to maturity by paying the face value of the bond plus:

Correct Answer
verified

Junk bond market financing became more important in mergers and corporate restructurings because:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Short-term debt is sometimes referred to as:

Correct Answer
verified

The call policy that maximizes shareholder wealth is to call a bond issue when the:

Correct Answer
verified

Income bonds provide the same tax advantage as regular coupon paying bonds but have an advantage of:

Correct Answer
verified

A key difference between a direct placement and a public issue of debt:

Correct Answer
verified

A description of the property in security and the details of the protective covenants are:

Correct Answer
verified

The length of time debt remains outstanding with some unpaid balance is called the:

Correct Answer
verified
D

Studies have shown that around the announcement of bond rating changes:

Correct Answer
verified

A sinking fund is useful to a corporation because:

Correct Answer
verified
B

A bond has a call provision.The call provision allows the to _ the bonds before maturity.

Correct Answer
verified

Bonds below BBB or Baa are called:

Correct Answer
verified
C

The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay.This limitation is:

Correct Answer
verified

Correct Answer
verified

Bonds that sell for much less than face value and pay no coupon are called:

Correct Answer
verified

Correct Answer
verified
Accrued interest on Sept 1 = (.08/12)(2)...
View Answer

Correct Answer
verified

Exam 20: Debt Financing

Correct AnswerverifiedShow Answer

Corporations typically have the right to repurchase a debt issue prior to maturity by paying the face value of the bond plus:

Correct AnswerverifiedShow Answer

Junk bond market financing became more important in mergers and corporate restructurings because:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Short-term debt is sometimes referred to as:

Correct AnswerverifiedShow Answer

The call policy that maximizes shareholder wealth is to call a bond issue when the:

Correct AnswerverifiedShow Answer

Income bonds provide the same tax advantage as regular coupon paying bonds but have an advantage of:

Correct AnswerverifiedShow Answer

A key difference between a direct placement and a public issue of debt:

Correct AnswerverifiedShow Answer

A description of the property in security and the details of the protective covenants are:

Correct AnswerverifiedShow Answer

The length of time debt remains outstanding with some unpaid balance is called the:

Correct AnswerverifiedD

Studies have shown that around the announcement of bond rating changes:

Correct AnswerverifiedShow Answer

A sinking fund is useful to a corporation because:

Correct AnswerverifiedB

A bond has a call provision.The call provision allows the ________ to _________ the bonds before maturity.

Correct AnswerverifiedShow Answer

Bonds below BBB or Baa are called:

Correct AnswerverifiedC

The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay.This limitation is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Bonds that sell for much less than face value and pay no coupon are called:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAccrued interest on Sept 1 = (.08/12)(2)...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
D

Correct Answer
verified

Correct Answer
verified
B

A bond has a call provision.The call provision allows the to _ the bonds before maturity.

Correct Answer
verified

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Accrued interest on Sept 1 = (.08/12)(2)...
View Answer

Correct Answer
verified