Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 15 Debt Financing
15.1 Corporate Debt
1) The chief advantage of debt inancing over inancing through raising equity capital is
that the former does not dilute the current owner’s share of the business.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) 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.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Private debt cannot be in the form of bonds.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) By deinition, a preferred stock is a form of debt security.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
1
5) Which of the following is usually a form of public debt?
A) a preferred stock
B) a bank loan
C) a bond issue
D) a revolving line of credit
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
6) Which of the following is NOT an advantage of private debt over public debt?
A) It is liquid.
B) It need not be registered with the U.S. Securities and Exchange Commission.
C) It has to have interest and principal payments made upon it.
D) It does not dilute the ownership of a irm.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) 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 term loan
B) a revolving line of credit
C) an asset-backed line of credit
D) a private placement
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) Which of the following is an advantage of a public bond issue over private placement?
A) It can be tailored to a particular situation.
B) It is less costly to issue.
C) It does not need to be registered with the SEC.
D) It is freely tradable on the bond market.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
9) In terms of public oferings of bonds, what is an indenture?
A) a list of the duties of a trust company representing the bondholders’ interests
B) a memorandum that must be produced to describe the details of a bond ofering
C) a formal contract that speciies a irm’s obligations to the bondholders
D) a schedule of the fees charged by an underwriting company
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) In terms of public oferings of bonds, what is a prospectus?
A) a list of the duties of a trust company representing the bondholders’ interests
B) a memorandum that must be produced to describe the details of a bond ofering
C) a formal contract that speciies a irm’s obligations to the bondholders
D) a schedule of the fees charged by an underwriting company
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) Smithield Enterprises issues debt with a maturity of 7 years. In the case of bankruptcy,
holders of this debt may only claim those assets of the irm that are not already pledged as
collateral on other debt. Which of the following best describes this type of corporate debt?
A) a note
B) a mortgage bond
C) an asset-backed bond
D) unsecured debt
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
12) 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 irm that are not already
pledged as collateral on other debt. Which of the following best describes this type of
corporate debt?
A) a note
B) a debenture
C) an asset-backed bond
D) unsecured debt
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) 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 note
B) a debenture
C) a mortgage bond
D) an asset-backed bond
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) Clearview Corporation, a company that deals mainly with the inancing 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 note
B) a debenture
C) a mortgage bond
D) an asset-backed bond
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4
15) 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 yield to maturity of a bond as compared to bonds of comparable rating
D) the issue price of the bond as compared to its face value
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16) A irm issues $225 million in straight bonds at an original issue discount of 2.0% and a
coupon rate of 6%. The irm pays fees of 4% on the face value of the bonds. The net amount
of funds that the debt issue will provide for the irm is ________.
A) $200.925 million
B) $211.5 million
C) $222.075 million
D) $232.65 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
17) A irm issues $170 million in straight bonds at par and a coupon rate of 8.5%. The irm
pays fees of 2% on the face value of the bonds. The net amount of funds that the debt issue
will provide for the irm is ________.
A) $150 million
B) $158 million
C) $167 million
D) $175 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5
18) A irm issues $300 million in straight bonds at an original issue discount of 0.50% and a
coupon rate of 7%. The irm pays fees of 2.0% on the face value of the bonds. The net
amount of funds that the debt issue will provide for the irm is closest to which of the
following?
A) $248,625,000
B) $263,250,000
C) $277,875,000
D) $292,500,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
19) 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
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
20) 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
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6
21) Kruller A.G. issues a bond that is ofered 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
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
22) Tompkinson’s PLC., a British company, issues a bond in U.S. dollars in the United States
which is intended for U.S. investors. Which of the following best describes this bond?
A) a domestic bond
B) a Eurobond
C) a global bond
D) a Yankee bond
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
23) Eurobonds issued in the United Kingdom could NOT be issued in which of the following
denominations?
A) U.S. dollars
B) euros
C) pounds sterling
D) yen
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7
24) The face value of bonds is denominated most commonly in which of the following
standard increments?
A) $10
B) $100
C) $1,000
D) $10,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
25) What kind of corporate debt must be secured by real property?
A) mortgage bonds
B) notes
C) asset-backed bonds
D) debentures
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
26) What kind of corporate debt can be secured by any kind of assets?
A) preferred stocks
B) notes
C) asset-backed bonds
D) debentures
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
27) What kind of corporate debt has a maturity of less than ten years?
A) asset-backed bonds
B) debentures
C) notes
D) mortgage bonds
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
28) What kind of unsecured corporate debt has a maturity of less than ten years?
A) mortgage bonds
B) asset-backed bonds
C) debentures
D) notes
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
29) ________ are international bonds that are not denominated in the local currency of the
country in which they are issued.
A) Domestic bonds
B) Yankee bonds
C) Eurobonds
D) Debentures
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
30) Foreign bonds in the United States are known as ________.
A) domestic bonds
B) Yankee bonds
C) Eurobonds
D) foreign bonds
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
9
31) Which of the following statements is FALSE?
A) Global bonds combine the features of domestic, foreign, and Eurobonds, and are ofered
for sale in several diferent 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 speciic term.
D) Eurobonds are international bonds that are denominated in European currency.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
32) Which of the following statements is FALSE?
A) With registered bonds, on each coupon payment date, the bond issuer consults the irm’s
registered owners and mails each bondholder 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 $1,000.
D) In a public ofering, the indenture lays out the terms of the bond issue.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
33) 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 of the holders of subordinated debentures until all more senior debt has
been paid of.
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 irm 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.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
34) 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.