Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1) 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.
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.
3) Private debt cannot be in the form of bonds.
4) By definition, a corporate bond is any form of debt security.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
5) Which of the following is usually a form of public debt?
A) a private placement
B) a bank loan
C) a bond issue
D) a revolving line of credit
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 the firm.
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
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 less costly to issue.
C) It does not need to be registered with the SEC.
D) It is freely tradable on the bond market.
9) In terms of public offerings of bonds, what is an indenture?
A) a list of the duties of the trust company representing the bondholders’ interests
B) a memorandum that must be produced to describe the details of a bond offering
C) a formal contract that specifies the firm’s obligations to the bondholders
D) a schedule of the fees charged by the underwriting company
10) In terms of public offerings of bonds, what is a prospectus?
A) a list of the duties of the trust company representing the bondholders’ interests
B) a memorandum that must be produced to describe the details of a bond offering
C) a formal contract that specifies the firm’s obligations to the bondholders
D) a schedule of the fees charged by the underwriting company
11) Smithfield 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 firm 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
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 firm 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
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
14) 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 note
B) a debenture
C) a mortgage bond
D) an asset–backed bond
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
16) A firm issues $250 million in straight bonds at an original issue discount of 1.5% and a coupon rate of 6%.
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) $225 million
B) $239 million
C) $250 million
D) $261 million
17) A firm issues $160 million in straight bonds at par and a coupon rate of 8.5%. 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) $146 million
B) $154 million
C) $157 million
D) $160 million
18) A firm issues $200 million in straight bonds at an original issue discount of 0.75% and a coupon rate of 7%.
The firm pays fees of 2.5% 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) $178,257,200
B) $180,375,000
C) $185,000,000
D) $193,500,000
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
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
21) Kruller A.G. 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
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 foreign bond
B) a Eurobond
C) a global bond
D) a Yankee bond
23) Eurobonds issued in France could NOT be issued in which of the following denominations?
A) U.S. dollars
B) euros
C) pounds sterling
D) yen
24) The face value of bonds are denominated most commonly in which of the following standard increments?
A) $10
B) $100
C) $1000
D) $10,000
25) What kind of corporate debt must be secured by real property?
A) mortgage bonds
B) notes
C) asset–backed bonds
D) debentures
26) What kind of corporate debt can be secured by any specified assets?
A) mortgage bonds
B) notes
C) asset–backed bonds
D) debentures
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
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
29) 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.
30) 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.
31) Which of the following statements is FALSE?
A) Global bonds combine the features of domestic, foreign, 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.
32) 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.
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
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.
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.
35) 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.
36) 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.
37) 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) $205 million
C) $195 million
D) $200 million
38) 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) $475 million
B) $485 million
C) $505 million
D) $500 million
39) 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) $500 million
B) $495 million
C) $485 million
D) $480 million
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
40) What is an original issue discount bond?
41) What are debentures?
42) What are notes?
43) What are secured debt?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
44) 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.
45) Bond covenants tend to increase a bond issuer’s borrowing costs.
46) 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.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
47) Why do the issuers of bonds not seek to minimize the strength and number of covenants in a bond
agreement?
A) Covenants favor the equity holders that managers work for.
B) Covenants can increase the flexibility of the company issuing the bond.
C) Covenants lower the interest rate investors will require to buy the bond.
D) Covenants force the company to renegotiate the terms of the bond if they are broken.
48) Which of the following will have the greatest need of strong bond covenants if it is to receive a high bond
rating?
A) a debenture
B) a mortgage bond
C) an asset–backed bond
D) a foreign bond
49) 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) issuing new debt
B) dividends and share repurchases
C) mergers and acquisitions
D) asset disposition
50) 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 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.
51) 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.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
52) What are bond covenants?
53) What are the implications of stronger bond covenants?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
54) The sole way that a firm can repay its bonds is by making the coupon and principal payments as specified in
the bond contract.
55) Convertible bonds have a provision that gives the bondholder an option to convert each bond owned into a
fixed number of shares of common stock.
56) 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.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
57) What is a call provision?
A) the periodic repurchasing of issued bonds through a sinking fund by the issuer
B) an option to the issuer to repurchase the bonds at a predetermined price
C) the option for the bondholder to convert each bond owned into a fixed number of shares of common
stock
D) a clause in a bond contract that restricts the actions of the issuer that might harm the interests of the
bondholders
58) 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 greater than the
bond’s coupon rate
B) when the market price of the bond exceeds the call price, and market interest rates are less 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
59) 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
60) A company issues a callable (at par) ten–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) 0.60%
B) 1.50%
C) 1.92%
D) 5.47%
61) A company issues a callable (at par) ten–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) 0.60%
B) 1.92%
C) 4.00%
D) 5.47%
62) A company issues a callable (at par) ten–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) 0.60%
B) 1.92%
C) 4.00%
D) 5.47%