19) A ________ is a restrictive provision in a bond indenture, providing for the systematic
retirement of the bonds prior to their maturity.
A) redemption clause
B) sinking-fund requirement
C) conversion feature
D) subordination clause
20) Bond indentures include restrictive covenants.These provisions protect the bondholders
against ________.
A) increase in inflation rate
B) increase in borrower’s risk
C) decrease in liquidity risk
D) maturity risk
21) Which of the following is a restrictive covenant?
A) to maintain satisfactory accounting records
B) to pay the taxes due
C) to supply audited financial statements
D) to impose fixed asset restrictions
22) The purpose of the debt covenant that requires maintaining a minimum level of net working
capital is to ________.
A) protect the lender by controlling the risk and marketability of the borrower’s security
investment alternatives
B) limit the amount of fixed-payment obligations
C) ensure a cash shortage does not cause an inability to meet current obligations
D) limit the annual cash dividends paid by the firm
23) The purpose of the debt covenant that prohibits borrowers from entering into certain types of
leases is to ________.
A) protect the lender by controlling the risk and marketability of the borrower’s security
investments alternatives
B) limit the amount of fixed-payment obligations
C) ensure a cash shortage does not cause an inability to meet current obligations
D) limit the annual cash dividends paid by the firm
24) The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to
________.
A) protect the lender by controlling the risk and marketability of the borrower’s security
investment alternatives
B) limit the amount of fixed-payment obligations
C) ensure a cash shortage does not cause an inability to meet current obligations
D) prevent the firm from liquidation and ensure its ability to repay the debt
25) The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is
to ________.
A) assure the lender that additional borrowing is constrained
B) limit the amount of fixed-payment obligations
C) limit the realization of current assets to cash
D) limit the payment of annual cash dividends
26) The purpose of the restrictive debt covenant that requires that subsequent borrowing be
subordinated to the original loan is to ________.
A) maintain a minimum level of liquidity
B) limit the amount of fixed-payment obligations
C) ensure a long-run cash shortage does not cause an inability to meet current obligations
D) protect the original lender in the priority of claims during liquidation
27) ________ means that subsequent creditors agree to wait until all claims of the are senior debt
satisfied before having their claims satisfied.
A) Security interest
B) Subordination
C) Sinking fund requirement
D) Bond indenture
28) The purpose of the restrictive debt covenant that limits the distribution of profits to
shareholders is to ________.
A) assure the lender that additional borrowing is constrained or may be subordinated to the
original loan
B) limit the amount of fixed-payment obligations
C) ensure a cash shortage does not cause an inability to meet current obligations
D) avoid default of payments to bondholders
29) An example of a standard debt provision is to ________.
A) limit the corporation’s annual cash dividend payments
B) pay taxes and other liabilities when due
C) restrict the corporation from disposing of fixed assets
D) maintain a minimum level of liquidity
30) The cost of a long-term debt generally ________ that of a short-term debt.
A) is less than
B) is equal to
C) is greater than
D) is less than or equal to
31) Which of the following affects the cost of a bond?
A) maturity of a bond
B) dividend policy
C) fixed assets purchased from the proceeds of bond issue
D) money market regulations
32) To compensate for the uncertainty of future interest rates and the fact that the longer the term
of a loan the higher the probability that the borrower will default, the lender typically ________.
A) charges a higher interest rate on long-term loans
B) reserves the right to change the terms of the loan at any time
C) includes excessively restrictive debt provisions
D) reserves the right to demand immediate payment at any time
33) The size of a loan and its issuance costs (as a percentage of the amount borrowed) are
________.
A) not related
B) inversely related
C) independent
D) perfectly positively correlated
34) The ________ in the capital market is the basis for determining a bond’s coupon interest rate.
A) cost of money
B) weighted average cost of capital
C) bond’s face value
D) average coupon interest rate
6.3 Discuss the general features, yields, prices, ratings, popular types, and international issues
of corporate bonds.
1) A call premium is the amount by which the call price exceeds the market price of the bond.
2) Stock purchase warrants are instruments that give their holder the right to purchase a certain
number of shares of the firm’s common stock at the market price over a certain period of time.
3) A call feature is a feature included in all corporate bonds and allows the issuer to repurchase
bonds at the market price prior to maturity.
4) Bondholders will convert their convertible bonds into shares of stock only when the
conversion price is greater than the market price of the stock.
5) To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise
equivalent noncallable bond.
6) The conversion feature of a bond is a feature that is included in all corporate bond issues that
gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.
7) A call feature in a bond allows bondholders to change each bond into a stated number of
shares of common stock.
8) A conversion feature in a bond allows bondholders to change each bond into a stated number
of shares of common stock.
9) The call option in a bond has a greater chance of being exercised (to the detriment of the
bondholder) if market interest rates have fallen since the bond was issued.
10) A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated
price prior to maturity, and this option has a greater chance of being exercised (to the benefit of
the bondholder) if market interest rates have fallen since the bond was issued.
11) A conversion feature in a bond has a greater chance of being exercised (to the detriment of
the bondholder) if market interest rates have risen since the bond was issued.
12) IBM stock will experience greater trading activity (in terms of the number of shares traded
on a given day) compared to IBM bonds.
13) A company’s bonds will experience more trading activity (in terms of the number of bonds
traded on a given day) compared to its stock.
14) High-quality (high-rated) bonds provide lower returns than lower-quality (low-rated) bonds.
15) There is an inverse relationship between the quality or rating of a bond and the rate of return
it must provide bondholders.
16) Any bond rated Aaa through Caa according to Moody’s, would be considered investment
grade debt.
17) An A rated bond should provide investors with a higher yield than an otherwise identical B
rated bond.
18) Any Ba rated bond or lower would be considered speculative or “junk.”
19) As a bond approaches maturity, the price of the bond will approach its par value until, the
bond is worth its face value at maturity.
20) Debentures such as convertible bonds are unsecured bonds that only the most creditworthy
firms can issue.
21) Putable bonds give the bondholders an option to sell the bond at a price higher than par value
by the amount of one year interest payment when and if the firm takes specified actions such as
being acquired, acquiring another company, or issuing a large amount of additional debt.
22) Since a putable bond gives its holder the right to “put the bond” at specified times or because
of specified actions by the issuing firm, the bond’s yield would be lower than that of an otherwise
equivalent non-putable bond.
23) With subordinated debentures, payment of interest by a firm is required only when earnings
are available.
24) Since the issuer of zero (or low) coupon bonds can annually deduct the current year’s interest
accrual without having to actually pay the interest until the bond matures (or is called), its cash
flow each year is increased by the amount of the tax shield provided by the interest deduction.
25) The market price of a callable bond will not generally exceed its call price, except in the case
of a convertible bond.
26) Floating-rate bonds are bonds that can be redeemed at par at the option of their holder either
at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm
takes specified actions such as being acquired, acquiring another company, or issuing a large
amount of additional debt.
27) A bond issued by an American company that is denominated in Swiss Francs and sold in
Switzerland would be an example of a foreign bond.
28) A foreign bond is a bond issued by a foreign corporation or government and is denominated
in the investor’s home currency and sold in the investor’s home market.
29) A Eurobond is a bond issued by an international borrower and sold to investors in countries
with currencies other than the country in which the bond is denominated.
30) A Eurobond bond is a bond denominated in Euros.
31) The ________ feature permits the issuer to repurchase bonds at a stated price prior to
maturity.
A) call
B) conversion
C) put
D) swap
32) The ________ feature allows bondholders to change each bond into stated number of shares
of stock.
A) call
B) conversion
C) put
D) swap
33) ________ allow bondholders to purchase a certain number of shares of the firm’s common
stock at a specified price over a certain period of time.
A) Call options
B) Stock purchase warrants
C) Debentures
D) Put options
34) A ________ give bondholders the right to purchase a certain number of shares of the issuer’s
common stock at a specified price over a certain period of time.
A) stock purchase warrant
B) call feature
C) swap
D) conversion feature
35) Stock purchase warrants are instruments that give their holders ________.
A) the obligation to purchase a certain number of shares of the issuer’s common stock at a
specified price over a certain period of time
B) the right to purchase a certain number of shares of the issuer’s common stock at a specified
price over a certain period of time
C) the obligation to sell a certain number of shares of the issuer’s preferred stock at a specified
price over a certain period of time
D) the right to sell a certain number of shares of the issuer’s preferred stock at a specified price
over a certain period of time
36) A $1,000, 8% bond sells for 980. $1,000 is called the ________.
A) current value
B) market value
C) par value
D) auction value
37) The current yield on a bond is measured by ________.
A) the annual interest payment divided by the current price
B) the annual interest payment divided by the par value
C) the annual interest payment divided by the maturity value
D) the annual interest payment divided by the yield to maturity
38) A bond rated Aaa according to Moody’s, is considered ________.
A) a high grade bond
B) a prime quality bond
C) an upper medium grade bond
D) a medium grade bond
39) The riskiness of publicly traded bond issues is rated by independent agencies. According to
Moody’s rating system, an Aaa bond and a Caa bond are ________ and ________ respectively.
A) speculative; investment grade
B) prime quality; medium grade
C) prime quality; speculative
D) medium grade; lowest grade
40) A(n) ________ gives purchasers inflation protection.
A) zero-coupon bond
B) junk bond
C) floating rate bond
D) income bond
41) ________ is used to finance “rolling stock”-airplanes,trucks,boats,railroad cars.
A) Income bonds
B) Equipment trust certificates
C) Collateral trust bonds
D) Subordinated debentures
42) Deeply discounted bond that pays no coupon interest is a ________.
A) junk bond
B) floating rate bond
C) zero coupon bond
D) subordinated debenture
43) Stated interest rate under ________ is adjusted periodically within stated limits in response
to changes in specified money market or capital market rates.
A) junk bonds
B) floating rate bonds
C) extendible notes
D) putable bonds
44) ________ are popular vehicle used to finance mergers and takeovers.
A) Income bonds
B) Junk bonds
C) Floating rate bonds
D) Convertible debentures
45) A(n) ________ is secured by real estate.
A) income bond
B) debenture
C) mortgage bond
D) subordinated debenture
46) A(n) ________ is issued with no or very low coupon and sells significantly below its par
value.
A) income bond
B) zero or low coupon bond
C) mortgage bond
D) subordinated debenture
47) On ________, the stated interest rate is adjusted periodically within stated limits in response
to changes in specified money or capital market rates.
A) a floating rate bond
B) a zero coupon bond
C) a mortgage bond
D) an equipment trust certificate
48) ________ are commonly issued in the reorganization of a failed or failing firm.
A) Floating rate bonds
B) Income bonds
C) Mortgage bonds
D) Equipment trust certificates
49) ________ bonds are characterized by interest payments that are required only when earnings
are available.
A) Floating rate
B) Income
C) Mortgage
D) Junk
50) ________ are debt rated Ba or lower by Moody’s or BB or lower by Standard & Poor’s and
are commonly used by rapidly growing firms to obtain growth capital, most often to finance
mergers and takeovers.
A) Subordinated debentures
B) Mortgage bonds
C) Junk bonds
D) Equipment trust certificates
51) Convertible bonds are normally ________.
A) debentures
B) income bonds
C) zero coupon bonds
D) mortgage bonds
52) A debenture is ________.
A) a bond secured by specific assets that any firm can issue
B) a secured bond that is secured by unspecified assets
C) a secured bond issued by startup firms
D) an unsecured bond that only creditworthy firms can issue