77. Which of the following properly represents the hierarchy of creditor and stockholder claims?
78. A call provision, which allows the corporation to force an early maturity on a bond issue, usually
contains all but which of the following characteristics?
79. A bond with a call provision would generally be sold to yield
80. A call feature allows
81. The “call” provision on some bonds allows
16–15
82. Buchanan Corp. is refunding $10 million worth of 10% debt. The new bonds will be issued for 8%. The
corporation’s tax rate is 35%. The call premium is 9%. What is the net cost of the call premium after taxes?
83. A conversion feature allows
84. The dollar interest received divided by the market price of the bond is called the
85. The true measure of the return on a bond is its
86. Prices of existing bonds move _________ as market interest rates move _______.
87. Which of the following is not a form of yield on a bond?
88. With regard to interest rates and bond prices, it can be said that
89. A bond with a coupon rate of 6.5% (assume it is paid once annually), maturing in 10 years at a value of
$1,000 and a current market price of $695, will have a current yield of
90. Short-term bond yields are generally ______ than long-term bond yields, whereas long-term bond
prices are generally ________ than short-term bond prices.
16–17
91. Which company is a leader in rating bonds?
92. The higher the bond rating,
93. A bond with an annual coupon rate of 6.5%, maturing in 10 years at a value of $1,000 and a current
market price of $899.35, will have a yield to maturity (using the approximation formula) of
94. Solow Corp. has a bond with annual interest payments of $109 maturing in 10 years at a value of
$1,000 per bond. The current market price is $960. What will the nominal yield be?
95. Allais Company’s bond has an $85 annual interest payment that will mature in 10 years at a value of
$1,000. The bond has a current market price of $1,140. What is the nominal yield of the bond?
96. Investors consider which of the following to be the most important measure of bond returns?
97. Which of the following does a bond’s rating NOT depend on?
98. An Aa2 bond is rated lower than a _____ bond.
99. If investors are enthusiastic about the future, the spread between yields on high-grade and low-grade
bonds
100. Bond refunding typically occurs when
101. An investor’s underwriting cost on a new issued bond
102. The higher the tax rate, the ______ the net underwriting cost on the new bond issue, from a cash flow
point of view.
103. Which of the following represents an inflow in a bond refunding decision?
104. Which of the following does not represent a tax implication in the bond refunding decision?
105. What discount rate is used in the net present value of the refunding decision?
106. Which of the following is not a characteristic of a zero-coupon bond?
107. From the corporate issuer viewpoint, a zero-coupon bond allows the firm to
108. Zero-coupon bonds
109. Floating rate bonds
110. Which of the following is an advantage of floating rate bonds to investors?
111. From an investors’ point of view, when is the best time to own a floating rate bond?
112. In general, how often are floating rate bonds adjusted to meet the market demands?
113. The Haavelmo Widget Corporation (lessee) has just signed a 60-month lease on an asset with a six–
year life. The lessor will retain the title to the property at the end of the lease, and the present value of the
minimum lease payments is $470,000. The estimated fair value of the property is $600,000. Is this an
operating lease?
114. Floating rate bonds are most likely to be popular with investors when it is anticipated that
115. A Eurobond is a
116. Disclosure requirements for a Eurobond are _____ demanding than those of the Securities and
Exchange Commission or other domestic regulatory agencies.
117. The disadvantages of debt to the corporation include all but which of the following?
118. Which of the following is not a financial advantage to companies using debt?
119. Leasing is a popular form of financing because
120. Which of the following are advantages of leasing?
121. Which one of these conditions qualifies a lease as a “capital lease?”
122. An operating lease
123. Long-term financing leases currently
124. Bond ratings are significantly based on all of the following EXCEPT
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125. An advantage to the corporation of issuing zero coupon bonds is
126. An investor would consider investing in a zero coupon bond because of the
127. Floating rate bonds provide which one of the following advantages?
128. The benefits of debt to the corporation include all of the following EXCEPT
129. Which of the following statements regarding the June 2009 bankruptcy of General Motors (GM) is
false?
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130. Dairy Corp. has a $20 million bond obligation outstanding and a coupon rate of 8%. Dairy Corp. has
the ability to buy back the debt at 7% above par and issue new debt at 6.5%, so it is considering refunding
this bond. Assume the underwriting cost for the old issue was $100,000 and the new issue is $200,000,
with a tax rate of 40%. What is the net cost of call premium?
131. When calculating net present value for a bond refunding calculation, all of the following are considered
either outflows are inflows EXCEPT:
132. Time value of money is calculated in all of the bond refunding calculations except _______________
because this is a one-time exchange of cash that happens on the day it is refunded.
Chapter 16 Test Bank – Static Summary
Category
# of
Questions
AACSB: Analytical Thinking
15
AACSB: Reflective Thinking
117
Accessibility: Keyboard Navigation
131
Blooms: Apply
7
Blooms: Evaluate
4
Blooms: Remember
66
Blooms: Understand
55
16–26
Difficulty: Basic
45
Difficulty: Challenge
9
Difficulty: Intermediate
78
Learning Objective: 16-01 Analyzing long-term debt requires consideration of the collateral pledged, method of
repayment, and other key factors.
51
Learning Objective: 16-02 Bond yields are important to bond analysis and are influenced by how bonds are rated by major
bond rating agencies.
31
Learning Objective: 16-03 An important corporate decision is whether to call in and reissue debt (refund the obligation)
when interest rates decline.
27
Learning Objective: 16-04 Long-term lease obligations have many characteristics similar to debt and are recognized as a
form of indirect debt by the accounting profession.
15
Learning Objective: 16-05 When a firm fails to meet its financial obligations, it may be subject to bankruptcy.
8
Topic: Advantages and disadvantages of debt
5
Topic: Bankruptcy
1
Topic: Bond coupons
2
Topic: Bond features
18
Topic: Bond ratings and credit risk
9
Topic: Bond refunding
12
Topic: Bond types
9
Topic: Bond valuation
7
Topic: Bond yields and returns
12
Topic: Capital and operating leases
15
Topic: Capital structure
2
Topic: Debt
1
Topic: Financial market regulation
1
Topic: Financial obligations
1
Topic: Historical performance
2
Topic: Indenture provisions
12
Topic: Interest rate risk
7
Topic: Loan security
1
Topic: Long-term solvency ratios
1
Topic: Nominal and real returns
1
Topic: Refunding
3
Topic: Shareholder rights
2
Topic: Taxes
6
Topic: Types of bonds
1
Topic: Zero coupon bond
1