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Chapter 16 - Long-Term Debt and Lease Financing
1. Over the decades, the times interest earned ratio of the Standard and Poor's' 500
corporations has held fairly steady.
2. Homebuilding companies, like D.R. Horton Inc., realized significant losses in 2008-2009.
3. Par value and maturity value on a bond generally are the same.
Chapter 16 - Long-Term Debt and Lease Financing
4. A bond indenture is a bond with no specific collateral securing it.
5. When a company defaults on a secured debt, it is rare for the secured asset to be sold and
the proceeds distributed to the debtor.
6. Debentures are commonly issued by small companies.
Chapter 16 - Long-Term Debt and Lease Financing
7. If a company has promised to pay interest on debt, it must pay the interest even if it shows
no profit for the year, or else it may go bankrupt.
8. Bonds may be recalled only if there is a specific call provision in the bond.
Chapter 16 - Long-Term Debt and Lease Financing
9. The fact that interest payments on debt are fixed is both an advantage and a drawback.
10. An after-acquired property clause means that any new property acquired is placed under
the original mortgage.
11. If a corporation offers greater protection to a given class of bondholders, it must raise the
interest rate on its bonds to make them more attractive.
12. Generally the greater the protection offered to a given class of bondholders, the higher
will be the interest rate on the bonds.
Chapter 16 - Long-Term Debt and Lease Financing
13. Because of the legal problems associated with specific asset claims in a secured bond
offering, the trend is for companies to issue more debentures.
14. The call feature is usually advantageous to the bondholder.
15. The call premium tends to increase with the passage of time.
16. Under a sinking fund provision, money is set aside every year until the bond matures, then
the money is used to repay the principal.
Chapter 16 - Long-Term Debt and Lease Financing
17. Long-term bond prices are more volatile than short-term bond prices given an equal
percentage change in the interest rate.
18. The value of bonds will move opposite interest rates.
19. If you expect interest rates to go up, you should buy a long-term bond now.
20. The yield to maturity is the internal rate of return on a bond.
Chapter 16 - Long-Term Debt and Lease Financing
21. During economic upswings, spreads between bonds of different ratings tend to widen.
22. When interest rates rise, bond refunding becomes quite popular.
23. As interest rates decline, bond refunding should become more common.
24. Refunding a bond occurs when the company sells more bonds of the same series with
maturity and coupon equal to the bonds sold earlier.
Chapter 16 - Long-Term Debt and Lease Financing
25. A bond can only be easily refunded if it has a call feature.
26. The costs of bond refunding are the call premium, and the underwriting costs on the old
and new bond issue.
27. The payment of a call premium may generally be taken as an immediate tax write-off.
28. Costs of bond refunding are the call premium and the underwriting cost on the new bond
issue.
Chapter 16 - Long-Term Debt and Lease Financing
29. The weighted average cost of capital is generally used as the discount rate in a bond-
refunding decision.
30. Zero-coupon bonds are sold at a deep discount primarily because investors are not
interested in owning them.
31. The prices of zero-coupon bonds tend to react violently to large swings in interest rates.
32. Zero-coupon bonds are sold at face value.
Chapter 16 - Long-Term Debt and Lease Financing
33. The difference between the initial bond price and the maturity value is amortized for tax
purposes over the life of a zero-coupon bond.
34. The advantage of a zero-coupon bond to an investor is that the annual increase in the bond
is taxable as ordinary income.
35. The primary advantage of investing in floating rate bonds is that the bonds will maintain a
stable market value within a reasonable limit.
36. A floating rate bond's price is inversely related to the changes in interest rates.
Chapter 16 - Long-Term Debt and Lease Financing
37. A floating rate bond has a reasonably stable price but actual interest payments received
change often over the life of the bond.
38. A bondholder may have paper losses as large as 30-40% or more at some point between
the time of issue and redemption.
39. A Eurobond is a bond payable in the borrower's currency but sold outside the borrower's
country.
40. In an inflationary economy, debt must be paid back with "more expensive dollars."
Chapter 16 - Long-Term Debt and Lease Financing
41. A financing lease usually calls for an annual expense deduction equal to the lease
payment.
42. Lease obligations currently appear only in the footnotes of U.S. corporate financial
statements.
43. Leasing land provides a tax advantage to the lessee in that lease payments are tax
deductible, while there is no deduction for depreciation for a landowner.
44. The essence of the treatment of long-term, non-cancelable leases is the same as if the
company had borrowed the money and bought the asset.
Chapter 16 - Long-Term Debt and Lease Financing
45. The inclusion of leases on the balance sheet as an asset and liability has lowered firms'
debt to asset ratio.
46. An operating lease is generally a long-term, non-cancelable obligation.
47. A financial lease has many of the characteristics of a long-term debt obligation.
48. A capital lease is the same as an operating lease.
Chapter 16 - Long-Term Debt and Lease Financing
49. Bond refunding is generally advantageous to the investor because they get a higher future
interest rate.
50. Many companies try to maintain investment grade status due to the significant yield
differential when rated with a junk-bond status.
51. Yield spreads between investment grade and junk bond ratings are usually greater during
economic boom periods.
52. The coupon rate of the bond varies indirectly with changes in interest rates.
Chapter 16 - Long-Term Debt and Lease Financing
53. Senior debentures usually provide lower interest rates than junior secured debt.
54. Bonds provide stable pricing because they offer a fixed coupon rate and maturity date
unlike stocks.
55. Corporate debt has
Chapter 16 - Long-Term Debt and Lease Financing
56. The greater use of debt by corporations since the late 1960s is best shown by the
57. The main cause for the increase in corporate debt in America is:
58. The term debenture refers to
Chapter 16 - Long-Term Debt and Lease Financing
59. The document that outlines the covenants and duties existing between bondholders and
the issuing corporation is called
60. Which of the following bonds offers the most security to the bondholder?
61. An indenture is
Chapter 16 - Long-Term Debt and Lease Financing
62. A debenture represents:
63. Which of the following is the lowest in priority of claims against a bankrupt firm?
64. Many bonds have some orderly, preplanned, alternative system of repayment. Which of
the following apply?
Chapter 16 - Long-Term Debt and Lease Financing
65. A serial bond repayment plan involves a
66. Which of the following best represents the hierarchy of creditor and stockholder claims?
67. A "subordinated debenture"
Chapter 16 - Long-Term Debt and Lease Financing
68. Which of the following properly represents the hierarchy of creditor and stockholder
claims?
69. 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?
70. A bond with a call provision would generally be sold to yield
