20) 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
21) 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
22) 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
23) 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) prevent the firm from selling current assets to raise cash to pay current obligations
D) limit the payment of annual cash dividends
24) 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
25) ________ 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
26) 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
27) 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
28) 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
29) Which of the following affects the cost of a bond to the issuer?
A) maturity of a bond
B) dividend policy
C) fixed assets purchased from the proceeds of bond issue
D) money market regulations
30) 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
31) 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
32) A call premium is the amount by which the call price exceeds the market price of the bond.
33) 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.
34) A call feature is a feature included in nearly all corporate bonds and allows the issuer to repurchase
bonds at the market price prior to maturity.
35) Bondholders will convert their convertible bonds into shares of stock only when the conversion price
is greater than the market price of the stock.
36) To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise equivalent
noncallable bond.
37) The conversion feature of a bond is a feature that is included in nearly all corporate bond issues that
gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.
38) A call feature in a bond allows bondholders to change each bond into a stated number of shares of
common stock.
39) A conversion feature in a bond allows bondholders to change each bond into a stated number of
shares of common stock.
40) 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.
41) 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.
42) 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.
43) IBM stock will experience greater trading activity (in terms of the number of shares traded on a given
day) compared to IBM bonds.
44) 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.
45) High-quality (high-rated) bonds provide lower returns than lower-quality (low-rated) bonds.
46) There is an inverse relationship between the quality or rating of a bond and the rate of return it must
provide bondholders.
47) Any bond rated Aaa through Caa according to Moody’s, would be considered investment grade debt.
48) An A rated bond should provide investors with a higher yield than an otherwise identical B rated
bond.
49) Any Ba rated bond or lower would be considered speculative or “junk.”
50) 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.
51) 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.
52) With subordinated debentures, payment of interest by a firm is required only when earnings are
available.
53) The market price of a callable bond will not generally exceed its call price, except in the case of a
convertible bond.
54) 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.
55) 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.
56) 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.
57) 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.
58) A Eurobond bond is a bond denominated in Euros.
59) The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
A) call
B) conversion
C) put
D) swap
60) The ________ feature allows bondholders to change each bond into stated number of shares of stock.
A) call
B) conversion
C) put
D) swap
61) ________ 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
62) 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
63) 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
64) 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
65) 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
66) A bond rated Aaa according to Moody’s, is considered ________.
A) a high grade bond
B) an investment grade bond
C) an upper medium grade bond
D) a medium grade bond
67) 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) investment grade; speculative
D) medium grade; lowest grade
68) A(n) ________ gives purchasers inflation protection.
A) zero-coupon bond
B) junk bond
C) floating rate bond
D) income bond
69) ________ 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
70) A deeply discounted bond that pays no coupon interest is a ________.
A) junk bond
B) floating rate bond
C) zero coupon bond
D) subordinated debenture
71) The stated interest rate on ________ 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
72) A(n) ________ is secured by real estate.
A) income bond
B) debenture
C) mortgage bond
D) subordinated debenture
73) 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
74) 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
75) ________ 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
76) ________ bonds are characterized by interest payments that are required only when earnings are
available.
A) Floating rate
B) Income
C) Mortgage
D) Junk
77) ________ 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
78) Convertible bonds are normally ________.
A) debentures
B) income bonds
C) zero coupon bonds
D) mortgage bonds
79) 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
80) ________ are secured by stock and/or bonds that are owned by the issuer.
A) Mortgage bonds
B) Equipment trust certificates
C) Collateral trust bonds
D) Subordinated debentures
81) ________ have a short maturities, typically one to five years, and which can be renewed for a similar
period at the option of their holders.
A) Floating rate bonds
B) Extendible notes
C) Putable bonds
D) Junk bonds
82) Payment of interest required only when earnings are made available from which to make a payment
is characteristic of a(n) ________.
A) floating rate bond
B) income bond
C) mortgage bond
D) equipment trust certificate
83) A putable bond gives the bondholder ________.
A) the right to sell the bond back to the corporation at a discount
B) the right to sell the bond back to the corporation at a stated premium
C) the right to sell the bond back to the corporation at the current market value
D) the right to sell the bond back to the corporation at par
84) A significant portion of the return on a zero coupon bond is in the form of ________.
A) interest and gain in value
B) interest
C) gain in value
D) tax reduction
85) ________ are claims that are not satisfied until those of the creditors holding certain (senior) debts
have been fully satisfied.
A) Convertible debentures
B) Subordinated debentures
C) Mortgage bonds
D) Collateral trust bonds
86) Bonds that can be redeemed at par at the option of their holders 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 are called ________.
A) zero coupon bonds
B) junk bonds
C) floating-rate bonds
D) putable bonds
87) A foreign bond is issued by a(n) ________.
A) foreign corporation or government and is denominated in the investor’s home currency and sold in
the investor’s home market
B) corporation or government and is denominated in the investor’s foreign currency and sold in the
foreign market
C) international borrower and sold to investors in countries with currencies other than the local currency
D) international borrower and sold to investors in countries with currencies in which the bond is
denominated
Table 6.1
Assume the below information to answer the following question(s).
88) Based on the table 6.1, the bond price quotation is for a ________ bond.
A) Treasury
B) municipal
C) tax-free
D) corporate
89) Based on the Table 6.1, assume this bond’s face value is $1,000. What is the bond’s current market
price?
A) $65.00
B) $655.00
C) $650.00
D) $6,550.00
90) Based on the Table 6.1, what is the last yield for this bond?
A) 11.0%
B) 14.2%
C) 16.8%
D) 18.9%
6.3 Valuation fundamentals
1) The primary goal of financial management is creating value by ________.
A) making investments that are worth more than they cost
B) making investments that pay off sooner rather than later
C) taking as little risk as possible
D) issuing bonds that receive investment-grade ratings
2) ________ is a process that links risk and return to determine the worth of an asset.
A) Establishing a bond rating
B) The time value of money
C) Valuation
D) The term structure of interest rates
3) The value of an asset depends on the historical cash flow(s) up to the present time.