104) If investors are enthusiastic about the future, the spread between yields on high-grade and
low-grade bonds
A) increases.
B) stays the same.
C) decreases.
D) None of these options are true.
105) Bond refunding typically occurs when
A) interest rates in the market are sufficiently less than the coupon rate on the old bond.
B) interest rates in the market have risen above the coupon rates on the old bond.
C) the price of the old bond is less than par.
D) a related sinking fund has accumulated enough money to retire the bond issue.
106) A corporation’s underwriting cost on a newly issued bond
A) is an immediate outflow and immediate tax write-off.
B) is an immediate tax write-off with a deferred outflow.
C) is a deferred outflow and deferred tax write-off.
D) is an immediate outflow and deferred tax write-off.
107) The higher the tax rate, the ________ the net underwriting cost on the new bond issue, from
a cash flow point of view.
A) higher
B) lower
C) higher or lower
D) substantially higher
108) Which of the following represents an inflow in a bond refunding decision?
A) The call premium
B) The write-off of underwriting cost
C) The cost savings from lower interest rates
D) Two of the options are correct
109) Which of the following does not represent a tax implication in the bond refunding decision?
A) The call premium.
B) The cost savings in lower interest rates.
C) Underwriting costs of a new issue.
D) All of these options have tax implications.
110) What discount rate is used in the net present value of the refunding decision?
A) The before-tax cost of the new debt
B) The after-tax cost of new debt
C) The weighted average cost of capital
D) The after-tax cost of total firm capital
111) Which of the following is not a characteristic of a zero-coupon bond?
A) It doesn’t pay interest during the life of the bond.
B) It is sold at a deep discount from face value.
C) The bond’s price does not change during the life of the bond.
D) It provides a means for corporations to take annual deductions without cash being exchanged.
112) From the corporate issuer viewpoint, a zero-coupon bond allows the firm to
A) receive deferred income for tax purposes.
B) reduce the multiplier of the initial investment.
C) defer payment obligations.
D) take advantage of low volatility.
113) Zero-coupon bonds
A) provide no annual interest payments.
B) have highly stable prices even with changing interest rates.
C) provide an investor with tax-free income until maturity.
D) Two of the options are correct.
114) Floating rate bonds
A) have interest payments based on some overall market rate.
B) have a better capacity for constant market value.
C) usually have very broad limits that interest payments cannot exceed.
D) All of these options are correct.
115) Which of the following is an advantage of floating rate bonds to investors?
A) They allow for locking in a multiplier of the initial investment.
B) Their prices tend to be highly stable regardless of interest rate changes.
C) They are sold at a deep discount.
D) All of these options are correct.
116) From an investors’ point of view, when is the best time to own a floating rate bond?
A) When the bond sells for a discount.
B) When interest rates are expected to fall.
C) When interest rates are expected to rise.
D) Any time, the interest rate fluctuations don’t affect the floating rate bond.
117) In general, how often are floating rate bonds adjusted to meet the market conditions?
A) Daily
B) Weekly
C) Monthly or Quarterly
D) Annually
118) 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?
A) No
B) Yes
C) Yes, if the company elects to treat the lease as an operating lease
D) More information is required to determine an answer.
119) Floating rate bonds are most likely to be popular with investors when it is anticipated that
A) interest rates will stay the same.
B) interest rates will go up.
C) interest rates will go down.
D) short-term interest rates will be higher than long-term interest rates.
120) A Eurobond is a
A) bond payable in the investor’s currency but sold outside the borrower’s country.
B) bond payable in the investor’s currency but sold inside the borrower’s country.
C) bond payable in the borrower’s currency and sold inside the borrower’s country.
D) bond payable in the borrower’s currency but sold outside the borrower’s country.
121) Disclosure requirements for a Eurobond are ________ demanding than those of the
Securities and Exchange Commission or other domestic regulatory agencies.
A) more
B) less
C) the same
D) More information is needed to determine an answer.
122) The disadvantages of debt to the corporation include all but which of the following?
A) Debt may have to be paid back with “cheaper” dollars because of inflation.
B) Interest and principal payments must be met regardless of performance results.
C) Indenture agreements may place burdensome restrictions on the firm.
D) Too much debt may depress the firm’s stock price.
123) Which of the following is not a financial advantage to companies using debt?
A) Debt is paid back in “cheaper” dollars during inflationary periods.
B) Bond holders have no control over the actions of management.
C) The cost of debt can lower the weighted overall cost of capital.
D) Interest payments are tax deductible.
124) Leasing is a popular form of financing because
A) lease provisions are generally less restrictive than a bond indenture.
B) the lessor likely has experience with the equipment being leased.
C) the lessee may not be financially able to purchase.
D) all of these options are true.
125) Which of the following are advantages of leasing?
A) A lease obligation may be substantially less restrictive than the provisions of a bond
indenture.
B) There may be no down payment requirement as in a purchase.
C) The negative effects of obsolescence may be eliminated.
D) All of these options are advantages.
126) Which one of these conditions qualifies a lease as a “finance lease?“
A) The lease contains a bargain purchase price at the end of the lease.
B) The lease must have a value of at least $10 million.
C) The present value of the minimum lease payments is at least 75% of the fair value of the
asset.
D) All of these options are correct.
127) An operating lease
A) has a lease term equal to 75% or more of the estimated property.
B) is usually short-term and is often cancelable at the option of the lessee.
C) must appear on the balance sheet.
D) none of these options are correct.
128) Long-term financing leases currently
A) appear both on the balance sheet and in the footnotes to the annual report.
B) appear only in the footnotes to the annual report.
C) appear on the company’s statement of retained earnings.
D) do not appear on any financial statements.
129) Bond ratings are significantly based on all of the following EXCEPT
A) The times interest earned ratio
B) The debt-to-equity ratio
C) The current ratio
D) The return on assets
130) An advantage to the corporation of issuing zero coupon bonds is
A) lower interest rates than conventional bonds.
B) cash inflow with lower cash outflow than conventional bonds.
C) tax benefits due to amortization.
D) none of these options are advantages.
131) An investor would consider investing in a zero coupon bond because of the
A) tax benefits of amortization.
B) lower volatility.
C) ability to lock in a multiplier of the initial investment.
D) none of these options are reasons to invest in zero coupons.
132) Floating rate bonds provide which one of the following advantages?
A) A lower risk for the issuing corporation
B) A higher initial rate received by the investor
C) Higher tax advantages for the investor than a conventional bond
D) A fixed market value for the investor
133) The benefits of debt to the corporation include all of the following EXCEPT
A) Tax-deductible interest payments
B) Increases the stock value when used heavily
C) Fixed obligation
D) Generally a lower overall cost than equity
134) Which of the following statements regarding the June 2009 bankruptcy of General Motors
(GM) is false?
A) The government provided more than $50 billion in the bailout.
B) The common stockholders received no cash.
C) The U.S. government still owns some of the common stock of GM as of 2014.
D) The secured debtholders were paid off in full.
135) 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?
A) $1,300,000
B) $840,000
C) $560,000
D) $1,040,000
136) When calculating net present value for a bond refunding calculation, all of the following are
considered either outflows or inflows EXCEPT:
A) Cost savings with the new interest rates.
B) Net loss from underwriting cost on old issue.
C) Net cost of underwriting expense on new issue.
D) Net cost of call premium.
137) 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.
A) Cost savings with the new interest rates.
B) Net gain from underwriting cost on old issue.
C) Net cost of underwriting expense on new issue.
D) Net cost of call premium.