Deck 16: Long-Term Debt and Lease Financing

Question 1

Long-term interest rates are generally higher than short-term interest rates.

Answer 1

True

Question 2

An operating lease is generally a long-term, non-cancellable obligation.

Answer 2

False

Question 3

A bond indenture is a bond with no specific collateral securing it.

Answer 3

False

Question 4

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.

Question 5

If you expect interest rates to go up, you should buy a long-term bond now.

Question 6

The call feature is usually advantageous to the bondholder.

Question 7

The cost of capital is generally not used as the discount rate in a bond-refunding decision.

Question 8

When interest rates rise, bond refunding becomes quite popular.

Question 9

The payment of a call premium may generally be taken as an immediate tax write-off.

Question 10

A financial lease has many of the characteristics of a long-term debt obligation.

Question 11

Par value and maturity value on a bond generally are the same.

Question 12

The yield to maturity is the internal rate of return on a bond.

Question 13

The fact that interest payments on debt are fixed is both an advantage and a drawback.

Question 14

The call premium tends to increase with the passage of time.

Question 15

In an inflationary economy, debt must be paid back with "more expensive dollars."

Question 16

The value of bonds will move opposite interest rates.

Question 17

A bondholder may have paper losses as large as 30-40% or more at some point between the time of issue and redemption.

Question 18

As interest rates have declined after 1981, bond refunding was more common in the 1990s as rates stayed low.

Question 19

The stated interest payment divided by the par value of a bond is called the coupon rate.

Question 20

Bonds may be recalled only if there is a specific call provision in the bond.

Question 21

A financing lease usually calls for an annual expense deduction equal to the lease payment.

Question 22

An after-acquired property clause means that any new property acquired is placed under the original mortgage.

Question 23

Long-term bond prices are more volatile than short-term bond prices given an equal percentage change in the interest rate.

Question 24

Under a sinking fund provision money is set aside every year until the bond matures, then the money is used to repay the principal.

Question 25

The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond.

Question 26

Costs of bond refunding are the call premium and the underwriting cost on the new bond issue.

Question 27

Refunding a bond occurs when the company sells more bonds of the same series with maturity and coupon equal to the bonds sold earlier.

Question 28

Strip bonds are sold at face value.

Question 29

Leasing land provides a tax advantage to the lessee in that lease payments are tax deductible, while there is no deduction for amortization for a landowner.

Question 30

A bond can only be easily refunded if it has a call feature.

Question 31

Strip bonds are sold at a deep discount primarily because investors are not interested in them.

Question 32

Since the mid 1970s, the times interest earned ratio of the Canadian industrial corporations has held fairly steady.

Question 33

Generally the greater the protection offered a given class of bondholders, the higher will be the interest rate on the bonds.

Question 34

A capital lease is the same as an operating lease.

Question 35

Lease obligations currently appear only in the footnotes of Canadian corporate financial statements.

Question 36

A Eurobond is a bond payable in the borrower's currency but sold outside the borrower's country.

Question 37

The inclusion of leases on the balance sheet as an asset and liability has lowered firms debt to asset ratio.

Question 38

The essence of the treatment of long-term, noncancellable leases is the same as if the company had borrowed the money and bought the asset.

Question 39

The primary advantage of investing in floating rate bonds is that the bonds will maintain a stable market value within a reasonable limit.

Question 40

The costs of bond refunding are the call premium, and the underwriting costs on the old and new bond issue.

Question 41

Under the borrowing-purchasing decision compared to leasing, we must consider not only the amount of the payment but also separate out those items that are tax deductible.

Question 42

An assignment is a form of out-of-court liquidation.

Question 43

After assets against which liens are held are disposed of, secured creditors participate equally with unsecured creditors.

Question 44

In the lease-purchase decision, the discount rate used in the present value analysis is the aftertax cost of debt.

Question 45

The decision to lease rather than purchase will not be affected by the method of amortization used under the purchase method.

Question 46

Bonds with a call premium generally trade at higher yields than bonds without call premiums.

Question 47

During economic upswings, spreads between bonds of different ratings tend to widen.

Question 48

Debentures are commonly issued by small corporations.

Question 49

The decline in the interest paying capability of corporate borrowers has translated to a dramatic increase in defaults on corporate obligations.

Question 50

A floating rate bond has a reasonably stable price but actual interest payments received change often over the life of the bond.

Question 51

After the recession of 1990-1991 pushed times interest earned to its lowest level it has been in many years, it has began to recover in the subsequent economic expansion.

Question 52

An internal reorganization may be considered when a merger partner is found for the firm.

Question 53

The prices of strip bonds tend to react violently to large swings in interest rates.

Question 54

A firm may be technically insolvent even though it has a positive net worth.

Question 55

A composition means a distressed firm will be given more time to pay its bills.

Question 56

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.

Question 57

A floating rate bond's price is inversely related to the changes in interest rates.

Question 58

The advantage of a strip bond to an investor is that the annual increase in the bond is taxable as ordinary income.

Question 59

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

Question 60

One current trend in the bond market is toward more secured debt, as investors become increasingly wary of defaults on unsecured debt.

Question 61

Internal reorganization may involve a change in the firm's capital structure.

Question 62

A composition is an alternative to formal bankruptcy proceedings in which creditors agree to accept a portion of their original claims.

Question 63

A creditor committee may be established to run a business when management's only other alternative to prevent bankruptcy is composition.

Question 64

Bankruptcy refers to a circumstance where a firm is unable to pay its bills as they come due.

Question 65

Corporate debt has

A) increased rapidly since 1961.
B) increased slowly since 1961.
C) held fairly steady since 1961.
D) none of the other answers are correct

Question 66

An out-of-court settlement will hardly ever involve both extension and composition.

Question 67

Management of a firm may accept a creditor committee only as a last resort before bankruptcy.

Question 68

Establishing a credit committee to run the business is a type of in-court settlement.

Question 69

Federal, provincial, and local taxes due have a first priority claim against assets in a bankruptcy proceeding.

Question 70

In an extension settlement, creditors agree to allow the firm more time to meet its financial obligations.

Question 71

Generally when a firm is considered bankrupt, the liquidation value of the assets is less than the book value of the assets.

Question 72

A firm in bankruptcy may be either liquidated or reorganized, but not both.

Question 73

The term debenture refers to

A) long-term, secured debt.
B) long-term, unsecured debt.
C) the after-acquired property clause.
D) a 100-page document covering the specific terms of the offering.

Question 74

A majority of creditors must refuse to accept an out-of-court settlement before formal bankruptcy proceedings will begin.

Question 75

The three highest priority levels in bankruptcy include the cost of administering the proceedings, past wages due to workers, and overdue interest payments to creditors.

Question 76

In 2003, the average corporate times-interest-earned ratio was about ______, having fallen steadily from above____________in the late-1970s.

A) 3x, 10x
B) 2x, 10x
C) 3x, 5x
D) 2x, 5x

Question 77

Bankruptcy proceedings may be initiated either by the distressed company or its creditors.

Question 78

In the priority of claims in bankruptcy liquidation, taxes due at the federal or provincial level have rights of first payment.

Question 79

Both an extension and a creditor committee cannot be established.

Question 80

In a liquidation, each claim against the assets of the firm will be satisfied equally.