Deck 24: Debt Financing

Question 1

Which of the following statements is false?

A) Almost all bonds that are issued today are registered bonds.
B) The trust company represents the bondholders and makes sure that the terms of the indenture are enforced.
C) For private placements, the prospectus must include an indenture, a formal contract between the bond issuer and a trust company.
D) In the case of default, the trust company represents the bondholders' interests.

Answer 1

For private placements, the prospectus must include an indenture, a formal contract between the bond issuer and a trust company.

Question 2

Bonds issued by a local entity,denominated in the local currency,traded in a local market,but purchased by foreigners are called

A) Domestic bonds.
B) Yankee bonds.
C) Eurobonds.
D) Foreign bonds.

Answer 2

Domestic bonds.

Question 3

Which of the following statements regarding the private debt market is false?

A) Private debt has the advantage that it avoids the cost of registration.
B) Bank loans are an example of private debt, debt that is not publicly traded.
C) Private debt has the disadvantage of being illiquid.
D) The public debt market is larger than the private debt market.

Answer 3

The public debt market is larger than the private debt market.

Question 4

What kind of corporate debt can be secured by any specified assets?

A) Mortgage bonds
B) Notes
C) Asset-backed bonds
D) Debentures

Question 5

Which of the following statements is false?

A) The registered bond system also facilitates tax collection because the government can easily keep track of all interest payments made.
B) Asset backed bonds and mortgage bonds are secured debt: Specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy.
C) Notes typically have longer maturities (more than ten years) than debentures.
D) Although the word "bond" is commonly used to mean any kind of debt security, technically a corporate bond must be secured.

Question 6

Treasury securities that are semiannual-paying coupon bonds with maturities longer than 10 years are called

A) Treasury bonds.
B) TIPS.
C) Treasury bills.
D) Treasury notes.

Question 7

In January 2010,the U.S.Treasury issued a $1000 par.ten-year,inflation-indexed note with a coupon of 4%.On the date of issue,the consumer price index (CPI)was 200.By January 2020, the CPI had increased to 300.The principal payment that was made in January 2020 is closest to:

A) $1000
B) $1020
C) $1030
D) $1500

Question 8

What kind of corporate debt must be secured by real property?

A) Mortgage bonds
B) Notes
C) Asset-backed bonds
D) Debentures

Question 9

Which of the following statements is false?

A) Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously.
B) In a leveraged buyout (LBO), a group of private investors purchases all the equity of a public corporation.
C) A term loan is a bank loan that lasts for a specific term.
D) Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued.

Question 10

What kind of corporate debt has a maturity of less than 10 years?

A) Asset-backed bonds
B) Debentures
C) Notes
D) Mortgage bonds

Question 11

Which of the following statements is false?

A) In the event of default, the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off.
B) Because more than one debenture might be outstanding, the bondholder's priority in claiming assets in the event of default, known as the bond's seniority, is important.
C) When a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt, the new debt is known as a subordinated debenture.
D) Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt.

Question 12

In January 2010,the U.S.Treasury issued a $1000 par.five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2020, the CPI had decreased to 200.The coupon payment that was made in January 2015 is closest to:

A) $20
B) $25
C) $30
D) $40

Question 13

Bonds issued by a foreign company in a local market,intended for local investors,and denominated in the local currency are known as

A) Domestic bonds.
B) Yankee bonds.
C) Eurobonds.
D) Foreign bonds.

Question 14

In January 2010,the U.S.Treasury issued a $1000 par.five-year,inflation-indexed note with a coupon of 5%.On the date of issue,the consumer price index (CPI)was 250.By January 2020, the CPI had decreased to 200.The principal payment that was made in January 2015 is closest to:

A) $800
B) $1000
C) $1250
D) $1500

Question 15

Which of the following statements regarding private placements is false?

A) A private placement is a bond issue that does not trade on a public market but rather is sold to a small group of investors.
B) Privately placed debt need not conform to the same standards as public debt; as a consequence, it can be tailored to the particular situation.
C) In 1990, the U.S. Securities and Exchange Commission (SEC) issued Rule 144A, which significantly decreased the liquidity of certain privately placed debt.
D) Because a private placement does not need to be registered, it is less costly to issue.

Question 16

Treasury securities that are semiannual coupon bonds with original maturities of between 1 and 10 years are called

A) Treasury bonds.
B) Treasury bills.
C) Treasury notes.
D) TIPS.

Question 17

In January 2010,the U.S.Treasury issued a $1000 par.ten-year,inflation-indexed note with a coupon of 4%.On the date of issue,the consumer price index (CPI)was 200.By January 2020, the CPI had increased to 300.The coupon payment that was made in January 2020 is closest to:

A) $20
B) $30
C) $40
D) $50

Question 18

Which of the following statements is false?

A) With registered bonds, on each coupon payment date, the bond issuer consults its list of registered owners and mails each owner a check (or directly deposits the coupon payment into the owner's brokerage account).
B) If a coupon bond is issued at a discount, it is called an original issue discount bond.
C) The face value or principal amount of the bond is denominated in standard increments, most often $10,000.
D) In a public offering, the indenture lays out the terms of the bond issue.

Question 19

What kind of unsecured corporate debt has a maturity of less than 10 years?

A) Mortgage bonds
B) Asset-backed bonds
C) Debentures
D) Notes

Question 20

Treasury securities that are pure discount bonds with original maturities ranging from a few days to 26 weeks are called

A) TIPS.
B) Treasury bonds.
C) Treasury notes.
D) Treasury bills.

Question 21

Treasury securities that are standard coupon bonds where the outstanding principal is adjusted for inflation are called

A) Treasury notes.
B) Treasury bonds.
C) TIPS.
D) Treasury bills.

Question 22

The largest sector of the asset-backed security market is the ________ market.

A) collateralized debt obligation
B) mortgage-backed security
C) real property-backed security
D) double-barreled security

Question 23

Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then it's yield to call is closest to:

A) 3.4%
B) 6.0%
C) 6.5%
D) 6.8%

Question 24

The cash flows of a collateralized debt obligation are usually divided into how many different branches?

A) 2
B) 3
C) 4
D) 6

Question 25

A(n)________ cash flows come from the cash flows of underlying financial securities.

A) general obligation security's
B) revenue bond's
C) asset-backed security's
D) double-barreled bond's

Question 26

Packaging a portfolio of financial securities and issuing an asset-backed security backed by this portfolio is known as

A) asset securitization.
B) revenue securitization.
C) backup securitization.
D) payment securitization.

Question 27

Asset securitization is the process of creating a(n)

A) collateralized security.
B) asset-backed security.
C) municipal security.
D) payment security.

Question 28

Suppose that in January 2001,the U.S.Treasury issued a ten-year inflation-indexed note with a coupon of 3 1/2%.On the date of issue the consumer price index (CPI)was 175.1.In January 2006,the CPI had increased to 198.3.What coupon payment was made on this bond in January 2006?

Question 29

Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then it's yield to maturity is closest to:

A) 3.4%
B) 6.0%
C) 6.5%
D) 6.8%

Question 30

Which of the following statements is false?

A) In the case of a Treasury note or Treasury bond offering, the stop-out yield determines the coupon of the bond and then all bidders pay the discounted value for the bond or note.
B) All competitive bidders submit sealed bids in terms of yields and the amount of bonds they are willing to purchase.
C) In the past, the Treasury has issued bonds with maturities of 30 years (often called long bonds) and 20 years.
D) Noncompetitive bidders (usually individuals) just submit the amount of bonds they wish to purchase and are guaranteed to have their orders filled at the auction.

Question 31

Rearden Metal has just issued a callable,$1000 par value,twenty-year,8% coupon bond with semiannual coupon payments.The bond can be called at par in five years or anytime thereafter on a coupon payment date.If the bond is currently trading for $1040.79,then it's yield to call is closest to:

A) 3.8%
B) 7.0%
C) 7.6%
D) 8.0%

Question 32

Rearden Metal has just issued a callable,$1000 par value,twenty-year,8% coupon bond with semiannual coupon payments.The bond can be called at par in five years or anytime thereafter on a coupon payment date.If the bond is currently trading for $1040.79,then it's yield to maturity is closest to:

A) 3.8%
B) 7.0%
C) 7.6%
D) 8.0%

Question 33

When banks resecuritize other asset-backed securities,the new asset-backed security is known as a

A) mortgage-backed security.
B) double-barreled security.
C) collateralized debt obligation.
D) resecuritized security.

Question 34

Which of the following statements is false?

A) Mortgage-backed securities, such as GNMAs, are pass-through securities. That is, each security is backed by an underlying portfolio or pool of mortgages.
B) The Government National Mortgage Association (GNMA, or "Ginnie Mae") is an example of an enterprise; the Student Loan Marketing Association ("Sallie Mae") is an example of a government-sponsored agency.
C) Sovereign debt is debt issued by national governments.
D) Agency securities are issued by agencies of the U.S. government or by U.S. government sponsored enterprises.

Question 35

Which of the following statements is false?

A) If the issuer fails to live up to any covenant, the issuer goes into bankruptcy.
B) The stronger the covenants in the bond contract, the less likely the issuer will default on the bond, and so the lower the interest rate investors will require to buy the bond.
C) Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds.
D) Bond agreements often contain covenants that restrict the ability of management to pay dividends.

Question 36

Mortgages that do not meet certain credit criteria and have a high probability of default are know as ________ mortgages.

A) prepayment
B) pooled
C) under-water
D) subprime

Question 37

An asset-backed security backed by home mortgages is a

A) mortgage-backed security.
B) primary home-backed security.
C) bond-backed security.
D) real estate-backed security.

Question 38

Which of the following does not issue asset-backed securities?

A) Government National Mortgage Association
B) Federal National Mortgage Association
C) Student Loan Marketing Association
D) Federal Reserve

Question 39

Which of the following statements regarding municipal bonds is false?

A) A single municipal bond issue will often contain a number of different maturity dates. Such issues are often called multi-muni bonds because the bonds are scheduled to mature over a multiple number of years.
B) Revenue bonds are where the local government pledges specific revenues generated by projects that were initially financed by the bond issue.
C) Municipal bonds are sometimes also referred to as tax-exempt bonds.
D) Bonds backed by the full faith and credit of a local government are known as general obligation bonds and are not as secure as bonds backed by the full faith and credit of the federal government.

Question 40

Which of the following statements is false?

A) Zero-coupon Treasury securities with maturities longer than one year also trade in the bond market.
B) Treasury securities are initially sold to the public through dealers.
C) Municipal bonds ("munis") are issued by state and local governments.
D) Municipal bonds' distinguishing characteristic is that the income on municipal bonds is not taxable at the federal level.

Question 41

Use the information for the question(s) below.
Luther Industries has just issued a callable (at 102) ten-year, 8% coupon bond with semiannual coupon payments. The bond can be called at 102 in three years or anytime thereafter on a coupon payment date. It has a current price of 99.
What is the Yield to Maturity (YTM)on this bond?

Question 42

Use the information for the question(s) below.
KT Enterprises has just issued a callable (at par) fifteen-year, 7% coupon bond with semiannual coupon payments. The bond can be called at par in five years or anytime thereafter on a coupon payment date. It has a current price of 101.
What is the Yield to Call (YTC)on this bond?

Question 43

Which of the following statements is false?

A) The holder of a callable bond faces reinvestment risk precisely when it hurts: when market rates are lower than the coupon rate she is currently receiving.
B) When yields have risen, the issuer will not choose to exercise the call on the callable bond.
C) The issuer will exercise the call option only when the prevailing market rate exceeds the coupon rate of the bond.
D) A callable bond is relatively less attractive to the bondholder than the identical non-callable bond.

Question 44

You own a bond with a face value of $1,000 and a conversion ratio of 45.The conversion price is closest to:

A) $18
B) $22
C) $45
D) $1,000

Question 45

Which of the following statements is false?

A) Before the call date, investors anticipate the optimal strategy that the issuer will follow, and the bond price reflects this strategy.
B) The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity.
C) A callable bond will trade at a lower price (and therefore a higher yield) than an otherwise equivalent non-callable bond.
D) The price of a callable bond can be low when yields are high, but does not rise above the call value when the yield is low.

Question 46

Which of the following statements is false?

A) By including more covenants, issuers increase their costs of borrowing.
B) Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders.
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital.
D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative NPV actions that exploit debt holders, then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants.

Question 47

Use the information for the question(s) below.
KT Enterprises has just issued a callable (at par) fifteen-year, 7% coupon bond with semiannual coupon payments. The bond can be called at par in five years or anytime thereafter on a coupon payment date. It has a current price of 101.
What is the Yield to Maturity (YTM)on this bond?

Question 48

Which of the following statements is false?

A) When bond yields have increased, by exercising the call on the callable bond and then immediately refinancing, the issuer can lower its borrowing costs.
B) To understand how call provisions affect the price of a bond, we first need to consider when an issuer will exercise its right to call the bond.
C) If the call provision offers a cheaper way to retire the bonds the issuer will forgo the option of purchasing the bonds in the open market and call the bonds instead.
D) An issuer can always retire one of its bonds early by repurchasing the bond in the open market.

Question 49

Which of the following statements is false?

A) A convertible bond can be thought of as a regular bond plus a special type of call option called a warrant.
B) On the maturity date of the bond, the strike price of the embedded warrant in a convertible bond is equal to the face value of the bond divided by the conversion ratio-that is, the conversion price.
C) Calling a convertible bond transfers the remaining time value of the conversion option from shareholders to bondholders.
D) If the stock price is low so that the embedded warrant is deep out-of-the-money, the conversion provision is not worth much and the bond's value is close to the value of a straight bond-an otherwise identical bond without the conversion provision.

Question 50

Which of the following statements is false regarding a call provision?

A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue.
B) A call provision allows the issuer to repurchase the bonds at a predetermined price.
C) The call price is generally set at or below, and expressed as a percentage of, the bond's face value.
D) A call feature allows the issuer of the bond the right (but not the obligation) to retire all outstanding bonds on (or after) a specific date (the call date), for the call price.

Question 51

Which of the following statements regarding sinking fund provisions is false?

A) With a sinking fund, if a bond is trading at below its face value, because the bonds are repurchased at par the decision as to which bonds to repurchase is made by lottery.
B) With a sinking fund, instead of repaying the entire principal balance on the maturity date, the company makes regular payments into a sinking fund administered by a trustee over the life of the bond.
C) Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund.
D) Because the sinking fund allows the issuer to repurchase the bonds at par, the option to accelerate the payments is another form of call provision.

Question 52

Use the information for the question(s) below.
Luther Industries has just issued a callable (at 102) ten-year, 8% coupon bond with semiannual coupon payments. The bond can be called at 102 in three years or anytime thereafter on a coupon payment date. It has a current price of 99.
What is the Yield to Call (YTC)on this bond?

Question 53

You own a bond with a face value of $1,000 and a conversion price of $40.The conversion ratio is closest to:

A) 15
B) 20
C) 25
D) 40

Question 54

Which of the following statements is false?

A) The assumption that underlies the yield calculation of a callable bond-that it will not be called-is not always realistic, so bond traders often quote the yield to call.
B) The yield to call (YTC) is the annual yield of a callable bond assuming that the bond is called at the earliest opportunity.
C) We can think of the yield to maturity of a callable bond as the interest rate the bondholder receives if the bond is not called and repaid in full.
D) Because the price of a callable bond is higher than the price of an otherwise identical non-callable bond, the yield to maturity of a callable bond will be lower than the yield to maturity for its non-callable counterpart.