Deck 16: Long-Term Debt and Lease Financing

Question 1

Homebuilding companies, like D.R. Horton Inc., realized significant losses in 2008-2009, but have realized gains since then.

Answer 1

True

Question 2

One of several reasons that companies might choose to issue bonds is to shift their capital structure from more equity ownership to more debt borrowing.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

In the U.S., bond issuers can be either corporations or the government.

Question 5

Although the times interest earned ratio of many corporations went down tremendously during the 2007-2008 financial crisis, the ratio has been increasing steadily mainly because companies took advantage of the recent low interest rates.

Question 6

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

Question 7

When a company is obligated contractually 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 8

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

Question 9

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

Question 10

A bondholder is one that buys the bond, while the bond issuer is the one that sells the bond.

Question 11

The call feature is usually advantageous to the bondholder.

Question 12

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 to investors.

Question 13

During a default situation, a bondholder is better off with a secured loan because debenture bonds don't give the bondholder any protection.

Question 14

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

Question 15

Under a sinking fund provision, money is set aside every year until the bond matures, and the money is used to purchase bonds from willing sellers.

Question 16

Debentures are commonly issued by small companies.

Question 17

Because of the legal problems associated with specific asset claims in a secured bond offering, the trend is for companies to issue more debentures.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

The prices of zero-coupon bonds tend to react violently to large swings in interest rates.

Question 26

If an investor expect interest rates to go up, the investor should sell a long-term bond now.

Question 27

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

Question 28

The coupon rate is the actual interest that the seller pays, which may not equal the amount that the seller incurs for an expense.

Question 29

The weighted average cost of capital is generally used as the discount rate in a bond-refunding decision.

Question 30

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

Question 31

The coupon rate is the actual interest rate on the bond and is usually payable in semiannual installments.

Question 32

When interest rates rise, bond refunding becomes quite popular.

Question 33

As interest rates decline, bond refunding should become more common.

Question 34

Zero-coupon bonds are more risky then other bonds because there is no interest payments involved during the life of the bond.

Question 35

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

Question 36

The maturity date is the final date on which repayment of the bond interest is due.

Question 37

Zero-coupon bonds are sold at a deep discount primarily because investors are not interested in owning them.

Question 38

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

Question 39

The value of bonds will move in the opposite direction from the market interest rates.

Question 40

Zero-coupon bonds are sold at face value because no interest is paid.

Question 41

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 42

Lease obligations, whether capital or operating, currently appear only in the footnotes of U.S. corporate financial statements.

Question 43

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

Question 44

The lessee is the one making the rental payments, while the lessor is the one receiving the rental payments.

Question 45

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

Question 46

The inclusion of leases on the balance sheet as an asset and liability has lowered firm's debt-to-equity ratio.

Question 47

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

Question 48

In an operating lease situation, the lessee shows the asset and the debt on its financial statements.

Question 49

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

Question 50

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

Question 51

Under a sinking fund arrangement, semiannual or annual contributions are made by the corporation into a fund administered by a trustee for purposes of debt retirement.

Question 52

Bonds with serial payment provisions are paid off in installments over the life of the issue.

Question 53

In an inflationary economy, debt is adjusted for inflation and must be paid back with "more expensive dollars."

Question 54

The disadvantage of a zero-coupon bond to an investor is that the annual increase in the bond is taxable as ordinary income and no annual cash payments are received to pay for the tax charges.

Question 55

The initial floating rate bond price is inversely related to changes in interest rates.

Question 56

Bond refunding is generally advantageous to the investor because the investor gets a higher future interest rate.

Question 57

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

Question 58

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

Question 59

A capital (or "financing") lease usually calls for an annual expense deduction equal to the lease payment.

Question 60

An advantage of the zero coupon bond is that there is no coupon, so the yield to maturity is locked in for the life of the bond.

Question 61

Bonds provide stable pricing because they offer a fixed coupon rate and maturity date unlike stocks.

Question 62

Which of the following bonds offers the most security to the bondholder?

A) Junior mortgage bonds
B) Senior mortgage bonds
C) Debenture bonds
D) Income bonds

Question 63

The term debenture refers to

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

Question 64

Many companies try to maintain investment grade status due to the significant yield differential when rated with a junk-bond status.

Question 65

The coupon rate of the bond varies indirectly with changes in market interest rates.

Question 66

Many bonds have some orderly, preplanned, alternative system of repayment. Which of the following apply?

A) Sinking funds
B) Serial bonds
C) Income bonds
D) Sinking funds and serial bonds

Question 67

The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called

A) an indenture.
B) a debenture.
C) secured debt.
D) protective covenants.

Question 68

An indenture is

A) the section of a corporation's bylaws pertaining to bond issues.
B) the summary of the essential features of a stock issue.
C) the contract between a corporation and a trustee acting for bondholders.
D) the underwriting contract.

Question 69

Bond ratings start with Aaa and end with C or Aaa1 and end with C3.

Question 70

A debenture represents

A) debt not secured by a specific asset.
B) secured debt.
C) a long document covering every detail of a bond issue.
D) debt that is subordinate to preferred stock.

Question 71

Yield spreads between investment grade and junk bond ratings are usually greater during economic boom periods.

Question 72

Which of the following is the lowest in priority of claims against a bankrupt firm?

A) An unsecured bond
B) A senior debenture
C) Common stock
D) Federal taxes

Question 73

The greater use of debt by corporations since the late 1970s is best shown by the

A) declining "times interest covered" ratio.
B) small amount of common stock sold.
C) rising cost of interest.
D) inability of earnings to keep up with inflation.

Question 74

When making a decision to refund, outflows in the form of financing costs related to redeeming and reissuing securities and inflows represented by savings in annual interest costs and tax savings are involved.

Question 75

A serial bond repayment plan involves a(n)

A) lump-sum payment at maturity.
B) conversion of debt to common stock.
C) early redemption of all debt.
D) series of installments to retire the debt over the life of the issue.

Question 76

Senior debentures usually provide lower interest rates than junior secured debt.

Question 77

A low bond rating during a bad economic time means that the company will have to issue new bonds at a higher rate.

Question 78

Which of the following best represents the hierarchy of creditor and stockholder claims?

A) Common stock, senior secured debt, subordinated debentures
B) Senior debentures, subordinated debentures, junior secured debt
C) Senior secured debt, subordinated debentures, common stock
D) Preferred stock, secured debt, debentures

Question 79

A challenge for multinational corporations is trying to get the right financing for certain operating activity expectations.

Question 80

The main cause for the increase in corporate debt in America is

A) rapid business expansion.
B) inflationary impacts.
C) drop in interest rates.
D) all of these options are true.