Question 1

Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located.

Accepted Answer

Eurocredits are typically denominated in a currency other than where the lending bank is located, often in dollars or euros.

Question 2

Eurobonds are typically issued as registered bonds rather than bearer bonds.

Accepted Answer

Eurobonds are typically issued as bearer bonds, meaning they are not registered in the name of the holder and ownership is transferred by physical delivery.

Question 3

In general, long-term unsecured debts are less costly than long-term secured debts for a particular firm.

Accepted Answer

Long-term secured debts tend to have lower interest rates than long-term unsecured debts because the lender has collateral to mitigate their risk. This makes secured debts less costly for the borrower in the long run.

Question 4

As junk bonds are such high-risk instruments, the returns on such bonds aren't very high.

Accepted Answer

Junk bonds have higher returns than investment grade bonds to compensate investors for taking on higher risk.

Question 5

Issuing zero coupon bonds might appeal to a company that is considering investing in a long-term project that will not generate positive cash flows for several years.

Accepted Answer

Issuing zero coupon bonds means that the company is not required to make any interest payments until the bond matures. This would be attractive to a company investing in a long-term project because they would not have to make interest payments while they are not generating positive cash flows. Once the project starts generating positive cash flows, the company can then use that money to pay off the bonds.

Question 6

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.

Accepted Answer

Floating-rate debt has interest rates that adjust periodically based on a benchmark rate such as LIBOR. This means that if market rates rise, the interest rate on the debt will also increase, providing higher returns to investors.

Question 7

Call provisions on corporate bonds are generally included to protect the issuer against large increases in interest rates. They affect the actual maturity of the bond but not its price.

Accepted Answer

Call provisions can affect the price of a bond as well as its actual maturity. When interest rates decrease, the issuer of a bond may call it in and reissue a new bond with a lower coupon rate, which can cause the price of the original bond to fall.

Question 8

Foreign debt is debt sold in a country other than the one in whose currency the debt is denominated

Accepted Answer

The answer of Foreign debt is debt sold in a...

Question 9

A call provision gives bondholders the right to demand, or "call for," the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A call provision gives the issuer of the bond the right, not the bondholder, to repurchase the bond before its maturity date, typically when interest rates fall, not rise, so they can refinance at a lower cost.

Question 10

LIBOR is the acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S. corporations.

Accepted Answer

While LIBOR stands for London Interbank Offered Rate, it is an average of interest rates at which a panel of banks can borrow wholesale, unsecured funds from one another in the London interbank market, not the rate offered to U.S. corporations.

Question 11

One of the disadvantages of issuing zero coupon bonds is that the tax shield associated with the bonds' appreciation cannot be claimed until the bond matures.

Accepted Answer

The tax shield on zero coupon bonds is claimed annually as the bond appreciates, not just at maturity.

Question 12

If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and have effectively refinanced at a lower rate.

Accepted Answer

If a bond is callable, the issuer has the option to redeem the bond before its maturity date. If interest rates decline, the issuer can issue new bonds with lower interest rates, which can effectively refinance the old bonds by redeeming them early. This is a common strategy used by companies to take advantage of lower interest rates and reduce their borrowing costs. Therefore, the statement is true.

Question 13

Foreign debt is a debt instrument sold by a foreign borrower that is denominated in the currency of the country in which it is sold.

Accepted Answer

Foreign debt is indeed a debt instrument sold by a foreign borrower that is denominated in the currency of the country in which it is sold.

Question 14

Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets, particularly in the United States.

Accepted Answer

Eurobonds typically have a lower level of required disclosure compared to bonds issued in domestic markets, especially in the United States, where regulatory standards for disclosure are high.

Question 15

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm" and the coupon rate is generally set equal to the required rate.

Accepted Answer

The buyer is not called the "issuing firm", but rather the "investor" or "bondholder". The coupon rate is not necessarily set equal to the required rate, as it depends on market conditions and the creditworthiness of the issuing firm.

Question 16

The motivation for floating-rate bonds arose out of the costly experience of the early 1980s when inflation pushed interest rates to very high levels, causing sharp declines in the prices of long-term bonds.

Accepted Answer

The statement accurately describes the motivation for floating-rate bonds.

Question 17

Restrictive covenants are designed to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

Accepted Answer

Restrictive covenants are indeed included in the bond indenture to protect both the bondholder and the issuer. Although they may limit the firm's managers' freedoms or actions, they are vital for maintaining the credit quality of the bond and ensuring that the issuer can fulfill its obligations to the bondholders.

Question 18

The financial pages of the local newspaper helped Mary in identifying that she can buy a bond ($1,000 par) for $800. If the coupon rate is 10 percent, the annual interest payments equal $80.

Accepted Answer

The annual interest payments would be $100 because the coupon rate (10 percent) is applied to the par value of the bond ($1,000), not the purchase price ($800).

Question 19

Typically, debentures have higher interest rates than mortgage bonds primarily because mortgage bonds are backed by assets while debentures are unsecured.

Accepted Answer

Debentures are not backed by any specific asset or collateral, which makes them riskier than mortgage bonds. Therefore, to compensate for the higher perceived risk, debentures usually offer higher interest rates than mortgage bonds.

Question 20

Although common stock represents a riskier investment to an individual than do bonds, bonds represent a riskier method of financing to a corporation than does common stock.

Accepted Answer

Bonds require fixed interest payments and repayment of principal, increasing financial risk for a corporation, whereas common stock does not obligate the company to fixed payments.

Quiz 6: Bonds Debtcharacteristics and Valuation