Question 1

Contrast the two methods used by investment banks when selling bonds on behalf of a company,their client?

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Question 2

What are the reasons for issuing bonds rather than using a bank loan?

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Question 3

Based on the characteristics provided below,what kind of bond is being discussed?
1.________ permit the issuing company to redeem before maturity.
2.________ are bonds backed by specific collateral such as a mortgage on real estate.
3.________ are unsecured bonds.
4.________ are bonds that do not pay interest and are sold at a discount and mature at face value.

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Question 4

What are "zero-coupon bonds"?

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Zero-coupon bonds are bonds that do not pay interest. Instead, they are sold at a discount to their face value and investors receive the full face value of the bond when it matures.

Question 5

Explain the difference between real-return bonds,convertible bonds and perpetual bonds.

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Question 6

Why do lenders avoid lending large amounts of money to one borrower?

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Question 7

What are positive and negative covenants? Give an example of a positive and negative covenant.

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Question 8

What are "secured bonds"?

Accepted Answer

Secured bonds are backed by specific collateral, such as a property, equipment or other assets. This provides additional security for investors in case of default.

Question 9

What are "debentures"?

Accepted Answer

Debentures are bonds that are not backed by any specific collateral or security. They are unsecured and are therefore considered riskier than secured bonds.

Question 10

What is "firm commitment" underwriting?

Accepted Answer

Firm commitment underwriting refers to an underwriting process in which the underwriter guarantees to the issuer that they will purchase all the shares of the public offering at a fixed price, and then resell them to the public. This provides assurance to the issuer that they will sell all the shares, and also involves some risk for the underwriter if they are unable to resell the shares at a higher price, resulting in a loss. This is different from best efforts underwriting (where the underwriter sells as much of the debt issue as possible) and collateralized debt (which is debt backed by specific collateral). The fourth option, redeeming before maturity, is a feature that may be available with some types of debt but not directly related to underwriting.

Question 11

What are "serial bonds"?

Accepted Answer

Serial bonds are bonds that are issued at different maturity dates, typically in a series or sequence. As each bond in the series matures, the issuer pays it off, hence "serial." This is in contrast to "bullet bonds," which have a single maturity date. Therefore, choice B is the correct answer as it describes serial bonds.

Question 12

What is the "best efforts" approach?

Accepted Answer

The "best efforts" approach refers to a method of underwriting a debt issue where the broker sells as much of the debt as possible, but without making any guarantee about the final amount sold or the price achieved. Therefore, option B is the correct choice.

Question 13

Define the following:
a)Financial liabilities
b)A Mortgage
c)A bond indenture
d)Secured bonds
e)Debentures
f)Stripped bonds
g)Serial bonds
h)Callable bonds
i)Convertible bonds
j)Inflation-linked or real-return
k)Perpetual bonds

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a)Financial liabilities
b)A Mortgage
c)A bond indenture
d)Secured...

Question 14

What are "stripped bonds"?

Accepted Answer

Stripped bonds are also known as zero-coupon bonds which pay no interest and are sold at a discount. These bonds are created by separating the interest payments (coupon payments) from the principal of the bond and selling them separately as individual securities. The investor then receives the full face value of the bond at maturity.

Question 15

How should non-current financial liabilities be recorded initially?

Accepted Answer

Non-current financial liabilities should be recorded initially at fair value less transaction costs. This approach reflects the actual cost to the entity of securing the financing, after accounting for the costs directly attributable to the transaction.

Question 16

Based on the characteristics provided below,what kind of bond is being discussed?
1.________ are a set of bonds issued at the same time but that mature at regular scheduled dates rather than all on the same date.
2.________ are bonds that never mature.
3.________ allow the holder to exchange the bond into other securities in the corporation,usually common shares.
4.________ protect investors against inflation.

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Question 17

What are "callable bonds"?

Accepted Answer

Callable bonds are bonds that can be redeemed before maturity by the issuer, meaning the issuer has the option to call (redeem) the bond before the scheduled maturity date.

Question 18

What is a "covenant"?

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Question 19

What is a bond indenture?

Accepted Answer

A bond indenture is a legal contract that outlines the terms of a bond, including the interest rate, payment schedule, bond maturity, and any provisions or covenants that the borrower must adhere to. It is essentially the borrowing agreement between the issuer and the bondholders. A is incorrect as there is no guarantee of the price to the borrower. C is incorrect as it relates to restrictive covenants which may be outlined in the indenture, but it is not the definition of a bond indenture. D is incorrect as it relates to a call feature which may also be outlined in the indenture, but it is not the definition of a bond indenture.

Question 20

Why do bonds often include covenants?

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Quiz 12: Non-Current Financial Liabilities