Question 1

All of the following are examples of restrictive debt covenants EXCEPT

Accepted Answer

Supplying audited financial statements is not a restrictive debt covenant as it is a standard requirement for most loans. The other options listed are all examples of restrictive covenants, which limit the borrower's actions and impose conditions on the use of borrowed funds.

Question 2

The length of the maturity on a bond offering affects its cost. In general, the longer the maturity, the lower the cost.

Accepted Answer

In general, the longer the maturity of a bond offering, the higher the cost. This is because there is a greater risk of inflation and default over a longer period of time, which increases the perceived risk for investors, leading to higher interest rates and a higher cost of borrowing for the issuer.

Question 3

The length of the maturity on a bond offering affects its cost. In general, the longer the maturity, the higher the cost.

Accepted Answer

This statement is true. The longer the maturity of a bond, the greater the risk to the investor, as there is a longer period of time for economic, political, and financial factors to affect the issuer's ability to repay the bond. As a result, investors typically demand a higher return for taking on this additional risk, leading to a higher cost of borrowing for the issuer.

Question 4

The purpose of the restrictive debt covenant that requires maintaining a minimum level of net working capital is to

Accepted Answer

The purpose of a restrictive debt covenant requiring the maintenance of minimum net working capital is to ensure that a company has enough cash to meet its current obligations, regardless of short-term cash shortages. This protects the lender by reducing the risk of default and helps the company to operate smoothly without facing a liquidity crisis. Option A is related to marketability of securities and is not directly related to net working capital. Option B is related to payments, whereas net working capital is more about maintaining liquidity of current assets. Option D is not related to net working capital.

Question 5

The legal contract setting forth the terms and provisions of a corporate bond is a(n)

Accepted Answer

An indenture is a legal contract that sets forth the terms and provisions of a corporate bond, including the interest rate, maturity date, and any collateral pledged to secure the bond. Debentures and promissory notes are types of bonds, but they do not necessarily require an indenture. A loan document is a general term that could refer to any type of loan agreement, not specifically a bond indenture.

Question 6

If a bond pays $1,000 plus interest at maturity, $1,000 is called the

Accepted Answer

The term used to describe the principal amount that is paid back at maturity on a bond is "par value." Therefore, the correct answer is (C) par value.

Question 7

A ________ is a restrictive provision on a bond which provides for the systematic retirement of the bonds prior to their maturity.

Accepted Answer

A sinking-fund requirement is a provision on a bond that requires the issuer to regularly set aside money to retire a portion of the bond issue before maturity. This helps to reduce the risk of default and provides investors with a greater level of security. A redemption clause allows the issuer to redeem the bonds before maturity, but it is not necessarily tied to a systematic retirement plan. A conversion feature allows bondholders to convert their bonds into shares of the issuer's common stock. A subordination clause is a provision that limits the rights of certain bondholders in the event of default or bankruptcy.

Question 8

All of the following are examples of restrictive debt covenants EXCEPT

Accepted Answer

Supplying audited financial records is not a restrictive debt covenant as it does not limit the actions of the firm, but rather provides transparency to lenders. The other options are all examples of restrictive debt covenants that limit the firm's actions or require certain actions to be taken.

Question 9

________ is a paid individual, corporation, or commercial bank trust department that acts as a third party to a bond indenture to ensure that the issuer does not default on its contractual responsibilities to the bondholders.

Accepted Answer

A trustee is a paid individual, institution or commercial bank trust department that is responsible for enforcing the terms of the bond indenture, collecting payments from the issuer and distributing them to bondholders while ensuring that the issuer meets its obligations under the agreement.

Question 10

A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called

Accepted Answer

A corporate bond is a debt instrument issued by a corporation to borrow money from investors. It promises to repay the borrowed amount at a future date and also offers interest payments to bondholders. Bond indenture is a legal document outlining the terms and conditions of the bond issuance. Discount bond refers to a bond that is sold at a price below its face value, while treasury bond is a debt instrument issued by the US government.

Question 11

A sinking-fund requirement is a restrictive provision often included in a bond indenture providing for periodic payments representing only interest and a large lump-sum payment at the maturity of the loan representing the entire loan principal.

Accepted Answer

A sinking-fund requirement involves periodic payments to retire part of the bond issue before maturity, not just interest, and does not involve a large lump-sum payment at maturity.

Question 12

In a bond indenture, the term security interest refers to collateral pledged against the bond.

Accepted Answer

A security interest is a pledge of collateral to secure a debt, and in a bond indenture, the term security interest most commonly refers to the collateral pledged against the bond.

Question 13

A ________ is a complex and lengthy legal document stating the conditions under which a bond has been issued.

Accepted Answer

A bond indenture is a legal document that outlines the terms and conditions of a bond issue, including the issuer's obligations, interest rate, payment schedule, and other details. It is a complex and lengthy document that governs the relationship between the bond issuer and bondholders.

Question 14

Restrictive covenants, which are also known as standard debt provisions, place operating and financial constraints on the borrower.

Accepted Answer

The answer of Restrictive covenants, which are also known as...

Question 15

The major factor(s) affecting the cost, or interest rate, on a bond is (are) its

Accepted Answer

All of the above factors can affect the cost or interest rate on a bond. Maturity can impact the interest rate as longer-term bonds typically have higher rates due to the increased risk of inflation and uncertainty over a longer period of time. The size of the offering can also affect the interest rate as larger offerings may be more attractive to investors and therefore require a lower interest rate. Issuer risk, or the creditworthiness of the company issuing the bond, can greatly impact the interest rate as investors will demand higher rates for riskier investments. Finally, the basic cost of money, or the prevailing interest rates in the market, will also affect the interest rate on a bond.

Question 16

All of the following are examples of standard debt provisions EXCEPT

Accepted Answer

Limiting the annual dividend payment is a restrictive covenant, not a standard debt provision. Standard debt provisions typically include maintaining facilities, paying taxes, and keeping accurate records.

Question 17

An example of a standard debt provision is the

Accepted Answer

Standard debt provisions typically include requirements to pay taxes and other liabilities when due, ensuring the borrower maintains financial responsibility and solvency.

Question 18

The cost of long-term debt generally ________ that of short-term debt.

Accepted Answer

Long-term debt usually has a higher interest rate than short-term debt because lenders are taking on more risk by committing funds for a longer period of time. This higher interest rate compensates the lender for the extended risk exposure.

Question 19

In a bond indenture, the term security interest refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.

Accepted Answer

A security interest refers to the collateral pledged by the borrower to secure repayment of the bond. Sinking fund provisions are a method of repaying the bond and do not provide security for bondholders.

Question 20

All of the following are examples of long-term debt EXCEPT

Accepted Answer

Lines of credit are typically considered short-term debt, as they are often used to meet short-term financing needs. Bonds, term loans, and debentures are all examples of long-term debt, as they have longer repayment periods and typically involve larger amounts of money.

Quiz 6: Interest Rates and Bond Valuation

All of the following are examples of restrictive debt covenants EXCEPT

The length of the maturity on a bond offering affects its cost. In general, the longer the maturity, the lower the cost.

The length of the maturity on a bond offering affects its cost. In general, the longer the maturity, the higher the cost.

The purpose of the restrictive debt covenant that requires maintaining a minimum level of net working capital is to

The legal contract setting forth the terms and provisions of a corporate bond is a(n)

If a bond pays $1,000 plus interest at maturity, $1,000 is called the

A ________ is a restrictive provision on a bond which provides for the systematic retirement of the bonds prior to their maturity.

All of the following are examples of restrictive debt covenants EXCEPT

________ is a paid individual, corporation, or commercial bank trust department that acts as a third party to a bond indenture to ensure that the issuer does not default on its contractual responsibilities to the bondholders.

A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called

A sinking-fund requirement is a restrictive provision often included in a bond indenture providing for periodic payments representing only interest and a large lump-sum payment at the maturity of the loan representing the entire loan principal.

In a bond indenture, the term security interest refers to collateral pledged against the bond.

A ________ is a complex and lengthy legal document stating the conditions under which a bond has been issued.

Restrictive covenants, which are also known as standard debt provisions, place operating and financial constraints on the borrower.

The major factor(s) affecting the cost, or interest rate, on a bond is (are) its

All of the following are examples of standard debt provisions EXCEPT

An example of a standard debt provision is the

The cost of long-term debt generally ________ that of short-term debt.

In a bond indenture, the term security interest refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.

All of the following are examples of long-term debt EXCEPT