Deck 22: Corporate Senior Instruments Markets: I

Question 1

Corporate senior instruments:

A) Are financial obligations of a corporation.
B) Include debt obligations and preferred stock.
C) Have priority over common stock in the case of bankruptcy.
D) All of the above.
E) None of the above.

Answer 1

All of the above.

Question 2

The market for corporate debt obligations include the:

A) Medium-term note market.
B) Bank loan market.
C) Commercial paper market.
D) a and b only.
E) All of the above.

Answer 2

All of the above.

Question 3

An investor who lends funds to a corporation by purchasing its debt obligation is exposed to:

A) Credit risk.
B) Default risk.
C) Downgrade risk.
D) a and b only.
E) All of the above.

Answer 3

All of the above.

Question 4

The yield on a corporate debt instrument is made up of:

A) The yield on a similar maturity Treasury issue.
B) Risk premium.
C) A credit spread.
D) a and c only.
E) All of the above.

Question 5

Standard & Poor's Corporation, Moody's Investors Services, and Fitch are companies in the U.S. that:

A) Offer investment banking advice to corporations.
B) Assign ratings to corporate debt instruments.
C) Provide investment advice to institutional investors.
D) Give legal advice in the case of bankruptcy.
E) All of the above.

Question 6

A deterioration in the credit quality of a debt issue or the issuer that is rewarded with a better credit rating is referred to as:

A) Upgrading.
B) Downgrading.
C) Credit improvement.
D) Credit deterioration.
E) None of the above.

Question 7

When assessing the credit risk of a corporate issuer rating agencies look at:

A) Corporate governance risk.
B) Financial risk.
C) Business risk.
D) a and c only
E) All of the above.

Question 8

Corporate governance issues include:

A) Traditional ratio analysis.
B) Policies for financial disclosure.
C) The uncertainty of operating cash flows.
D) Net assets and working capital.
E) All of the above.

Question 9

In all rating systems the term high grade means:

A) High probability of future payments.
B) High credit risk.
C) Low credit risk.
D) a and b only.
E) a and c only.

Question 10

A rating of Ba3 means that a bond is:

A) Very high grade, very high quality.
B) Lower medium grade.
C) Substantial risk, in poor standing.
D) Predominantly speculative.
E) Low grade, speculative.

Question 11

Loans made by offshore banks are referred to as:

A) Eurocurrency loans.
B) Euro medium-term notes.
C) Eurobonds.
D) Euroloans.
E) None of the above.

Question 12

Loan structures in which no repayment of the principal is made until the maturity date are referred to as:

A) Balloon payment loans.
B) Term loans.
C) Bullet loans.
D) Performing loans.
E) None of the above.

Question 13

Senior bank loans:

A) Have a priority position over subordinated lenders with respect to interest and principal.
B) Have first claim to the earnings and assets of the firm.
C) Have a fixed term.
D) a and c only.
E) All of the above.

Question 14

The reference rate on a syndicated loan is typically:

A) The Treasury bill rate.
B) LIBOR.
C) The federal funds rate.
D) The discount rate.
E) None of the above.

Question 15

Syndicated loans are distributed by:

A) Assignment.
B) Participation.
C) Underwriting.
D) a and b only.
E) All of the above.

Question 16

Leasing is a form of:

A) Bank borrowing.
B) Syndication.
C) Tax avoidance.
D) Participation.
E) None of the above.

Question 17

When the lessor uses only a portion of its own funds to purchase the equipment and borrows the balance from a bank, the lease is referred to as a:

A) Tax-oriented lease.
B) Leveraged lease.
C) Direct lease.
D) Single-investor lease.
E) None of the above.

Question 18

That creditors are less informed about the true economic operating conditions of the firm
Than is management is espoused in:

A) The absolute priority rule.
B) The incentive hypothesis.
C) The recontracting process hypothesis.
D) The stockholders' influence on reorganization plan hypothesis.
E) The strategic bargaining process hypothesis.

Question 19

A formal corporate bond-rating systems has existed in Japan since the 1940s.

Question 20

In assessing the ability of an issuer to service its debt, analysts consider qualitative factors in addition to financial ratios calculated from the financial statements of the issuing corporation.

Question 21

More strongly aligning the interests of management with those of shareholders can mitigate the likelihood that management will act in its own self-interest.

Question 22

Business risk analysis involves traditional ratio analysis and other factors affecting the firm's financing.

Question 23

Bond issues assigned a rating in the top four categories are referred to as high-yield bonds.

Question 24

The banks in a syndicated loan have the right to sell their parts of the loan to other banks.

Question 25

The absolute priority rule is the principle that guarantees the seniority of equity holders to junior creditors.

Question 26

Leasing is a way by which tax benefits can be transferred from the lessee to the lessor.

Question 27

Compare and contrast a single-investor lease and a leveraged lease.

Question 28

Describe the basic terms of a loan agreement.