Question 1

Describe the characteristics of a Strip Bond.

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Question 2

Laura's Design Inc. has a bond with a coupon rate of 12%, maturing in 12 years at $1,000 per bond. The current market price is $940. What is the current yield?

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Question 3

List and rank from highest to lowest the 8 possible ratings a bond can have, as determined by Dominion Bond Rating Service and S&P's rating service. What factors determine these ratings? What influence do the ratings have?

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Question 4

Morgan Corp. is refunding $6 million worth of 12% debt. The new bonds will be issued for 6%. The corporation's tax rate is 35%. The call premium is 8%. What is the net cost of the call premium?

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Question 5

Describe the characteristics of a Floating-Rate Bond.

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Question 6

List and describe the 3 bases on which bond yields are quoted. Use a $1,000 bond paying $100/year for 10 years and currently selling in the market for $900 as the basis for your example.

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Question 7

The trustee in the bankruptcy settlement for the Edsel Corp. lists the following book values and liquidation values for the assets of the corporation. Liabilities and shareholders' claims are shown below. $\begin{array}{lrr}
\text { Assets }&\text {Book Value}&\text {Liquidation Value}\
\text { Accounts receivable } & \$ 100,000 & \$ 50,000 \
\text { Inventory } & 100,000 & 80,000 \
\text { Machinery and } & 300,000 & 150,000\
\text { equipment }\ 
\text { Building and plant }&500,000&120,000\
&\$1,000,000&\$400,000
\end{array}$

$\text { Liabilities and Shareholders' Claims }$

$\begin{array}{ll}
\text { Liabilities }\
\text { Accounts payable } & \$ 100,000 \
\text { 1st lien, secured by machinery } & \
\quad \text { and equipment } & 250,000 \
\text { Senior debt unsecured } & 100,000 \
\text { Subordinated debentures } & \underline{150,000} \
\text { Total liabilities } & \$ 600,000
\end{array}$

$\begin{array}{ll}
\text { Shareholders' Claims }\
\text { Preferred stock } & \$ 100.000 \
\text { Common stock } & \underline{250.000} \
\text { Total shareholders' claims } & \$ 350.000
\end{array}$
 Assume the administrative costs of bankruptcy, workers allowable wages and source deductions add up to $100,000. (Administrative costs $75,000)
Indicate how much (in dollars) the following parties will receive in liquidation:
A) Common shareholders
B) Secured creditor holding the first lien
C) Senior unsecured debt holder

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Question 8

Leasing is a popular form of financing because

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Leasing is popular because it allows companies that may not have the financial capability to purchase equipment outright to still use it.

Question 9

List and discuss reasons why a firm might decide to lease instead of purchase equipment.

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Question 10

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

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All of the other answers are correct. Sinking funds, serial bonds, and single sum payments are all methods used for the orderly repayment of bonds.

Question 11

Describe the characteristics of a zero-coupon rate bond.

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Question 12

List and describe 4 out-of-court settlement alternatives for financially distressed firms.

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Question 13

Floating rate bonds

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Floating rate bonds have interest payments that are tied to a benchmark interest rate, such as LIBOR or the federal funds rate, which means their interest payments fluctuate with market rates.

Question 14

Describe the characteristics of a Eurobond.

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Question 15

A bond with a coupon rate of 7.5% paid semiannually, maturing in 5 years at a value of $1,000, and a current market price of $710, will have a yield to maturity of

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Question 16

A bond's rating can depend on

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A bond's rating can depend on multiple factors, including the corporation's debt-equity ratio, size, and ability to make interest payments. Therefore, all of the answer choices are correct.

Question 17

A bond with a coupon rate of 8.0%, maturing in 10 years at a value of $1,000, and current market price of $753 will have a current yield to maturity of

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Question 18

A bond with a $95 annual coupon, maturing in 10 years at a value of $1,000 has a current market price of $950. What is the yield to maturity of the bond?

Accepted Answer

To find the yield to maturity, we need to use the formula:

P = (C/r) x [1 - 1/(1+r)^n] + F/(1+r)^n

Where:
P = current market price = $950
C = annual coupon payment = $95
r = yield to maturity (unknown)
n = number of years until maturity = 10
F = face value (or maturity value) = $1,000

Plugging in the values, we get:

$950 = ($95/r) x [1 - 1/(1+r)^10] + $1,000/(1+r)^10

We can solve for r using trial and error or with a financial calculator. The yield to maturity comes out to be approximately 10.3%, which is closest to answer choice B.

Question 19

Which one of these conditions must be met for a lease to qualify as a capital lease?

Accepted Answer

All the conditions listed (A, B, and C) are criteria that can qualify a lease as a capital lease under the previous accounting standards (ASC 840).

Question 20

Which of the following are advantages of leasing?

Accepted Answer

Option A is the only correct advantage of leasing among the given options. Lease obligations are generally less restrictive than bond indentures because they are negotiated directly between the lessor and lessee, without the need for outside parties like banks, underwriters, trustees, and credit rating agencies. The restrictions and covenants are typically tailored to the specific needs of the lessee and are more flexible than the standardized terms of a bond.

Option B is incorrect because leases are usually binding for a fixed term and cannot be terminated without penalties or obligations unless there is a specific clause for early termination. Even then, the lessee may have to compensate the lessor for the remaining lease payments, unpaid rent, maintenance costs, and other expenses that the lessor incurs.

Option C is incorrect because ownership of the leased asset remains with the lessor throughout the lease term, and the lessee only has the right to use the asset subject to the terms of the lease. There may be an option to purchase the asset at the end of the lease term, but that is not automatic and may require additional payments.

Therefore, the best choice(s) for the advantages of leasing is A.

Quiz 16: Long-Term Debt and Lease Financing