Question 1

What is a bond's seniority?

Accepted Answer

Seniority refers to the bondholder's priority in claiming assets in the event of default. In other words, seniority determines the order in which bondholders get paid back in case of bankruptcy or default. The more senior a bond is, the higher its priority to receive payment from the issuer's assets.

Question 2

Smithfield Enterprises issues debt with a maturity of 7 years.In the case of bankruptcy,holders of this debt may only claim those assets of the firm that are not already pledged as collateral on other debt.Which of the following best describes this type of corporate debt?

Accepted Answer

A

Question 3

Which of the following best describes a bond that is issued by a local entity and traded in a local market,but may be purchased by foreigners?

Accepted Answer

A domestic bond is issued by a local entity and traded in a local market, but can still be purchased by foreigners. Foreign bonds are issued in foreign currencies by foreign entities and traded in foreign markets. Eurobonds are issued outside the home country in a currency different from the currency of the issuer's country. Global bonds refer to bonds that are issued and traded in multiple markets, including foreign and domestic.

Question 4

A firm issues $200 million in straight bonds at an original issue discount of 0.75% and a coupon rate of 7%.The firm pays fees of 2.5% on the face value of the bonds.The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Accepted Answer

The answer of A firm issues $200 million in straight...

Question 5

A firm issues $160 million in straight bonds at par and a coupon rate of 8.5%.The firm pays fees of 2% on the face value of the bonds.The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Accepted Answer

The firm pays 2% in fees on the $160 million face value, which is $3.2 million. Therefore, the net amount of funds is $160 million - $3.2 million = $156.8 million, which is closest to $157 million.

Question 6

Athelstone Realty issues debt with a maturity of 20 years.In the case of bankruptcy,holders of this debt may claim the property held by Athelstone Realty.Which of the following best describes this type of corporate debt?

Accepted Answer

The fact that holders of this debt may claim property held by Athelstone Realty indicates that this is a mortgage bond. Mortgage bonds are secured by a lien on specific property owned by the issuer, which can be claimed by bondholders in case of default or bankruptcy.

Question 7

Gepps Cross Industries issues debt with a maturity of 25 years.In the case of bankruptcy,holders of this debt may only claim those assets of the firm that are not already pledged as collateral on other debt.Which of the following best describes this type of corporate debt?

Accepted Answer

The answer of Gepps Cross Industries issues debt with a...

Question 8

Private debt cannot be in the form of bonds.

Accepted Answer

Private debt can be in the form of bonds.

Question 9

By definition,a corporate bond is any form of debt security.

Accepted Answer

The answer of By definition,a corporate bond is any form...

Question 10

Which of the following best describes an international bond that is not denominated in the local currency of the country in which it is issued?

Accepted Answer

An international bond that is not denominated in the local currency of the country in which it is issued is called a Eurobond. A foreign bond would typically be denominated in the local currency of the country in which it is issued, while a global bond could be denominated in multiple currencies, including the local currency. A domestic bond is issued within the country and is denominated in the local currency.

Question 11

Which of the following is NOT an advantage of private debt over public debt?

Accepted Answer

Private debt is generally less liquid than public debt, as it is not traded on public markets.

Question 12

Which of the following terms best describes a loan where a larger line of credit or lower interest rate has been obtained by providing collateral to back that loan?

Accepted Answer

An asset-backed line of credit is a loan where the borrower has provided collateral in the form of assets such as inventory, accounts receivable or property to secure the loan. This allows for a larger line of credit or lower interest rate as the lender has some security in the event of default. Term loans and private placements do not necessarily involve collateral, and a revolving line of credit does not require collateral to be provided.

Question 13

A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.

Accepted Answer

This is true because the yield of similar bonds in that currency reflects the risk associated with holding that currency, so the pricing of the bond takes this risk into consideration.

Question 14

A firm issues $250 million in straight bonds at an original issue discount of 1.5% and a coupon rate of 6%.The firm pays fees of 3% on the face value of the bonds.The net amount of funds that the debt issue will provide for the firm is closest to which of the following?

Accepted Answer

Step 1: Find the amount of original issue discount.
Original issue discount = face value of bonds x original issue discount rate
= $250 million x 1.5%
= $3.75 million

Step 2: Find the net proceeds from the bond issue.
Net proceeds = face value of bonds - original issue discount - fees
= $250 million - $3.75 million - ($250 million x 3%)
= $250 million - $3.75 million - $7.5 million
= $239 million

Therefore, the net amount of funds that the debt issue will provide for the firm is $239 million, which is closest to choice B).

Question 15

Which of the following is usually a form of public debt?

Accepted Answer

A bond issue is a common form of public debt, where the government or corporations raise funds from the public by issuing bonds.

Question 16

Which of the following is an advantage of a public bond issue over private placement?

Accepted Answer

Public bond issues are freely tradable on the bond market, while private placements are not. This means that public bond issues offer more liquidity and potentially greater access to a wider pool of investors, which can help to drive down interest rates and/or increase demand for the bonds. Although a public bond issue may be more costly and may require registration with the SEC, the advantages of liquidity and broad market access may outweigh these drawbacks. Tailoring a bond issue to a particular situation is possible through both public and private bond issuances, so it is not a unique advantage of one over the other.

Question 17

Clearview Corporation,a company that deals mainly with the financing and distribution of music,issues debt with a maturity of 15 years.In the case of bankruptcy,holders of this debt will have claim to the intellectual property of Clearview.Which of the following best describes this type of corporate debt?

Accepted Answer

This type of corporate debt is best described as an asset-backed bond because it is secured by a specific asset, in this case, the intellectual property of Clearview Corporation. Asset-backed bonds provide creditors with a claim to specific assets in the event of bankruptcy.

Question 18

In terms of public offerings of bonds,what is a prospectus?

Accepted Answer

A prospectus is a legal document that must be produced by issuers of securities, including bonds, in order to describe the details of the offering. It includes information about the issuer, the terms of the bond, the risks associated with investing in the bond, and other important details. It is meant to be a comprehensive document that allows potential investors to make informed decisions about whether or not to invest in the bond.

Question 19

In terms of public offerings of bonds,what is an indenture?

Accepted Answer

An indenture is a legal document that specifies the terms and conditions of a bond offering, including the firm's obligations to the bondholders. It serves as a formal contract between the issuer and the bondholders. A is incorrect because the duties of the trust company would typically be outlined elsewhere, not in the indenture. B is incorrect because a memorandum is not the same as an indenture, although a memorandum might be issued in conjunction with an indenture to provide additional details. D is incorrect because the schedule of fees would also typically be outlined elsewhere, not in the indenture.

Question 20

The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.

Accepted Answer

Debt financing involves borrowing money that must be repaid with interest, whereas equity financing involves selling shares of ownership in the business. By taking on debt, the current owner's share of the business is not diluted as it would be with equity financing.

Quiz 15: Debt Financing