Question 1

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 2

All of the following are examples of long-term debt EXCEPT
A) bonds.
B) lines of credit.
C) term loans.
D) debentures.

Accepted Answer

Lines of credit are a type of short-term debt, while bonds, term loans, and debentures are examples of long-term debt.

Question 3

________ 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) A trustee
B) An investment banker
C) A bond issuer
D) A bond rating agency

Accepted Answer

A trustee 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.

Question 4

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, the higher the cost of a bond offering. This is because investors are tying up their money for a longer period of time and want to be compensated for that risk.

Question 5

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
A) discount bond.
B) corporate bond.
C) bond indenture.
D) treasury bond.

Accepted Answer

A corporate bond is a debt instrument issued by a corporation to borrow money from investors. The corporation promises to repay the principal amount along with interest at a fixed rate and within a specific time frame. The terms of repayment and other contractual obligations are stated in the bond indenture, which is a legal document specifying the terms and conditions of the bond issuance. Discount bonds are issued at a price below the face value and do not pay interest, while treasury bonds are issued by the government and are backed by its creditworthiness.

Question 6

An example of a standard debt provision is the
A) limiting of the corporation's annual cash dividend payments.
B) requirement to pay taxes and other liabilities when due.
C) restricting the corporation from disposing of fixed assets.
D) constraints on subsequent borrowing.

Accepted Answer

The answer of An example of a standard debt provision...

Question 7

The legal contract setting forth the terms and provisions of a corporate bond is a(n)
A) indenture.
B) debenture.
C) loan document.
D) promissory note.

Accepted Answer

The legal contract setting forth the terms and provisions of a corporate bond is called an indenture. Debenture is a type of bond without any collateral whereas a loan document and promissory note generally refer to agreements for lending money rather than issuing bonds.

Question 8

A ________ is a restrictive provision on a bond which provides for the systematic retirement of the bonds prior to their maturity.
A) redemption clause
B) sinking-fund requirement
C) conversion feature
D) subordination clause

Accepted Answer

A sinking-fund requirement is a provision on a bond which mandates that the issuer make regular payments to a separate account in order to retire a portion of the bonds before their maturity. This helps to mitigate the risk for investors by ensuring that the issuer is able to meet its obligation to repay the bond at maturity. The sinking fund may be used to purchase bonds on the open market or to call bonds directly from investors.

Question 9

The major factor(s) affecting the cost, or interest rate, on a bond is (are) its
A) maturity.
B) size of the offering.
C) issuer risk.
D) basic cost of money.
E) all of the above

Accepted Answer

All of the factors listed - maturity, size of the offering, issuer risk, and basic cost of money - can affect the cost, or interest rate, on a bond. Maturity refers to the length of time until the bond reaches its final payment date, and longer-term bonds generally have higher interest rates to compensate investors for the increased risk of inflation and liquidity over time. The size of the offering can also affect the interest rate, as larger offerings may command lower rates due to economies of scale. Issuer risk, or the creditworthiness of the entity issuing the bond, also plays a significant role in determining interest rates, as riskier issuers will generally need to offer higher interest rates to attract investors. Finally, the basic cost of money refers to the prevailing interest rate environment, which can fluctuate based on factors such as inflation, economic growth, and central bank policies.

Question 10

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

The answer of A sinking-fund requirement is a restrictive provision...

Question 11

The purpose of the restrictive debt covenant that requires maintaining a minimum level of net working capital is to
A) protect the lender by controlling the risk and marketability of the borrower's security investment alternatives.
B) limit the amount of fixed-payment obligations.
C) ensure a cash shortage does not cause an inability to meet current obligations.
D) prevent liquidation of assets through large salary increases of key employees.

Accepted Answer

A minimum level of net working capital ensures that the borrower has enough cash and short-term assets to meet their current obligations, preventing a cash shortage. This provides assurance to the lender that the borrower can continue to make payments on their debt.

Question 12

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

The term security interest refers to a creditor's right to seize and sell collateral in the event of default, it is not necessarily related to sinking fund provisions.

Question 13

The cost of long-term debt generally ________ that of short-term debt.
A) is less than
B) is equal to
C) is greater than
D) has no relation to

Accepted Answer

Long-term debt typically involves a higher level of risk for lenders or investors, as they are committing their funds for a longer period of time. To compensate for this increased risk, long-term debt usually carries a higher interest rate than short-term debt.

Question 14

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 is because longer maturities expose bondholders to greater interest rate risk and inflation risk, which makes them demand a higher yield or return on their investment. Additionally, longer-term bonds generally have lower liquidity than shorter-term bonds, which adds to their risk and makes them less attractive to investors.

Question 15

All of the following are examples of restrictive debt covenants EXCEPT
A) prohibition on selling accounts receivable.
B) supplying the creditor with audited financial statements.
C) constraint on subsequent borrowing.
D) prohibition on entering certain types of lease arrangements.

Accepted Answer

Restrictive debt covenants are contractual conditions placed on a borrower by a lender to limit the actions of the borrower and protect the interests of the lender. Options A, C, and D are all examples of restrictive debt covenants as they place limitations on the actions of the borrower. However, providing the creditor with audited financial statements is not a restrictive debt covenant, but rather a standard reporting requirement. While it may be a condition of the loan agreement, it does not limit the actions of the borrower in any way.

Question 16

All of the following are examples of standard debt provisions EXCEPT
A) maintaining all facilities in good working order.
B) paying taxes and liabilities when due.
C) maintaining satisfactory accounting records.
D) limiting the annual dividend payment.

Accepted Answer

The answer of All of the following are examples of...

Question 17

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

Accepted Answer

A security interest is a legal claim on collateral that has been pledged as security for a debt, such as the collateral pledged against a bond. The terms of the security interest are usually spelled out in the bond indenture.

Question 18

A ________ is a complex and lengthy legal document stating the conditions under which a bond has been issued.
A) bond debenture
B) warrant
C) sinking fund
D) bond indenture

Accepted Answer

A bond indenture is a legal document that outlines the terms and conditions of a bond issue, including the principal amount, interest rate, maturity date, and other provisions. It is a binding agreement between the issuer of the bond and the bondholders. A bond debenture is similar to a bond indenture but refers specifically to unsecured bonds. A warrant is a financial instrument that gives the holder the right to buy or sell an underlying security at a specified price before a certain expiration date. A sinking fund is a fund set up by an issuer of bonds to redeem a portion of the bonds over time before they mature.

Question 19

If a bond pays $1,000 plus interest at maturity, $1,000 is called the
A) stated value.
B) market value.
C) par value.
D) long-term value.

Accepted Answer

The par value of a bond is the amount that will be paid to the bondholder at maturity. This is also sometimes referred to as the face value or principal amount. Therefore, in this scenario, $1,000 is the par value of the bond.

Question 20

All of the following are examples of restrictive debt covenants EXCEPT
A) limiting the firm's annual cash dividend payments.
B) supplying audited financial records.
C) prohibiting combinations with other firms.
D) management restrictions to maintaining certain key employees.

Accepted Answer

Supplying audited financial records is a typical covenant that a borrower must follow but does not restrict the borrower's ability to act. The other options are restrictive covenants that limit the borrower's actions or require them to take specific actions.

Quiz 6: Interest Rates and Bond Valuation

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

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

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

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

An example of a standard debt provision is the

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

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

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

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.

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

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.

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

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

All of the following are examples of restrictive debt covenants EXCEPT

All of the following are examples of standard debt provisions EXCEPT

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.

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

All of the following are examples of restrictive debt covenants EXCEPT