Question 1

As interest rates decline, bond refunding should become more common.

Accepted Answer

A) True 
 B)False

Question 2

Bonds may be recalled only if there is a specific call provision in the bond.

Accepted Answer

A) True 
 B)False

Question 3

Debentures are commonly issued by small companies.

Accepted Answer

A) True 
 B)False

Question 4

Match the following with the items below:

Accepted Answer

The answer of Match the following with the items below:
...

Question 5

A bond with a coupon rate of 6.5%, maturing in 10 years at a value of $1,000 and a current market price of $950, will have a yield to maturity (using the approximation formula)  of

Accepted Answer

A)   between 6% and 6.5%
B)   between 6.5% and 7%
C)   between 7% and 7.5%
D)   between 7.5% and 8%

Question 6

A conversion feature allows:

Accepted Answer

A)   the bondholder to redeem the bond before the maturity date.
B)   the corporation to redeem the bond before the maturity date.
C)   the bondholder to convert the bond to common stock.
D)   the bondholder to demand increased collateral.

Question 7

The disadvantages of debt to the corporation include all but which of the following?

Accepted Answer

A)   Debt may have to be paid back with "cheaper" dollars.
B)   Interest and principal payments must be met.
C)   Indenture agreements may place burdensome restrictions on the firm.
D)   Too much debt may depress the firm's stock price.

Question 8

The prices of zero-coupon bonds tend to react violently to large swings in interest rates.

Accepted Answer

A) True 
 B)False

Question 9

If you expect interest rates to go up, you should buy a long-term bond now.

Accepted Answer

A) True 
 B)False

Question 10

In an inflationary economy, debt must be paid back with "more expensive dollars."

Accepted Answer

A) True 
 B)False

Question 11

The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called

Accepted Answer

A)   an indenture.
B)   a debenture.
C)   secured debt.
D)   protective covenants.

Question 12

The call premium tends to increase with the passage of time.

Accepted Answer

A) True 
 B)False

Question 13

Buchanan Corp. is refunding $10 million worth of 10% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium?

Accepted Answer

A)   $390,000
B)   $1,080,000
C)   $585,000
D)   $702,000

Question 14

The main cause for the increase in corporate debt in America is:

Accepted Answer

A)   rapid business expansion.
B)   inflationary impacts.
C)   inadequate internally-raised funds.
D)   All of these.

Question 15

The benefits of debt to the corporation include all of the following except:

Accepted Answer

A)   tax-deductible interest payments
B)   increases stock value when used heavily
C)   fixed obligation
D)   generally a lower overall cost than equity

Question 16

Which of the following statements regarding the June 2009 bankruptcy of General Motors is false?

Accepted Answer

A)   The government provided more than $50 billion in bailout.
B)   The common stockholders received nothing.
C)   The U.S. government owns 85% of the common stock of GM.
D)   The preferred stockholders received nothing.

Question 17

A capital lease is the same as an operating lease.

Accepted Answer

A) True 
 B)False

Question 18

Aa2 bond is rated lower than a _____ bond.

Accepted Answer

A)   Aa1
B)   Aa3
C)   A1
D)   A2

Question 19

Senior debentures usually provide lower interest rates than junior secured debt.

Accepted Answer

A) True 
 B)False

Question 20

A Eurobond is a bond payable in the borrower's currency but sold outside the borrower's country.

Accepted Answer

A) True 
 B)False

Exam 16: Long-Term Debt and Lease Financing

The prices of zero-coupon bonds tend to react violently to large swings in interest rates.

Correct AnswerverifiedShow Answer

Aa2 bond is rated lower than a _____ bond.

Correct AnswerverifiedShow Answer

Debentures are commonly issued by small companies.

Correct AnswerverifiedShow Answer

As interest rates decline, bond refunding should become more common.

Correct AnswerverifiedShow Answer

Senior debentures usually provide lower interest rates than junior secured debt.

Correct AnswerverifiedShow Answer

Which of the following statements regarding the June 2009 bankruptcy of General Motors is false?

Correct AnswerverifiedShow Answer

Bonds may be recalled only if there is a specific call provision in the bond.

Correct AnswerverifiedShow Answer

The disadvantages of debt to the corporation include all but which of the following?

Correct AnswerverifiedShow Answer

The call premium tends to increase with the passage of time.

Correct AnswerverifiedShow Answer

A bond with a coupon rate of 6.5%, maturing in 10 years at a value of $1,000 and a current market price of $950, will have a yield to maturity (using the approximation formula) of

Correct AnswerverifiedShow Answer

A conversion feature allows:

Correct AnswerverifiedShow Answer

Buchanan Corp. is refunding $10 million worth of 10% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium?

Correct AnswerverifiedShow Answer

The benefits of debt to the corporation include all of the following except:

Correct AnswerverifiedShow Answer

A capital lease is the same as an operating lease.

Correct AnswerverifiedShow Answer

If you expect interest rates to go up, you should buy a long-term bond now.

Correct AnswerverifiedShow Answer

The main cause for the increase in corporate debt in America is:

Correct AnswerverifiedShow Answer

The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called

Correct AnswerverifiedShow Answer

A Eurobond is a bond payable in the borrower's currency but sold outside the borrower's country.

Correct AnswerverifiedShow Answer

In an inflationary economy, debt must be paid back with "more expensive dollars."

Correct AnswerverifiedShow Answer

Match the following with the items below:

Correct AnswerverifiedShow Answer

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