Question 1

Which of the following is not a characteristic of a zero-coupon bond?

Accepted Answer

A)   it doesn't pay interest
B)   it is sold at a deep discount from face value
C)   the annual increase in the bond's price is not taxable as ordinary income
D)   it provides a means for corporations to take annual deductions without current cash outflow

Question 2

The term debenture refers to

Accepted Answer

A)   long-term, secured debt.
B)   long-term, unsecured debt.
C)   the after-acquired property clause.
D)   a 100-page document covering the specific terms of the offering.

Question 3

Gray House is issuing bonds with 10.5% coupon rates that will mature 15 years from today. The bonds pay interest semi-annually and the bond is currently selling for $980.
Calculate:
A) nominal yield
B) current yield
C) yield to maturity

Accepted Answer

A)

B)

C)
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Question 4

Internal reorganization may involve a change in the firm's capital structure.

Accepted Answer

A) True 
 B)False

Question 5

A bond can only be easily refunded if it has a call feature.

Accepted Answer

A) True 
 B)False

Question 6

Discuss the advantages and disadvantages of debt as a financing method.

Accepted Answer

Advantages of Debt
• The financia...

Question 7

In an extension settlement, creditors agree to allow the firm more time to meet its financial obligations.

Accepted Answer

A) True 
 B)False

Question 8

Under an extension settlement

Accepted Answer

A)   creditors agree to accept a fractional settlement on their original claim.
B)   creditors run the business.
C)   a new schedule of repayment is developed.
D)   assets are liquidated by going through formal court action.

Question 9

Ajax Corp. has a bond with a coupon rate of 12%, maturing in 15 years at $1,000 per bond. The current market price is $960. What is the current yield?

Accepted Answer

A)   12.7%
B)   12.6%
C)   12.0%
D)   11.5%

Question 10

In the lease-purchase decision, one of the advantages is

Accepted Answer

A)   the tax shield provided by the lease payment.
B)   the lower interest rate on the lease than on a loan to buy the asset.
C)   the ability to use the aftertax cost of debt rather than the weighted average cost of capital in the decision.
D)   all of the other choices are advantages

Question 11

The higher the bond rating

Accepted Answer

A)   the higher the interest rate on a bond.
B)   the lower the interest rate on the bond.
C)   the higher the call premium.
D)   the lower the call premium.

Question 12

Describe the characteristics of a Eurobond.

Accepted Answer

Eurobond
• A eurobond is a bond issued a...

Question 13

In general floating rate bonds have their interest rate payment adjusted

Accepted Answer

A)   daily.
B)   weekly.
C)   quarterly.
D)   annually.

Question 14

The greater use of debt by corporations since the late 1960s is best shown by the

Accepted Answer

A)   declining interest coverage ratio.
B)   small amount of common stock sold.
C)   rising cost of interest.
D)   inability of earnings to keep up with the inflation.

Question 15

Under the borrowing-purchasing decision compared to leasing, we must consider not only the amount of the payment but also separate out those items that are tax deductible.

Accepted Answer

A) True 
 B)False

Question 16

After assets against which liens are held are disposed of, secured creditors participate equally with unsecured creditors.

Accepted Answer

A) True 
 B)False

Question 17

Bonds with a call premium generally trade at higher yields than bonds without call premiums.

Accepted Answer

A) True 
 B)False

Question 18

After the recession of 1990-1991 pushed times interest earned to its lowest level it has been in many years, it has began to recover in the subsequent economic expansion.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is a form of an in-court settlement?

Accepted Answer

A)   assignment
B)   extension
C)   composition
D)   none of the other answers are correct

Question 20

When a reorganization plan requires a merger partner, it is likely that

Accepted Answer

A)   no strong, financially sound firm will assume the management and financial obligations of the bankrupt firm.
B)   the bankrupt firm's capital structure will be redesigned.
C)   old creditors and shareholders will be asked to make concessions.
D)   none of the other choices are true.

Exam 16: Long-Term Debt and Lease Financing

Ajax Corp. has a bond with a coupon rate of 12%, maturing in 15 years at $1,000 per bond. The current market price is $960. What is the current yield?

Correct AnswerverifiedShow Answer

In general floating rate bonds have their interest rate payment adjusted

Correct AnswerverifiedShow Answer

Which of the following is a form of an in-court settlement?

Correct AnswerverifiedShow Answer

The term debenture refers to

Correct AnswerverifiedShow Answer

In an extension settlement, creditors agree to allow the firm more time to meet its financial obligations.

Correct AnswerverifiedShow Answer

When a reorganization plan requires a merger partner, it is likely that

Correct AnswerverifiedShow Answer

After assets against which liens are held are disposed of, secured creditors participate equally with unsecured creditors.

Correct AnswerverifiedShow Answer

The greater use of debt by corporations since the late 1960s is best shown by the

Correct AnswerverifiedShow Answer

Under the borrowing-purchasing decision compared to leasing, we must consider not only the amount of the payment but also separate out those items that are tax deductible.

Correct AnswerverifiedShow Answer

A bond can only be easily refunded if it has a call feature.

Correct AnswerverifiedShow Answer

Internal reorganization may involve a change in the firm's capital structure.

Correct AnswerverifiedShow Answer

The higher the bond rating

Correct AnswerverifiedShow Answer

Which of the following is not a characteristic of a zero-coupon bond?

Correct AnswerverifiedShow Answer

Bonds with a call premium generally trade at higher yields than bonds without call premiums.

Correct AnswerverifiedShow Answer

Gray House is issuing bonds with 10.5% coupon rates that will mature 15 years from today. The bonds pay interest semi-annually and the bond is currently selling for $980. Calculate: A) nominal yield B) current yield C) yield to maturity

Correct Answerverified A) B) C) \[\begin{array} { l } \mathr ...View AnswerShow Answer

Discuss the advantages and disadvantages of debt as a financing method.

Correct AnswerverifiedAdvantages of Debt• The financia...View AnswerShow Answer

Under an extension settlement

Correct AnswerverifiedShow Answer

After the recession of 1990-1991 pushed times interest earned to its lowest level it has been in many years, it has began to recover in the subsequent economic expansion.

Correct AnswerverifiedShow Answer

Describe the characteristics of a Eurobond.

Correct AnswerverifiedEurobond• A eurobond is a bond issued a...View AnswerShow Answer

In the lease-purchase decision, one of the advantages is

Correct AnswerverifiedShow Answer

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A) B) C)
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Advantages of Debt
• The financia...
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Eurobond
• A eurobond is a bond issued a...
View Answer

Correct Answer
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