finance CH 6.2 & 6.3 (test2)

The legal contract setting forth the terms and provisions of a corporate bond is a(n) ________.A) indentureB) debentureC) loan documentD) promissory note A) indenture
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(n) ________.A) common stockB) corporate bondC) indentureD) preferred stock B) corporate bond
A(n) ________ is a paid individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture.A) trusteeB) investment bankerC) bond issuerD) bond rating agency A) trustee
A ________ is a restrictive provision in a bond indenture, providing for the systematic retirement of the bonds prior to their maturity.A) redemption clauseB) sinking-fund requirementC) conversion featureD) subordination clause B) sinking-fund requirement
Bond indentures include restrictive covenants. These provisions protect the bondholders against ________.A) increase in inflation rateB) increase in borrower’s riskC) decrease in liquidity riskD) maturity risk B) increase in borrower’s risk
Which of the following is a restrictive covenant?A) to maintain satisfactory accounting recordsB) to pay the taxes dueC) to supply audited financial statementsD) to impose fixed asset restrictions D) to impose fixed asset restrictions
The purpose of the 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 alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) limit the annual cash dividends paid by the firm C) ensure a cash shortage does not cause an inability to meet current obligations
The purpose of the debt covenant that prohibits borrowers from entering into certain types of leases is to ________.A) protect the lender by controlling the risk and marketability of the borrower’s security investments alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) limit the annual cash dividends paid by the firm B) limit the amount of fixed-payment obligations
The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to ________.A) protect the lender by controlling the risk and marketability of the borrower’s security investment alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) prevent the firm from liquidation and ensure its ability to repay the debt D) prevent the firm from liquidation and ensure its ability to repay the debt
The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to ________.A) assure the lender that additional borrowing is constrainedB) limit the amount of fixed-payment obligationsC) limit the realization of current assets to cashD) limit the payment of annual cash dividends C) limit the realization of current assets to cash
The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to ________.A) maintain a minimum level of liquidityB) limit the amount of fixed-payment obligationsC) ensure a long-run cash shortage does not cause an inability to meet current obligationsD) protect the original lender in the priority of claims during liquidation D) protect the original lender in the priority of claims during liquidation
________ means that subsequent creditors agree to wait until all claims of the are senior debt satisfied before having their claims satisfied.A) Security interestB) SubordinationC) Sinking fund requirementD) Bond indenture B) Subordination
The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________.A) assure the lender that additional borrowing is constrained or may be subordinated to the original loanB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) avoid default of payments to bondholders D) avoid default of payments to bondholders
An example of a standard debt provision is to ________.A) limit the corporation’s annual cash dividend paymentsB) pay taxes and other liabilities when dueC) restrict the corporation from disposing of fixed assetsD) maintain a minimum level of liquidity B) pay taxes and other liabilities when due
The cost of a long-term debt generally ________ that of a short-term debt.A) is less thanB) is equal toC) is greater thanD) is less than or equal to C) is greater than
Which of the following affects the cost of a bond?A) maturity of a bondB) dividend policyC) fixed assets purchased from the proceeds of bond issueD) money market regulations A) maturity of a bond
To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically ________.A) charges a higher interest rate on long-term loansB) reserves the right to change the terms of the loan at any timeC) includes excessively restrictive debt provisionsD) reserves the right to demand immediate payment at any time A) charges a higher interest rate on long-term loans
The size of a loan and its issuance costs (as a percentage of the amount borrowed) are ________.A) not relatedB) inversely relatedC) independentD) perfectly positively correlated B) inversely related
The ________ in the capital market is the basis for determining a bond’s coupon interest rate. A) cost of moneyB) weighted average cost of capitalC) bond’s face valueD) average coupon interest rate A) cost of money
The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.A) callB) conversionC) putD) swap A) call
The ________ feature allows bondholders to change each bond into stated number of shares of stock.A) callB) conversionC) putD) swap B) conversion
________ allow bondholders to purchase a certain number of shares of the firm’s common stock at a specified price over a certain period of time.A) Call optionsB) Stock purchase warrantsC) DebenturesD) Put options B) Stock purchase warrants
A ________ give bondholders the right to purchase a certain number of shares of the issuer’s common stock at a specified price over a certain period of time.A) stock purchase warrantB) call featureC) swapD) conversion feature A) stock purchase warrant
Stock purchase warrants are instruments that give their holders ________.A) the obligation to purchase a certain number of shares of the issuer’s common stock at a specified price over a certain period of timeB) the right to purchase a certain number of shares of the issuer’s common stock at a specified price over a certain period of timeC) the obligation to sell a certain number of shares of the issuer’s preferred stock at a specified price over a certain period of timeD) the right to sell a certain number of shares of the issuer’s preferred stock at a specified price over a certain period of time B) the right to purchase a certain number of shares of the issuer’s common stock at a specified price over a certain period of time
A $1,000, 8% bond sells for 980. $1,000 is called the ________.A) current valueB) market valueC) par valueD) auction value C) par value
The current yield on a bond is measured by ________.A) the annual interest payment divided by the current priceB) the annual interest payment divided by the par valueC) the annual interest payment divided by the maturity valueD) the annual interest payment divided by the yield to maturity A) the annual interest payment divided by the current price
A bond rated Aaa according to Moody’s, is considered ________.A) a high grade bondB) a prime quality bondC) an upper medium grade bondD) a medium grade bond B) a prime quality bond
The riskiness of publicly traded bond issues is rated by independent agencies. According to Moody’s rating system, an Aaa bond and a Caa bond are ________ and ________ respectively.A) speculative; investment gradeB) prime quality; medium gradeC) prime quality; speculativeD) medium grade; lowest grade C) prime quality; speculative
A(n) ________ gives purchasers inflation protection.A) zero-coupon bondB) junk bondC) floating rate bondD) income bond C) floating rate bond
________ is used to finance “rolling stock”-airplanes,trucks,boats,railroad cars.A) Income bondsB) Equipment trust certificatesC) Collateral trust bondsD) Subordinated debentures B) Equipment trust certificates
Deeply discounted bond that pays no coupon interest is a ________.A) junk bondB) floating rate bondC) zero coupon bondD) subordinated debenture C) zero coupon bond
Stated interest rate under ________ is adjusted periodically within stated limits in response to changes in specified money market or capital market rates.A) junk bondsB) floating rate bondsC) extendible notesD) putable bonds B) floating rate bonds
________ are popular vehicle used to finance mergers and takeovers.A) Income bondsB) Junk bondsC) Floating rate bondsD) Convertible debentures B) Junk bonds
A(n) ________ is secured by real estate.A) income bondB) debentureC) mortgage bondD) subordinated debenture C) mortgage bond
A(n) ________ is issued with no or very low coupon and sells significantly below its par value.A) income bondB) zero or low coupon bondC) mortgage bondD) subordinated debenture B) zero or low coupon bond
On ________, the stated interest rate is adjusted periodically within stated limits in response to changes in specified money or capital market rates.A) a floating rate bondB) a zero coupon bondC) a mortgage bondD) an equipment trust certificate A) a floating rate bond
________ are commonly issued in the reorganization of a failed or failing firm.A) Floating rate bondsB) Income bondsC) Mortgage bondsD) Equipment trust certificates B) Income bonds
________ bonds are characterized by interest payments that are required only when earnings are available.A) Floating rateB) IncomeC) MortgageD) Junk B) Income
________ are debt rated Ba or lower by Moody’s or BB or lower by Standard & Poor’s and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers.A) Subordinated debenturesB) Mortgage bondsC) Junk bondsD) Equipment trust certificates C) Junk bonds
Convertible bonds are normally ________.A) debenturesB) income bondsC) zero coupon bondsD) mortgage bonds A) debentures
A debenture is ________.A) a bond secured by specific assets that any firm can issueB) a secured bond that is secured by unspecified assetsC) a secured bond issued by startup firmsD) an unsecured bond that only creditworthy firms can issue D) an unsecured bond that only creditworthy firms can issue
________ are secured by stock and/or bonds that are owned by the issuer.A) Mortgage bondsB) Equipment trust certificatesC) Collateral trust bondsD) Subordinated debentures C) Collateral trust bonds
________ have a short maturities, typically one to five years, and which can be renewed for a similar period at the option of their holders.A) Floating rate bondsB) Extendible notesC) Putable bondsD) Junk bonds B) Extendible notes
Payment of interest required only when earnings are made available from which to make a payment is characteristic of a(n) ________.A) floating rate bondB) income bondC) mortgage bondD) equipment trust certificate B) income bond
A putable bond gives the bondholder ________.A) the right to sell the bond back to the corporation at a discountB) the right to sell the bond back to the corporation at a stated premiumC) the right to redeem the bond back to the corporation at the current market valueD) the right to redeem the bond back to the corporation at par D) the right to redeem the bond back to the corporation at par
A significant portion of the return on a zero coupon bond is in the form of ________.A) interest and gain in valueB) interestC) gain in valueD) tax reduction C) gain in value
When issuing a(n) ________ the issuer can annually deduct the current year’s interest accrual without having to actually pay the interest until the bond matures.A) junk bondB) zero coupon bondC) floating rate bondD) extendible note B) zero coupon bond
High-risk, high-yield junk bonds have declined in popularity over time due to ________.A) the decline in mergers and takeovers, which these bonds were used to financeB) the declining need of growth capitalC) the stabilizing of interest ratesD) a number of major defaults on these bonds D) a number of major defaults on these bonds
________ are claims that are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied.A) Convertible debenturesB) Subordinated debenturesC) Mortgage bondsD) Collateral trust bonds B) Subordinated debentures
Bonds that can be redeemed at par at the option of their holders either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt are called ________.A) zero coupon bondsB) junk bondsC) floating-rate bondsD) putable bonds D) putable bonds
The decision to refund a callable bond ________.A) should be made only if interest rates have increasedB) is a net working capital decisionC) is a capital budgeting decisionD) is an investing decision C) is a capital budgeting decision
A foreign bond is issued by a(n) ________.A) foreign corporation or government and is denominated in the investor’s home currency and sold in the investor’s home marketB) corporation or government and is denominated in the investor’s foreign currency and sold in the foreign marketC) international borrower and sold to investors in countries with currencies other than the local currencyD) international borrower and sold to investors in countries with currencies in which the bond is denominated A) foreign corporation or government and is denominated in the investor’s home currency and sold in the investor’s home market

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