Fins1612 Chapter 10

A $1000 face value bond, with a 7.5% coupon rate paid semi-annually and maturing in five years, is currently yielding 6.4% in the market. What is the current price of the bond?

$1046.44 (37.5/1.032)+(37.5/1.032^2)+...(1037.5/1.032^10)

A $1000 face value bond, with coupon rate of 8% paid annually, has five years to maturity. If bonds of similar risk are currently earning 6%, what is the current price of the bond?

$1084.25

What is the current price of a debenture with a $500 000 face value, a coupon rate of 9.5% paid semi- annually, six years remaining to maturity and market interest rates increased to 14%?

$410 644.78

A $1000 face value bond, with coupon rate of 9% paid annually, has six years to maturity. If bonds of similar risk are currently earning 11%, what is the current price of the bond?

$915.39

Which of the following is a positive loan covenant? A. A minimum working capital ratio B. A maximum gearing ratio C. A maximum level of unsecured debt D. All of the given answers

A A minimim working capital ratio

Which of the following statements about 'net' finance leases is incorrect? A. The lessor will be responsible for the periodic maintenance of the asset. B. At the end of the lease period, the company will be required to make a residual payment. C. Upon payment of the residual amount, ownership of the asset transfers to the company. D. The lessor's role is one of financing, while the lessee makes regular rental payments.

A The lessor will be responsible for the periodic maintenance of the asset

A holder of ________ has generally no charge over the issuing company's unpledged assets.

An Unsecured Note

For what type of lease does the lessee provide a significant part of the funds to purchase the asset, often losing the advantage of leveraged leasing, while a financial institution provides the remainder?

An equity lease

Which of the following is NOT an example of a positive debt covenant? A. The company has to maintain a minimum level of working capital. B. The company is restricted from doing mergers and acquisitions. C. The company has to supply periodic cash flow statements to the lender. D. The company has to supply annual audited statements to the lender.

B The company is restricted from doing mergers and acquisitions

Which one of the following statements about bonds is correct?

Bond prices vary inversely with interest rates

Which of the following is NOT an example of negative debt covenants? A. Specifying what activities the business can enter into B. Restrictions on amalgamation with other companies C. Supplying creditors with annual audited reports D. Limiting annual dividend payments to shareholders

C Supplying creditors with annual audited reports

A company can borrow from a bank at a margin to the bank's base rate. According to the text, all of the following factors affect this margin except: A. the credit risk of the company. B. the term of the loan. C. the term structure of interest rates. D. the loan repayment schedule.

C The term structure of the interest rates

A bank charge on any part of a loan that has not been fully drawn down by a company is called a/an:

Commitment Fee

Banks usually charge a/an _______ for any portion of a term loan that has not been drawn down.

Commitment Fee

Many securities contain an option that is included as part of a bond or preferred share, which allows the holder to convert the security into a predetermined number of shares. This feature is called a:

Conversion Feature

Which of the following statements is correct?

Coupon Rates are generally fixed when the bond is issued

Which of the following is NOT usually an example of restrictive debt covenants? A. Limitations on additional borrowing B. Constraints on disposal of non-current assets C. Minimum levels of cash flow D. Supplying the creditors with annual, audited financial statements

D Supplying the creditors with annual, audited financial statements

Which of the following is NOT an advantage of leasing from the lessor's perspective (compared with offering a straight loan)? A. Leasing has a relatively low default risk. B. Administration costs may be lower for a lease than for a straight loan. C. The return to the lessor may be higher than for a straight loan. D. The lessor may use the funds for other investment opportunities.

D The lessor may use the funds for other investment opportunities

Which of the following is NOT an advantage of leasing from the lessee's viewpoint? A. 100% financing B. The company's capital is not involved C. Flexible repayment scheduling D. With a net lease, costs of ownership remain with the lessee

D With a net lease, costs of ownership remain with the lessee

A company issues a long-term debt security with specified interest payments and fixed charges over unpledged assets. What type of security has been issued?

Debenture

The _______ value of a bond is also called its par value. Bonds with a current price greater than their par value sell at _______, while bonds with a current price less than their par value sell at _______.

Face; Premium; Discount

In the event of failure for a company that has issued a bond, the highest claims on the company's assets generally comes from:

Fixed-charge debenture holders

The price of a bond with a fixed coupon has a/an _______ relationship with the market interest rates.

Inverse

When the coupon rate of a bond is equal to the current market interest rates, a bond will sell at:

Its original value

Compared with a company with a strong financial rating, a company with a weaker rating is likely to be charged:

LIBOR plus 50 basis points

For what type of lease does the lessee borrow a large part of the funds, typically in a multi-million dollar arrangement, often with a lease manager, while one or more financial institutions provide the remainder?

Leveraged Lease

The fees charged by banks onto the total amount of the loan facility and are normally payable in advance are:

Line fees

When a lender includes conditions in a loan agreement to protect its loan, these are known as:

Loan covenants

If the interest rates on shorter term-to-maturity deposits are higher than those of longer term deposits, it is likely that the costs for the longer term financing for a company are:

Lower

A/An _______ lease is a short-term arrangement where the lessee agrees to make periodic payments to the lessor for the right to use the asset. This arrangement usually contains only minor or no penalties for cancellation of the lease.

Operating Lease

When a loan agreement contains actions for a borrowing company to comply with, such as supplying financial statements, these are called:

Positive Covenants

When the coupon rate of a bond is above the current market interest rates, a bond will sell at:

Premium

All of the following features of a bond are fixed except the: A. coupon rate. B. face value. C. price. D. interest payments.

Price

In relation to an issue of bonds, the method where the bond offer is made only to institutions that deal regularly in securities is called: A. public issue. B. family issue. C. private placement. D. institutional issue.

Private Placements

A direct finance lease is best described as a:

Sale & leaseback arrangement

Which type of financial claim is not satisfied until those of the creditors holding certain senior debts have been fully satisfied?

Subordinated Debentures

In Australia which long-term debt markets are the largest?

The mortgage market

Type of bond with lowest interest rate:

Treasury bond

The type of loan where a company pays periodic interest payments over its term and the principal at maturity to a lender is called:

amortised

A bond's price will be _______ when the coupon rate is higher than current market interest rates; _______ when the coupon rate is equal to the current market interest rates; and _______ when the coupon rate is less than the current market interest rates.

at a premium; equal to the face value; at a discount

A company has two outstanding bonds with the same features, apart from their coupon. Bond A has a coupon of 5%, while bond B has a coupon of 8%. If the market interest rate changes by 10%:

bond A will have the greater change in price

A company has two outstanding bonds with the same features, apart from the maturity date. Bond A matures in five years, while bond B matures in 10 years. If the market interest rate changes by 5%:

bond B will have the greater change in price

A debenture is a:

bond secured by a charge over the assets of the issuer

When a company defaults on interest payments for a debenture, the floating charge is said to ______ a fixed charge.

crystallise into

When a finance company purchases assets with its own funds and leases them to a lessee for a negotiated long-term period this is called a/an:

direct lease

The type of lease where the costs of ownership and operation are borne by the lessee, who agrees to make a residual payment at the end of the lease period, is a/an:

financial lease

Many years ago, banks:

held most loans on their books until they were paid off.

A breach of any specified loan covenant by the borrower generally gives the lender the right to do all of the following, except: A. increase the interest rate. B. demand immediate repayment of the loan. C. alter the term of the agreement, such as by reducing the maturity date. D. insist the company hand over its assets.

insist the company hands over it's assets

All of the following financial institutions arrange mortgage finance for companies except:

investment banks

The purpose of debt covenants that ban borrowers from entering into certain types of leases is to:

limit the amount of fixed-interest payments

Bonds are:

long-term debt instruments

When market interest rates increase after a bond is issued, the:

market value of the bond decreases

When the market interest rates decline after a bond is issued, the:

market value of the bond increases.

The lender who registers a mortgage as a security for a loan is the:

mortgagee

The borrower who issues a mortgage with real property as collateral to the bank is:

mortgagor

In relation to long-term financing, an amortised loan involves:

period equal repayments of interest & principal throughout the term

A key difference between a positive covenant and a negative covenant is, for a:

positive covenant, a company must maintain a minimum debt to gross cash flow ratio.

All of the following are examples of long-term debt instruments except: A. term loans. B. debentures. C. promissory notes. D. bonds.

promissory notes

The purpose of debt covenants that require the firm to rank any subsequent borrowing below the original loan is to:

protect the lender in their claim over pledged assets in the event of failure

What happens to the coupon rate of a $100 face value bond that pays $7 coupon annually, if market interest rates change from 8 to 9%? The coupon rate:

remains at 7%

When illiquid assets are transformed into new asset-backed securities, the process is called:

securitisation

One of the advantages of a prime rate set by a financial institution is that it is less likely to be affected by:

short-term credit fluctuations

A ________ is provided to a business by a financial institution and has a maturity of more than one year.

term loan

If a bond investor pays $1030 for an annual coupon bond with a face value of $1000, it follows that:

the coupon rate is higher than the current market yield

The market price of previously issued bonds is often different from face value because:

the market rate of interest has altered

Compared with missing an interest payment on debt, the penalties for missing a financial lease payment are:

the same

If a bond's price is at a discount to face value, it has a:

yield above its coupon rate

If a bond's price is at a premium to face value, it has a:

yield below its coupon rate of interest

Compared with unsecured notes, a debenture can offer:

a floating charge over the issuer's unpledged assets