Chapter 24 Test Bank - Static.docx

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1. A "foreign" bond is a bond A. sold in the United States by a U.S. company. B. sold to investors in the local market but issued by a company from some other country. C. sold in Europe by a U.S. company. D. sold in Europe by a European company. Accessibility: Keyboard Navigation Difficulty: Basic 2. The largest market for foreign bonds is A. the United States. B. Japan. C. Switzerland. D. Russia. Accessibility: Keyboard Navigation Difficulty: Basic 3. A "samurai bond" is a bond A. sold by a company from Japan. B. sold in the United States by a company from Japan. C. sold in Japan by a local company. D. sold in Japan by a company from some other country. Accessibility: Keyboard Navigation Difficulty: Basic 4. A Yankee bond is a bond A. sold by a company from the United States. B. sold in the United States by a foreign firm. C. sold in the United States by a local company. D. sold in Japan by a company from some other country. Accessibility: Keyboard Navigation Difficulty: Basic 5. A Yankee bond will be denominated in A. U.S. dollars. B. British pounds. C. Japanese yen. D. Euros. Accessibility: Keyboard Navigation Difficulty: Basic 6. The bonds that are sold to local investors issued by a firm from another country are called A. private placement. B. foreign bonds. C. junk bonds. D. investment-grade bonds. Accessibility: Keyboard Navigation Difficulty: Basic

7. According to SEC Rule 144A, A. bonds issued through private placements can be bought and sold by institutional investors. B. SEC registration is not needed for privately placed bonds. C. SEC registration is required of all securities issued in the United States. D. bonds issued through private placements can be bought and sold by institutional investors and SEC registration is not needed for privately placed bonds. Accessibility: Keyboard Navigation Difficulty: Intermediate 8. The written agreement between a corporation and the bondholder's representative is called the A. indenture. B. collateral maintenance agreement. C. prospectus. D. debenture. Accessibility: Keyboard Navigation Difficulty: Basic 9. The trust company for a bond issue represents the A. managers of the firm. B. firm's shareholders. C. firm's board of directors. D. firm's bondholders. Accessibility: Keyboard Navigation Difficulty: Intermediate 10. Very large bond issues that are marketed both internationally as well as in individual domestic markets are called A. Eurobonds. B. foreign bonds. C. global bonds. D. None of the options are correct. Accessibility: Keyboard Navigation Difficulty: Intermediate 11. In general, which of the following statements is (are) true? A. Bonds issued in the United States are registered and Eurobonds are normally issued in a major currency (e.g., $US, euro, or yen). B. Bonds issued in the United States are bearer bonds. C. Eurobonds are normally issued in a major currency (e.g., $US, euro, or yen). D. Bonds issued in the United States are bearer bonds and Eurobonds are normally issued in the local currency. Accessibility: Keyboard Navigation Difficulty: Basic 12. A type of bond that has the advantage of secrecy of ownership, but has the disadvantage of ownership not recorded by the firm's registrar, is a A. registered bond. B. premium bond. C. par bond. D. bearer bond.

Accessibility: Keyboard Navigation Difficulty: Basic 13. Which of the following are included in the typical bond indenture? A. The basic terms of the bond B. Details of the protective covenants C. Details of the protective covenants and sinking fund arrangements D. The basic terms of the bond, details of the protective covenants, sinking fund arrangements, and call provisions Accessibility: Keyboard Navigation Difficulty: Intermediate 14. Any bond that is issued at a discount is known as A. a pure discount bond. B. a zero-coupon bond. C. an original issue discount bond. D. a premium bond. Accessibility: Keyboard Navigation Difficulty: Basic 15. In general, which of the following statements is true? A. Bonds issued in the United States pay interest annually, while bonds issued in other countries pay interest semiannually. B. Bonds issued in the United States and other countries pay interest semiannually. C. Bonds issued in the United States and other countries pay interest annually. D. Bonds issued in the United States pay interest semiannually, while bonds issued in other countries pay interest annually. Accessibility: Keyboard Navigation Difficulty: Intermediate 16. The Alfa Co. has a 6 percent coupon bond outstanding that pays semiannual interest. Calculate the semiannual interest payment on a $1,000 face value bond. A. $60 B. $30 C. $10 D. $6 Accessibility: Keyboard Navigation Difficulty: Basic 17. The Alfa Co. has a 6 percent coupon bond outstanding that pays annual interest. Calculate the annual interest payment on a $1,000 face value bond. A. $60 B. $30 C. $10 D. $120 Accessibility: Keyboard Navigation Difficulty: Basic 18. The Alfa Co. has a 12 percent bond outstanding on a $1,000 face value bond that pays interest on February 1 and July 1. Today is March 1 and you are planning to purchase one of these bonds. How much will you pay in accrued interest?

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A. $10 B. $20 C. $30 D. $60 Accessibility: Keyboard Navigation Difficulty: Basic 19. A zero-coupon bond is also called a(n) A. income bond. B. original issue discount bond. C. pure discount bond. D. premium bond. Accessibility: Keyboard Navigation Difficulty: Basic 20. LIBOR means A. London Interbank Offered Rate. B. London International Bank Offered Rate. C. Long-term International Bank Offered Rate. D. Liberty of Repayment. Accessibility: Keyboard Navigation Difficulty: Intermediate 21. Which of the following bonds is secured by assets? A. A mortgage bond B. A floating rate bond C. A debenture D. An indenture Accessibility: Keyboard Navigation Difficulty: Intermediate 22. Which of the following bonds is typically secured? A. Sinking fund debenture B. Mortgage bond C. Floating rate note D. Eurobond Accessibility: Keyboard Navigation Difficulty: Basic 23. Long-term bonds that are unsecured obligations of a company are called A. indentures. B. debentures. C. mortgage bonds. D. bearer bonds. Accessibility: Keyboard Navigation Difficulty: Basic 24. The following are secured bonds except A. mortgage bonds.

B. debentures. C. collateral trust bonds. D. equipment trust certificates. Accessibility: Keyboard Navigation Difficulty: Basic 25. The following are various types of secured debt: A. mortgage bonds only. B. mortgage bonds and collateral trust bonds only. C. mortgage bonds, collateral trust bonds, and equipment trust certificate only. D. mortgage bonds, collateral trust bonds, equipment trust certificate, and debentures. Accessibility: Keyboard Navigation Difficulty: Intermediate 26. Floating-rate bonds have adjustable rates to protect real rates of return against inflation. The rates paid are limited by A. the put provisions of the issues. B. a floor rate that sets the minimum. C. a cap rate that sets the maximum. D. a floor rate that sets the minimum and a cap rate that sets the maximum. Accessibility: Keyboard Navigation Difficulty: Intermediate 27. Which of the following bonds is typically not secured? A. Collateral trust bond B. Mortgage bond C. Debenture D. Equipment trust certificate Accessibility: Keyboard Navigation Difficulty: Intermediate 28. The recovery rate on defaulting debt is the highest for the following type of debt: A. bank debt. B. senior secured bonds. C. senior subordinated bonds. D. junior subordinated bonds. Accessibility: Keyboard Navigation Difficulty: Intermediate 29. The recovery rate on defaulting debt is the least for the following type of debt: A. bank debt. B. senior secured bonds. C. senior subordinated bonds. D. junior subordinated bonds. Accessibility: Keyboard Navigation Difficulty: Intermediate 30. Which of the following provisions would often be included in the indenture for a first-mortgage bond? A. A limit on officer salaries

B. A negative pledge clause C. A limit on new issues of subordinated debt D. A limit on the amount of senior debt that can be issued Accessibility: Keyboard Navigation Difficulty: Intermediate 31. Firms often bundle up a group of assets and then sell the cash flows from these assets in the form of securities. They are called A. debentures. B. subordinated issues. C. asset-backed securities. D. mortgage bonds. Accessibility: Keyboard Navigation Difficulty: Basic 32. A sinking fund may be useful to a corporation because A. the corporation does not have to worry about paying the bondholders. B. it may provide the corporation with the option to acquire the bonds at the lower of face value or market price. C. the payments to the sinking fund are not necessary when the firm is in financial difficulty. D. they are simple and easy to monitor. Accessibility: Keyboard Navigation Difficulty: Challenge 33. Corporations often have the right to repurchase a debt issue prior to maturity at a fixed price. Such debt issues are said to be A. indentured. B. protected. C. convertible. D. callable. Accessibility: Keyboard Navigation Difficulty: Basic 34. Even though many bonds have deferred sinking funds, the sinking fund has the following effects on bondholders: A. provides extra protection to bondholders as both an early warning system and perhaps some collateral cash and provides an option to the firm to buy bonds at the lower of market or face value. B. puts the bondholders at added risk due to potential inability to meet sinking fund payments. C. provides an option to the firm to buy bonds at the lower of market or face value. D. provides an option to the firm to buy bonds at the lower of market or face value and puts the bondholders at added risk due to potential inability to meet sinking fund payments. Accessibility: Keyboard Navigation Difficulty: Challenge 35. The following are some of the complications associated with call provisions of bonds: A. The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt. B. The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, and the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders. C. The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders, and there may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond.

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D. The firm may be prevented from calling a bond because of a nonrefunding clause from issuing new debt, the call premium is a tax-deductible expense for the firm but is taxed as capital gains to bondholders, there may be other tax consequences to both the firm and the bondholders from replacing a low-coupon bond with a higher-coupon bond, and there are costs and delays associated with calling and reissuing debt. Accessibility: Keyboard Navigation Difficulty: Challenge 36. A 5 percent debenture (face value = $1,000) pays interest on June 30 and December 31. It is callable at a price of 105 percent together with accrued interest. Suppose the company decides to call the bonds on September 30. What amount must it pay for each bond? A. $1,000 B. $1,037.50 C. $1,062.50 D. $1,050 Accessibility: Keyboard Navigation Difficulty: Intermediate 37. An 8 percent debenture has five years of call protection and is thereafter callable at 100 percent, except that it is nonrefundable below interest cost. Which of the following statements is correct? A. The debenture may be called any time during the next five years. B. The debenture may not be called during the next five years. C. The lender has the option to demand early repayment. D. The bond should be called when the yield on similar noncallable bonds falls to 8 percent. Accessibility: Keyboard Navigation Difficulty: Intermediate 38. A puttable provision in a bond allows the A. issuer to call the bond at par on the coupon payment date. B. holder to redeem the bond at par before maturity. C. issuer to extend the maturity of the bond. D. holder to extend the maturity of the bond. Accessibility: Keyboard Navigation Difficulty: Intermediate 39. The call policy that maximizes shareholder wealth is to call a bond issue when A. the bond's price is above par. B. the bond's price is above par but below the call price. C. the bond's price exceeds the call premium. D. the bond's price equals or exceeds the call price. Accessibility: Keyboard Navigation Difficulty: Intermediate 40. Which of the following is not an example of an affirmative (positive) covenant? A. Requirement to maintain a minimum level of working capital B. Requirement to furnish bondholders with a copy of the firm's annual accounts C. Requirement to limit dividends to net income D. Requirement to maintain a minimum level of net worth Accessibility: Keyboard Navigation Difficulty: Intermediate

41. The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay. This limitation is a A. nonrecourse covenant. B. recourse covenant. C. positive covenant. D. negative covenant. Accessibility: Keyboard Navigation Difficulty: Intermediate 42. If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be A. callable. B. convertible. C. protected. D. None of the options are correct. Accessibility: Keyboard Navigation Difficulty: Intermediate 43. The holder of a $1,000 face value bond has the right to exchange the bond any time before maturity for shares of stock priced at $50 per share. The $50 is called the A. conversion price. B. stated price. C. exercise price. D. striking price. Accessibility: Keyboard Navigation Difficulty: Intermediate 44. The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. Then the conversion ratio A. is 40. B. is 25. C. is 100. D. depends on the current market price of the bond. Accessibility: Keyboard Navigation Difficulty: Intermediate 45. A $1,000 face value bond can be exchanged any time for 25 shares of stock. Then the conversion price is A. $40. B. $25. C. $100. D. $975. Accessibility: Keyboard Navigation Difficulty: Intermediate 46. The holders of ZZZ Corporation's bonds with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $25. What is the conversion price? A. $35 B. $7.70 C. $28.57 D. $975 Accessibility: Keyboard Navigation

Difficulty: Intermediate 47. The holders of ZZZ Corporation's bonds with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $25. What is the conversion value of the bond? A. $1,000 B. $875 C. $1,200 D. $965 Accessibility: Keyboard Navigation Difficulty: Basic 48. A convertible bond is selling for $993. It has 15 years to maturity, $1,000 face value, and pays 8 percent coupon interest payments annually. Similar straight bonds (nonconvertible) are priced to yield 8.5 percent. The conversion ratio is 20. The stock is currently selling for $45. Calculate the convertible bond's option value. A. $34.52 B. $93 C. $7 D. $58.48 Accessibility: Keyboard Navigation Difficulty: Challenge 49. Which of the following statements about convertible bonds is true? A. A convertible bond cannot have a sinking fund. B. A callable bond cannot have a convertible feature. C. A convertible bond can also have a call feature. D. A convertible bond must have a sinking fund. Accessibility: Keyboard Navigation Difficulty: Intermediate 50. A convertible bond issue can be thought of as the A. sale of a straight bond. B. sale of a straight bond and a call option. C. sale of a put option. D. sale of common stock. Accessibility: Keyboard Navigation Difficulty: Intermediate 51. All else equal, which of the following features will increase the value of a convertible bond? A. The risk-free interest rate is higher. B. The conversion ratio is higher. C. The conversion price is lower. D. All of the features increase the value. Accessibility: Keyboard Navigation Difficulty: Challenge 52. Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because A. the effects of risk are opposite on the two value components and tend to cancel each other out. B. if the firm is high risk, the option premium will be higher while the straight bond value is fixed. C. only risky companies issued these instruments.

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D. the equity value is dependent on current risks only, not the future risk at conversion. Accessibility: Keyboard Navigation Difficulty: Challenge 53. Generally, convertible bonds are issued by A. smaller and more speculative firms. B. mature and profitable firms. C. very large firms. D. the U.S. government. Accessibility: Keyboard Navigation Difficulty: Basic 54. A firm may prefer to issue a convertible bond, as opposed to issuing equity, because A. a convertible issue sends a better signal to investors than an issue of common stock. B. a convertible issue shows the management's willingness to take a chance that the stock price will rise enough to lead to conversion and also signals management's confidence in the future. C. a convertible issue sends a better signal to investors than an issue of common stock, and an announcement of a stock issue generates worries of overvaluation and usually depresses the stock price. D. a convertible issue sends a better signal to investors than an issue of common stock, an announcement of a stock issue generates worries of overvaluation and usually depresses the stock price, and a convertible issue shows the management's willingness to take a chance that the stock price will rise enough to lead to conversion and also signals management's confidence in the future. Accessibility: Keyboard Navigation Difficulty: Challenge 55. Which of the following is the most sensible reason for issuing convertibles? A. Convertibles are convenient and flexible-they're usually unsecured and subordinated, and cash requirements for debt service are relatively low. B. Interest rates on convertible issues are significantly less than on straight debt. C. Firms that need equity capital use convertibles as a roundabout way of issuing stock. D. Firms prefer to issue convertibles when their shares are undervalued. Accessibility: Keyboard Navigation Difficulty: Intermediate 56. Which of the following increase(s) the difficulty of valuing convertible bonds? A. Dividends B. Dilution caused by conversion C. Changing bond price D. All of the options are correct. Accessibility: Keyboard Navigation Difficulty: Intermediate 57. Warrants are sometimes issued A. with private placement bonds, to investment bankers as compensation, to creditors in the event of bankruptcy, and to common stockholders. B. with private placement bonds and to investment bankers as compensation. C. with private placement bonds, to investment bankers as compensation, and to creditors in the event of bankruptcy. D. to investment bankers as compensation and to creditors in the event of bankruptcy. Accessibility: Keyboard Navigation Difficulty: Basic

58. Two major differences between a warrant and a call option are that A. warrants have long maturities while options are usually short maturities, and warrant exercise dilutes the value of equity while options exercise usually does not. B. warrants are contracts outside of the firm while options are within the firm. C. warrants have long maturities while options are usually short maturities. D. warrant exercise dilutes the value of equity while options exercise usually does not. Accessibility: Keyboard Navigation Difficulty: Intermediate 59. A bond-warrant package A. always increases the risk of the common equity. B. always decreases the risk of the common equity. C. could either increase or decrease the risk of the common equity. D. does not affect the risk of common equity. Accessibility: Keyboard Navigation Difficulty: Challenge 60. The exercise of warrants creates new shares which A. increases the total number of shares but does not affect share value. B. increases the total number of shares and reduces the individual share value. C. does not change the number of shares outstanding, similar to options. D. increases share value because cash is paid into the firm at the time of warrant exercise. Accessibility: Keyboard Navigation Difficulty: Intermediate 61. Privately placed loans are advantageous because A. there are usually fewer restrictive covenants. B. there is direct contact with the lender and renegotiations can be handled more easily. C. SEC registration is necessary. D. there are usually fewer restrictive covenants and SEC registration is necessary. Accessibility: Keyboard Navigation Difficulty: Basic 62. Project finance is generally provided by A. the U.S. government. B. foreign governments. C. international banks. Accessibility: Keyboard Navigation Difficulty: Intermediate 63. Project finance is extensively used in developing countries to finance A. power projects. B. telecommunications projects. C. transportation projects. D. All of the options are correct. Accessibility: Keyboard Navigation Difficulty: Intermediate 64. LYONs are bonds that are

A. callable and puttable. B. callable, puttable, and convertible. C. callable, puttable, convertible, and zero-coupon. D. puttable, convertible, and zero-coupon. Accessibility: Keyboard Navigation Difficulty: Basic 65. PIKs are A. pay-in-kind bonds. B. pay interest kicker bonds. C. pay interest in Krugerrands. D. pay interest in kroner. Accessibility: Keyboard Navigation Difficulty: Basic 66. A loan guarantee provided by the government on a corporate bond acts like what kind of derivative security for the investor? A. Long put B. Short put C. Long call D. Short call Accessibility: Keyboard Navigation Difficulty: Challenge 67. The term bearer bond refers to bonds that bear little interest via coupon payments. FALSE Accessibility: Keyboard Navigation Difficulty: Basic 68. The term Yankee bond refers to any bond sold in the United States. FALSE Accessibility: Keyboard Navigation Difficulty: Basic 69. Bonds issued in the United States are usually registered. TRUE Accessibility: Keyboard Navigation Difficulty: Basic 70. Sinking funds reduce the average life of a bond and thereby reduce the risk of a default. TRUE Accessibility: Keyboard Navigation Difficulty: Basic 71. The difference between the price of callable and noncallable bonds is greatest when bond prices are lowest. FALSE

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Accessibility: Keyboard Navigation Difficulty: Intermediate 72. A negative pledge clause states that the company may grant an exclusive lien or claim on any of its assets. FALSE Accessibility: Keyboard Navigation Difficulty: Intermediate 73. Affirmative covenants impose certain duties on the company. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 74. The owner of a convertible bond owns both a straight bond and a call option. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 75. Convertible bonds can also have a call feature. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 76. Issuing convertible debt makes sense whenever investors have difficulty estimating the risk of the company's bond. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 77. A warrant holder is not entitled to vote but receives dividends. FALSE Accessibility: Keyboard Navigation Difficulty: Basic 78. A bond-warrant package has different effects on the firm's cash flow and capital structure than a convertible bond. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 79. Many times warrants may be issued on their own and do not have to be issued in conjunction with other securities. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate

80. Project finance requires a capital investment that can be clearly separated from the parent and offers tangible security to lenders. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 81. Floating price convertibles are convertible debt where bondholders can convert into a fixed value of shares. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 82. Reverse floaters are floating rate bonds that pay a higher rate of interest when other interest rates fall and a lower rate when other rates rise. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 83. Loan guarantees are valuable methods for propping up the value of debt without up-front cash. TRUE Accessibility: Keyboard Navigation Difficulty: Intermediate 84. Government loan guarantees are a risk-free and costless means for helping struggling firms. FALSE Accessibility: Keyboard Navigation Difficulty: Intermediate 85. Explain the differences between a bond issued only in the United States and Eurobond issues. There are two basic differences. First, a bond issued in the United States will generally have a fixed interest rate, while a Eurobond will usually have a floating interest rate tied to LIBOR. Second, bonds sold in the United States are almost always registered, which means that the company's registrar records the owner's name; most Eurobonds are sold in bearer form. Difficulty: Easy 86. Briefly explain the provisions of a typical bond indenture. An indenture is a written agreement between the corporation and a trust company that represents the bondholders. The trust company ensures that the provisions of the indenture are observed and generally looks after the interest of the bondholders. The indenture normally includes the following provisions: the basic terms of the bond; a description of property used as a security; details of the restrictive covenants; other provisions like call provisions, bond ratings, sinking fund arrangements, and so forth. Difficulty: Difficult 87. Briefly explain the restrictive covenants in a bond indenture. The restrictive covenants, also called protective covenants, are placed in the bond indenture to protect the bondholders' interests. There are two types of covenants, negative and positive (affirmative). Negative covenants limit or prohibit the company from taking certain actions like paying huge dividends to stockholders. Affirmative covenants specify certain duties on the company. These have to be exhaustive, as courts have held that only written covenants count.

Difficulty: Medium 88. Briefly explain the term conversion ratio. The number of shares received for each bond is called the conversion ratio. This is fixed for the life of the bond. Difficulty: Easy 89. Briefly explain the term conversion premium. The conversion premium is the difference between the conversion price and stock price expressed as a percent of stock price. Suppose the stock price is $25 and the conversion price is $45. Then the conversion premium is (45 – 25)/25 = 80 percent. This shows that the conversion price is 80 percent higher than the stock price. Difficulty: Easy 90. Discuss the valuation of a convertible bond. The value of a convertible bond will be the higher of the bond value or the conversion value. The bond value is what each bond would sell for if it could not be converted. The conversion value is what the bond would sell for, assuming immediate conversion. Difficulty: Medium 91. What are the three elements of convertible bond value? The value of a convertible bond is determined by straight bond value, conversion value, and the option value. Value of a convertible bond = higher of [straight bond value, conversion value] + option value. The straight bond value and the conversion values provide the floor for the convertible bond value. Difficulty: Medium 92. Briefly explain what is meant by force conversion. If the conversion value is greater than the call price and bond is called, then the call is said to force conversion. Obviously, bondholders would convert the bonds to realize the higher conversion value. Difficulty: Medium 93. Explain why firms issue convertible debt. Smaller and more risky firms generally issue convertibles. Convertibles are useful when investors have difficulty in assessing the risk of a company's debt. They also diminish the possible conflicts of interest between bondholder and stockholder. Difficulty: Medium 94. Explain the differences between warrants and convertibles. The main differences are that warrants are usually issued as a part of a private placement, warrants can be detached and sold separately, warrants may be issued on their own, warrants are exercised for cash, and warrants and convertibles are subject to different tax rules. Difficulty: Medium 95. Discuss the differences between publicly issued bonds and private placements. Mainly, there are three differences. First, publicly issued bonds must be registered with the SEC, while private placements need not. Second, publicly issued bonds are highly standardized, while private placements can be tailor-made for the firms involved. Third, the restrictions placed on the issuer are usually much more stringent with private placements.

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Difficulty: Medium 96. Briefly explain project financing. Project financing refers to debt financing that is largely a claim against the cash flow from a particular project rather than against the firm as a whole. Project financing is used for power, communication, and transportation projects. This is also used extensively in developing countries. Difficulty: Medium 97. What are LYONs? LYONs (liquid yield option notes) are an innovation in bond design. They are puttable, callable, and convertible; and they carry a zero-coupon interest rate. Difficulty: Medium 98. What are reverse floaters? Reverse floaters are floating-rate bonds that pay a higher rate of interest when other rates of interests fall and a lower rate when other rates rise. Difficulty: Easy 99. What are PIK bonds? PIK (pay-in-kind) bonds carry high coupon payments. They can be paid in cash or with bonds of equivalent face value. Difficulty: Medium 100. Explain why the following phrase is true or false. "Government loan guarantees are a costless method for the government to help troubled firms." This phrase is false for many reasons. While the issuance of a guarantee does not involve an up-front cost, it does transfer value and risk. A loan guarantee adds value to the recipients. By providing a guarantee, the firm will assume more risk than the capital markets would otherwise allow it to take. The transfer of risk to the government and the subsequent reduced risk aversion of the firm may increase the chance of a payout by the government. The intervention of the government prevents capital markets from assigning proper risk-adjusted prices to firm assets. Difficulty: Difficult

Category # of Questions Accessibility: Keyboard Navigation 84 Difficulty: Basic 30 Difficulty: Challenge 8 Difficulty: ChallengeTrue/False Questions 1 Difficulty: Difficult 2 Difficulty: Easy 4 Difficulty: Intermediate 45 Difficulty: Medium 10

Chapter 24 Test Bank - Static.docx

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