1. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
a.
A reduction in market interest rates.
b.
The company’s bonds are downgraded.
c.
An increase in the call premium.
d.
Answers a and b are both correct.
e.
Answers a, b, and c are all correct.
2. Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be ____ the YTM with it.
a.
Higher than
b.
Lower than
c.
The same as
d.
Either higher or lower, depending on the level of call premium, than
e.
Unrelated to
3. Of the following provisions that might be found in a bond indenture, which would tend to reduce the coupon interest rate on the bond in question?
a.
A subordination clause in a debenture.
b.
A call provision.
c.
A convertible feature.
d.
Having relatively few restrictive covenants.
e.
All of the above.
4. The terms and conditions to which a bond is subject are set forth in its
a.
Debenture.
b.
Underwriting agreement.
c.
Indenture.
d.
Restrictive covenants.
e.
Call provision.
5. All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a
a.
Sinking fund.
b.
Restrictive covenant.
c.
Call provision.
d.
Change in rating from Aa to Aaa.
e.
None of the above (all may reduce the required coupon rate).
6. Which of the following factors does not influence a firm’s long-term financing decisions?
a.
Its target capital structure.
b.
Maturity matching considerations.
c.
Comparative costs of financing alternatives.
d.
Availability of collateral.
e.
All of the above factors may influence a firm’s long-term financing decisions.
7. Common equity refers to the sum of which of the following balance sheet accounts?
a.
Common stock and retained earnings
b.
Book value, retained earnings, and common stock
c.
Common stock, additional paid-in capital, retained earnings
d.
Either answer a or c above could be correct depending on whether the firm has “par” or “no par” stock.
e.
Both b and c are correct since additional paid-in capital is equivalent to book value.