ch07 - Chapter 7 Bonds Characteristics and Valuation...

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Chapter 7 Bonds: Characteristics and Valuation TRUE-FALSE QUESTIONS T 1. Time value of money principles helps both borrowers and lenders determine items such as return on investment. F 2. During periods of economic expansion, firms usually rely more on internal sources of funds. T 3. Most of the annual funds raised from security issues come from corporate bond sales. F 4. Long term business funds are obtained by issuing commercial paper and corporate bonds. F 5. Private placements must be approved by the Securities and Exchange Commission (SEC). T 6. Firms issue more bonds than equities. T 7. A debt holder may force the firm to abide by the terms of the debt contract even if the result is reorganization or dissolution of the firm. T 8. Bondholders have priority claims over equity holders to a firm’s assets and cash flows. F 9. A bond covenant is an extensive document, and includes in great detail the various provisions of the loan arrangement. T 10. Bond covenants are the best way for bondholders to protect themselves against dubious management actions. T 11. Bond issues of a single firm can have different bond ratings if their security provisions differ. F 12. Mortgage bonds are secured by home mortgages.
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F 13. A closed-end mortgage bond is one that allows the same assets to be used as security in future bond issues. F 14. The claims of collateralized bondholders are junior to the claims of debenture holders. F 15. A convertible bond can be converted, at the issuing firm’s option, into a specific number of shares of the issuer’s common stock. T 16. Callable bonds can be redeemed prior to maturity by the firm. T 17. Putable bonds allow investors to force the issuer to redeem them prior to maturity. T 18. Eurodollar bonds are dollar-denominated bonds that are sold outside the United States. F 19. All Eurodollar bonds must be approved by the Securities and Exchange Commission. F 20. Yankee bonds are an example of Eurodollar bonds. T 21. Yankee bonds are U.S. dollar-denominated bonds that are issued in the United States by a foreign issuer. T 22. Global bonds usually are denominated in U.S. dollars and have offering sizes that typically exceed $1 billion. T 23. The return on debt securities of a firm would be lower than the return on equity securities in that same firm. T 24. The higher the discount rate or yield to maturity, the lower the price of a bond. T 25. The par value on a bond is sometimes called its face value. T 26. The bond issuer does not necessarily know who is receiving interest payments on bearer bonds. F 27. A bond with a coupon rate of 4% and a discount rate of 6% will pay $60 in interest each year.
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F 28. A trustee represents the company to ensure that the covenants of the bond indenture are met. T 29. Covenants in a bond indenture may impose restrictions on a firm.
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