The main pressure on Canadian corporations to raise capital has come from:
a. shareholder pressure
b. securities analysts
c. the expansion of the economy
d. institutional pressure
c. the expansion of the economy
The par value of a bond is:
a. the initial or face value of the bond
b. the yield to maturity
c. the stated interest payment
d. the value of the bond as traded on security markets.
a. the initial or face value of the bond
The coupon rate on a bond is:
a. the initial or face value of the bond
b. the yield to maturity
c. the rate at which the principal of the bond accrues
d. the stated interest rate of the bond
d. the stated interest rate of the bond
The document containing all of the legal details of the bond is:
a. the debenture
b. the indenture
c. the bond agreement
d. the debt agreement
b. the indenture
With a secured claim:
a. specific assets are pledged in the event of default
b. a debenture exists
c. the lower the value of the initial security
d. pledged assets are often sold off and the proceeds distributed
a. specific assets are pledged in the event of default
Debt that is not secured by specific assets is called:
a. an indenture
b. a debenture
c. a mortgage agreement
d. common stock
b. a debenture
Payment to subordinated debenture holders takes place:
a. prior to payment to secured debt holders
b. prior to payment to senior debenture holders
c. after payment of preferred shareholders
d. after payment to senior debenture holders
d. after payment to senior debenture holders
A call provision allows the firm to:
a. call the bond and common stock
b. redeem bonds prior to the call date
c. pay a discount 5-10% below par
d. redeem the bond prior to maturity
d. redeem the bond prior to maturity
Bond yields are quoted in all of the following ways except:
a. coupon rate
b. current yield
c. yield to maturity
d. debt yield
d. debt yield
Bonds are rated based on all of the following criteria except:
a. ability to make interest payments
b. consistency of performance
c. debt-equity ratio
d. nominal yield
d. nominal yield
A bond issue should be refunded when:
a. bondholders desire the return of their funds
b. it is too expensive to issue additional common stock
c. interest rates drop and you believe they will increase again
d. the existing bonds contain no call provision
c. interest rates drop and you believe they will increase again
Which of the following is a benefit of debt to the firm:
a. interest and principal obligations are contractually set
b. interest payments are tax deductible
c. indenture agreements provide the firm with no restrictions
d. used beyond a certain point, debt will decrease the cost of capital
b. interest payments are tax deductible
Long term lease obligations are treated as:
a. items in the footnotes of the financial statements
b. solely as an expense items on the income statement
c. in a manner similar to debt on the balance sheet
d. as an asset to the firm
c. in a manner similar to debt on the balance sheet
Leasing offers all of the following advantages except:
a. leases are an expense item that cannot be capitalized
b. the provisions of a lease may be less restrictive than a bond indenture
c. there may be no down payment requirement
d. creditor claims may be restricted on real property
a. leases are an expense item that cannot be capitalized
In a lease versus borrow to purchase decision the appropriate discount rate, except for the salvage value, is:
a. the cost of capital
b. the aftertax cost of debt
c. the cost of equity capital
d. the cost of the debt
b. the aftertax cost of debt
after-acquired property clause:
Property purchased is placed under the original mortgage if purchased after the mortgage is executed.
bond indenture:
A legal contract between the borrower and the lender that covers every detail regarding a bond issue.
bond ratings:
Bonds are rated according to risk by Dominion Bond Rating Services and Canadian Bond Rating Service. A bond that is rated AAA by Dominion or A11 by Canadian has the lowest risk, while a bond with a C rating has the highest risk. Coupon rates are greatly influenced by a corporation's bond rating.
call feature:
Used for bonds and some preferred stock. A call allows the corporation to retire securities before maturity by forcing the bondholders to sell bonds back to it at a set price. The call provisions are included in the bond indenture.
capital (or financing) lease:
A long-term, non cancellable lease that has many of the characteristics of debt. Under CICA guidelines, the lease obligation must be shown directly on the balance sheet.
conversion:
The process of swapping one security for common shares in a corporation.
coupon rate:
The actual interest rate on the bond, usually payable in semiannual instalments. The coupon rate normally stays constant during the life of the bond and indicates what the bondholder's annual dollar income will be.
current yield:
The yearly dollar interest payment divided by the current market price.
debenture:
A long-term unsecured corporate bond. Debentures are usually issued by large, prestigious firms having excellent credit ratings in the financial community.
Eurobonds:
Bonds payable or denominated in the borrower's currency but sold outside the country of the borrower, usually by an international syndicate.
floating rate bond:
The interest payment on the bond that changes with market conditions, rather than the price of the bond.
junk bond:
A bond that is not in default, but one that is of questionable quality and speculative in nature.
leveraged lease:
The lessor for a large capital item may finance a portion with a loan from a financial institution.
maturity date:
The date on which the bond is retired and the principal (par value) is repaid to the lender.
mortgage agreement:
A loan that requires real property (plant and equipment) as collateral.
operating lease:
A short-term, nonbinding obligation that is easily cancellable.
par value:
Sometimes referred to as the face value or the principal value of the bond. Most bond issues have a par value of $1,000 per bond. Older issues of common and preferred stock may also have an assigned par value.
real return bond:
A financial obligation that promises a coupon payment at a fixed yield above the inflation rate.
refunding decision:
The process of retiring an old bond issue before maturity and replacing it with a new issue. Refunding occurs when interest rates have fallen and new bonds may be sold at lower interest rates.
sale and leaseback:
An arrangement whereby a capital item is sold to a financial institution and then leased back from that financial institution. The arrangement may free monies and may allow for more effective use of the tax laws.
secured debt (claim):
A general category of debt, which indicates that the loan was obtained by pledging assets as collateral. Secured debt has many forms and usually offers some protective features to a given class of bondholders.
serial payments:
A bond may be paid off in instalments over the life of the issue.
sinking-fund provision:
A method for retiring bonds in an orderly process over the life of a bond. Each year or semiannually, a corporation sets aside a sum of money equal to a certain percentage of the total issue. These funds are then used by a trustee to purchase the bonds in the open market and retire them. This method prevents the corporation from being forced to raise a large amount of capital at maturity to retire the total bond issue.
strip bond:
A bond in which the investor only receives the maturity or face value with all coupons removed.
subordinated debenture:
An unsecured bond in which payment to the holder occurs only after designated senior debenture holders are satisfied.
term loan:
An intermediate-length loan in which credit is generally extended from one to seven years. The loan is usually repaid in monthly or quarterly instalments over its life, rather than with one single payment.
unsecured debt:
A loan that requires no assets as collateral, but allows the bondholder a general claim against the corporation, rather than a lien against specific assets.
yield to maturity:
The required rate of return on a bond issue. It is the discount rate used in present-valuing future interest payments and the principal payment at maturity. The term is used interchangeably with market rate of interest.
zero-coupon rate bond:
A bond that is sold at a deep discount from face value. The return to the investor is the difference between the investor's cost and the face value received at the end of the life of the bond
Share investment:
Represents one company's purchase of the shares in another company. Also called equity security.
