Chapter 10 - Test Bank: Multiple Choice Questions
Chapter 10 - Test Bank: Multiple Choice Questions
Chapter 10 - Test Bank: Multiple Choice Questions
A. commitment fees.
A. overdraft. B. establishment fees.
B. bank bill. C. line fees.
C. commercial paper. D. service fees.
D. fully drawn advance.
9. The fees charged by banks onto the total amount of the loan facility and are normally payable in advance
3. If a company wished to structure its financing so it repaid funds borrowed only when a project begins to are:
have positive cash flows, it would choose a/an:
A. commitment fees.
A. fully drawn advance. B. establishment fees.
B. term loan. C. line fees.
C. interest-only loan. D. service fees.
D. deferred payment loan.
10. Compared with an amortised loan, a deferred repayment loan involves:
4. Long-term debt can be categorised as financing with an initial maturity:
A. certificates of deposit.
A. periodic payments principal and interest repaid at maturity. B. commercial paper.
B. periodic interest and principal repayments when positive cash flows begin. C. corporate bonds.
C. periodic interest payments and principal repaid at maturity. D. term loans.
D. periodic equal repayments of interest and principal throughout the term.
12. ________ granted by banks generally have maturities of three to 15 years and are often made to finance 18. If the interest rates on shorter term-to-maturity deposits are higher than those of longer term deposits, it is
capital expenditure such as building construction and the purchase of real estate. likely that the costs for the longer term financing for a company are:
A. Debentures A. higher.
B. Mortgage bonds B. lower.
C. Term loans C. the same.
D. Capital leases D. not related.
13. A term loan is: 19. One of the advantages of a prime rate set by a financial institution is that it is less likely to be affected by:
A. a bill issued to finance a specific trade transaction. A. changes in the bank bill swap rate.
B. a bill issued to raise funds for general purposes. B. short-term market illiquidity.
C. a flexible funding arrangement for companies. C. short-term credit fluctuations.
D. when funds are borrowed for a set period. D. all of the given answers.
14. Banks usually charge a/an _______ for any portion of a term loan that has not been drawn down. 20. 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. establishment fee
B. service fee A. the credit risk of the company.
C. commitment fee B. the term of the loan.
D. term fee C. the term structure of interest rates.
D. the loan repayment schedule.
15. A bank charge on any part of a loan that has not been fully drawn down by a company is called a/an:
21. Compared with a company with a strong financial rating, a company with a weaker rating is likely to be
charged:
A. establishment fee.
B. commitment fee.
C. line fee. A. LIBOR.
D. service fee. B. LIBOR plus 10 basis points.
C. LIBOR plus 25 basis points.
16. All of the following affect interest rates charged on term loans except: D. LIBOR plus 50 basis points.
22. When a lender includes conditions in a loan agreement to protect its loan, these are known as:
A. default risk.
B. the maturity.
C. the repayment schedule. A. loan agreements.
D. refinancing risk. B. loan covenants.
C. loan terms.
17. Which of the following rates serves as a reference interest rate in Australia? D. loan actions.
23. When a loan agreement contains actions for a borrowing company to comply with, such as supplying
A. BBSW financial statements, these are called:
B. LIBOR
C. USCP
D. SIBOR A. accounting ratios.
B. negative covenants.
C. positive covenants.
D. loan options.
24. Which of the following is NOT usually an example of restrictive debt covenants? 30. A key difference between a positive covenant and a negative covenant is, for a:
A. Limitations on additional borrowing A. positive covenant, a company must comply with restrictions on its financial structure.
B. Constraints on disposal of non-current assets B. negative covenant, a company must maintain a minimum level of working capital.
C. Minimum levels of cash flow C. negative covenant, a company must provide annual audited financial statements.
D. Supplying the creditors with annual, audited financial statements D. positive covenant, a company must maintain a minimum debt to gross cash flow ratio.
25. Which of the following is NOT an example of negative debt covenants? 31. Which of the following is a positive loan covenant?
A. Specifying what activities the business can enter into A. A minimum working capital ratio
B. Restrictions on amalgamation with other companies B. A maximum gearing ratio
C. Supplying creditors with annual audited reports C. A maximum level of unsecured debt
D. Limiting annual dividend payments to shareholders D. All of the given answers
26. Which of the following is NOT an example of a positive debt covenant? 32. A ________ is provided to a business by a financial institution and has a maturity of more than one year.
27. The purpose of debt covenants that require the firm to rank any subsequent borrowing below the original 33. The type of loan where a company pays periodic interest payments over its term and the principal at
loan is to: maturity to a lender is called:
A. mortgagor.
A. increase the interest rate. B. mortgagee.
B. demand immediate repayment of the loan. C. mortgager.
C. alter the term of the agreement, such as by reducing the maturity date. D. mortgage.
D. insist the company hand over its assets.
36. The borrower who issues a mortgage with real property as collateral to the bank is the: 42. The value of a bond is the present value of the:
A. market value
A. $12 657.43 B. book value
B. $16 275.00 C. face value
C. $19 032.43 D. surrender value
D. none of the given answers
44. Which of the following types of bond generally has the lowest interest rate?
38. A company borrows $125 000 from a bank at 7.2% per annum to be amortised over six years. The monthly
instalment is:
A. Treasury bonds
B. Corporate BAA bonds
A. $1861.11 C. Semi-government bonds
B. $2143.15 D. Corporate ABB bonds
C. $7274.21
D. $26 386.61 45. Corporations and governments use long-term debt financing called:
39. In Australia which of the following long-term debt markets are the largest?
A. retained earnings.
B. bonds.
A. The corporate bond market C. shares.
B. The mortgage market D. preferred stock.
C. The unsecured note market
D. The leasing market 46. Bonds are:
40. When illiquid assets are transformed into new asset-backed securities, the process is called:
A. a type of equity financing.
B. a short-term financial arrangement with periodic interest payments.
A. conversion. C. a debt instrument issued at discount with interest and principal repaid at maturity.
B. liquidisation. D. long-term debt instruments.
C. securitisation.
D. transformation. 47. Compared with unsecured notes, a debenture can offer:
59. If a bond investor pays $1030 for an annual coupon bond with a face value of $1000, it follows that:
A. Subordinated debt
B. Unsecured notes
C. Commercial mortgage A. the coupon rate is higher than the current market yield.
D. Debenture B. the current market yield and coupon rate are equal.
C. the current market yield is higher than the coupon rate.
D. not enough information is given to compare the coupon rate and current market yield.
60. Which one of the following statements about bonds is correct? 66. When the coupon rate of a bond is below the current market interest rates, a bond will sell at:
A. discount.
A. premium; face value; a discount B. its original value.
B. discount; a premium; face value C. premium.
C. face; a premium; a discount D. book value.
D. premium; a reduction; a discount
68. A company has two outstanding bonds with the same features, apart from the maturity date. Bond A
62. What happens to the coupon rate of a $100 face value bond that pays $7 coupon annually, if market interest matures in five years, while bond B matures in 10 years. If the market interest rate changes by 5%:
rates change from 8 to 9%? The coupon rate:
A. the coupon rate has altered. A. bond A will have the greater change in price.
B. the maturity date has altered. B. bond B will have the greater change in price.
C. the market rate of interest has altered. C. the price of the bonds will not alter.
D. previously issued bonds sell at a discount to new bonds. D. the price of the bonds will change by the same amount.
64. The price of a bond with a fixed coupon has a/an _______ relationship with the market interest rates. 70. Which of the following statements is correct?
A. constant A. Short-term debt instruments are more volatile in price than long-term instruments.
B. linear B. Coupon rates are generally fixed when the bond is issued.
C. varying C. Bond prices and market interest rates move together.
D. inverse D. The higher the coupon of a bond, the lower its price.
65. When the coupon rate of a bond is above the current market interest rates, a bond will sell at: 71. 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?
A. discount.
B. its original value. A. $920.15
C. premium. B. $1000
D. face value. C. $1084.25
D. None of the given answers
72. A $1000 face value bond, with coupon rate of 9% paid annually, has six years to maturity. If bonds of 78. If a bond's price is at a discount to face value, it has a:
similar risk are currently earning 11%, what is the current price of the bond?
A. coupon rate.
B. face value. A. at a premium; equal to the face value; at a discount
C. price. B. at a premium; at a discount; equal to the face value
D. interest payments. C. at a discount; at a premium; equal to the face value
D. equal to the face value; at a discount; at a premium
74. 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? 80. 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%?
A. $1000
B. $1045.84 A. $320 149.12
C. $1046.44 B. $401 613.48
D. $1079.45 C. $410 644.78
D. $688 638.80
75. When the market interest rates decline after a bond is issued, the:
81. Which of the following statements about ‘net' finance leases is incorrect?
84. When a finance company purchases assets with its own funds and leases them to a lessee for a negotiated 90. For what type of lease does the lessee provide a significant part of the funds to purchase the asset, often
long-term period this is called a/an: losing the advantage of leveraged leasing, while a financial institution provides the remainder?
87. Compared with missing an interest payment on debt, the penalties for missing a financial lease payment True False
are:
94. Banks often calculate a prime rate lending as they can adjust it more quickly than other reference money
market rates.
A. less severe.
B. the same. True False
C. more severe. 95. Apart from an interest charge on funds advanced to a borrower, a bank will charge a service fee for
D. not related. considering the loan application and loan preparation.
88. Which of the following is NOT an advantage of leasing from the lessee's viewpoint?
True False
96. A positive loan covenant can state that a company must maintain a minimum level of working capital.
A. 100% financing
B. The company's capital is not involved True False
C. Flexible repayment scheduling
D. With a net lease, costs of ownership remain with the lessee
97. The inclusion of covenants in a term loan is designed to protect the borrower from taking on too much 103. Discuss the features of mortgage agreements for commercial loans.
debt.
True False
98. Under mortgage financing, the mortgagor is the lender of the mortgage funds.
True False
99. A bond is a long-term debt instrument issued directly into the capital markets.
True False 104. Identify the main debt securities of the Australian bond market.
100. The terms subordinated debt and unsecured note are interchanged as they are both corporate bonds that
have identical features.
True False
105. Discuss the use of a prospectus in relation to the issue of debt securities.
101. Discuss major features of a term loan.
A. a bank loan advanced for a precise period for an unspecified purpose. 5. In relation to long-term financing, an amortised loan involves:
B. A term loan where the full amount is provided at the start of the loan, usually for a specified purpose.
C. A term loan where the borrower has the option of putting its operating account in deficit up to an
agreed limit. A. periodic payments principal and interest repaid at maturity.
D. A term loan where the bank does not pay out the loan until after a specified period. B. periodic interest and principal repayments when positive cash flows begin.
Difficulty: Medium C. periodic interest payments and principal repaid at maturity.
Est time: <1 minute D. periodic equal repayments of interest and principal throughout the term.
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
Difficulty: Medium
Est time: <1 minute
2. If a company wishes to finance a printing press with a five-year life, it would be advisable to finance it Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
with a/an:
6. Which of the following statements best describes a fully amortised term loan?
A. overdraft.
B. bank bill. A. A fully amortised term loan is an interest-only loan with principal repayable at maturity.
C. commercial paper. B. A fully amortised term loan has periodic repayments, including interest and principal reduction.
D. fully drawn advance. C. Interest repayments on a fully amortised term loan are fixed for the period of the loan.
Difficulty: Medium D. A fully amortised term loan is a ‘low-start' loan whose repayments are increased over the term.
Est time: <1 minute
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment. Difficulty: Medium
Section: 10.1 Term loans or fully drawn advances Est time: <1 minute
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
3. If a company wished to structure its financing so it repaid funds borrowed only when a project begins to
have positive cash flows, it would choose a/an: 7. Term loans where each periodic loan payment consists of interest payments and then the principal is
repaid in full at maturity are:
A. fully drawn advance.
B. term loan. A. fully drawn advances.
C. interest-only loan. B. amortised loans.
D. deferred payment loan. C. interest-only loans.
Difficulty: Medium D. credit foncier loans.
Est time: <1 minute
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment. Difficulty: Medium
Section: 10.1 Term loans or fully drawn advances Est time: <1 minute
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
8. The fees that represent bank costs in considering loan applications and document preparation are called: 12. ________ granted by banks generally have maturities of three to 15 years and are often made to finance
capital expenditure such as building construction and the purchase of real estate.
A. commitment fees.
B. establishment fees. A. Debentures
C. line fees. B. Mortgage bonds
D. service fees. C. Term loans
D. Capital leases
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Est time: <1 minute
Section: 10.1 Term loans or fully drawn advances
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
9. The fees charged by banks onto the total amount of the loan facility and are normally payable in
advance are: 13. A term loan is:
10. Compared with an amortised loan, a deferred repayment loan involves: 14. Banks usually charge a/an _______ for any portion of a term loan that has not been drawn down.
11. The main longer-term finance provided by financial intermediaries is/are: 15. A bank charge on any part of a loan that has not been fully drawn down by a company is called a/an:
A. default risk.
B. the maturity. A. the credit risk of the company.
C. the repayment schedule. B. the term of the loan.
D. refinancing risk. C. the term structure of interest rates.
D. the loan repayment schedule.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Est time: <1 minute
Section: 10.1 Term loans or fully drawn advances
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
17. Which of the following rates serves as a reference interest rate in Australia?
21. Compared with a company with a strong financial rating, a company with a weaker rating is likely to be
charged:
A. BBSW
B. LIBOR
C. USCP A. LIBOR.
D. SIBOR B. LIBOR plus 10 basis points.
C. LIBOR plus 25 basis points.
Difficulty: Easy
Est time: <1 minute D. LIBOR plus 50 basis points.
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances Difficulty: Medium
Est time: <1 minute
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
18. If the interest rates on shorter term-to-maturity deposits are higher than those of longer term deposits, it Section: 10.1 Term loans or fully drawn advances
is likely that the costs for the longer term financing for a company are:
22. When a lender includes conditions in a loan agreement to protect its loan, these are known as:
A. higher.
B. lower. A. loan agreements.
C. the same. B. loan covenants.
D. not related. C. loan terms.
D. loan actions.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Est time: <1 minute
Section: 10.1 Term loans or fully drawn advances
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
19. One of the advantages of a prime rate set by a financial institution is that it is less likely to be affected
by: 23. When a loan agreement contains actions for a borrowing company to comply with, such as supplying
financial statements, these are called:
25. Which of the following is NOT an example of negative debt covenants? 29. A breach of any specified loan covenant by the borrower generally gives the lender the right to do all of
the following, except:
A. mortgagor.
A. debenture B. mortgagee.
B. mortgage bond C. mortgager.
C. term loan D. mortgage.
D. zero-coupon bond
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Learning Objective: 10-02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate an instalment on a mortgage loan.
Est time: <1 minute
Section: 10.2 Mortgage finance
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
37. A company borrows $75 000 from a bank, to be amortised over five years at 8.5% per annum. The
33. The type of loan where a company pays periodic interest payments over its term and the principal at annual instalment is:
maturity to a lender is called:
A. $12 657.43
A. amortised. B. $16 275.00
B. a debit foncier. C. $19 032.43
C. deferred payment. D. none of the given answers
D. interest-only.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 10-02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate an instalment on a mortgage loan.
Est time: <1 minute
Section: 10.2 Mortgage finance
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
38. A company borrows $125 000 from a bank at 7.2% per annum to be amortised over six years. The
34. All of the following financial institutions arrange mortgage finance for companies except: monthly instalment is:
35. The lender who registers a mortgage as a security for a loan is the: 39. In Australia which of the following long-term debt markets are the largest?
41. Many years ago, banks: 45. Corporations and governments use long-term debt financing called:
A. could make mortgage loans to households but not to businesses. A. retained earnings.
B. could make loans to businesses but not make mortgage loans. B. bonds.
C. held most loans on their books until they were paid off. C. shares.
D. repackaged and sold most loans to investors. D. preferred stock.
Difficulty: Medium Difficulty: Easy
Est time: <1 minute Est time: <1 minute
Learning Objective: 10-02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate an instalment on a mortgage loan. Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.2 Mortgage finance Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
42. The value of a bond is the present value of the: 46. Bonds are:
43. The coupon interest of a bond is calculated based on its _______, and is paid periodically. 47. Compared with unsecured notes, a debenture can offer:
A. market value A. a fixed charge over the issuer's already pledged assets.
B. book value B. a floating charge over the issuer's unpledged assets.
C. face value C. less chance of sale before maturity, as they are not usually traded.
D. surrender value D. provisions for interest rate changes.
Difficulty: Easy Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt. Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
48. An unsecured note differs from a debenture in that it has: 52. A debenture is a/an:
A. as security only unpledged assets. A. unsecured bond that only best-name corporate borrowers can issue.
B. as security a floating charge over assets. B. legal document stating the restrictive covenants on the loan.
C. as security a fixed charge over assets. C. bond secured by a charge over the assets of the issuer.
D. no supporting security. D. corporate bond with a credit enhancement.
Difficulty: Medium Difficulty: Easy
Est time: <1 minute Est time: <1 minute
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt. Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
49. A debt security supported or secured by mortgage assets held by a bank is a/an: 53. 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?
A. debenture.
B. income bond. A. Subordinated debt
C. mortgage bond. B. Unsecured notes
D. fixed-charge debenture. C. Commercial mortgage
D. Debenture
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Est time: <1 minute
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
50. All of the following are examples of long-term debt instruments except:
54. When a company defaults on interest payments for a debenture, the floating charge is said to ______ a
fixed charge.
A. term loans.
B. debentures.
C. promissory notes. A. transform into
D. bonds. B. crystallise into
C. originate as
Difficulty: Easy
Est time: <1 minute D. adjust to
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt Difficulty: Easy
Est time: <1 minute
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
51. In relation to an issue of bonds, the method where the bond offer is made only to institutions that deal Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
regularly in securities is called:
55. In the event of failure for a company that has issued a bond, the highest claims on the company's assets
generally comes from:
A. public issue.
B. family issue.
C. private placement. A. floating-charge debenture holders.
D. institutional issue. B. fixed-charge debenture holders.
C. unsecured note holders.
Difficulty: Easy
Est time: <1 minute D. the shareholders.
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt Difficulty: Easy
Est time: <1 minute
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
56. A holder of ________ has generally no charge over the issuing company's unpledged assets. 60. Which one of the following statements about bonds is correct?
57. Many securities contain an option that is included as part of a bond or preferred share, which allows the 61. The _______ value of a bond is also called its par value. Bonds with a current price greater than their
holder to convert the security into a predetermined number of shares. This feature is called a: par value sell at _______, while bonds with a current price less than their par value sell at _______.
58. Which type of financial claim is not satisfied until those of the creditors holding certain senior debts 62. What happens to the coupon rate of a $100 face value bond that pays $7 coupon annually, if market
have been fully satisfied? interest rates change from 8 to 9%? The coupon rate:
59. If a bond investor pays $1030 for an annual coupon bond with a face value of $1000, it follows that: 63. The market price of previously issued bonds is often different from face value because:
A. the coupon rate is higher than the current market yield. A. the coupon rate has altered.
B. the current market yield and coupon rate are equal. B. the maturity date has altered.
C. the current market yield is higher than the coupon rate. C. the market rate of interest has altered.
D. not enough information is given to compare the coupon rate and current market yield. D. previously issued bonds sell at a discount to new bonds.
Difficulty: Hard Difficulty: Easy
Est time: <1 minute Est time: <1 minute
Learning Objective: 10-04 Calculate the price of a fixed-interest bond. Learning Objective: 10-04 Calculate the price of a fixed-interest bond.
Section: 10.4 Calculations: fixed-interest securities Section: 10.4 Calculations: fixed-interest securities
64. The price of a bond with a fixed coupon has a/an _______ relationship with the market interest rates. 68. 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%:
A. constant
B. linear A. bond A will have the greater change in price.
C. varying B. bond B will have the greater change in price.
D. inverse C. the price of the bonds will not alter.
D. the price of the bonds will change by the same amount.
Difficulty: Easy
Est time: <1 minute
Difficulty: Hard
Learning Objective: 10-04 Calculate the price of a fixed-interest bond.
Est time: <1 minute
Section: 10.4 Calculations: fixed-interest securities
Learning Objective: 10-04 Calculate the price of a fixed-interest bond.
Section: 10.4 Calculations: fixed-interest securities
65. When the coupon rate of a bond is above the current market interest rates, a bond will sell at:
69. 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%:
A. discount.
B. its original value.
C. premium. A. bond A will have the greater change in price.
D. face value. B. bond B will have the greater change in price.
C. the price of the bonds will not alter.
Difficulty: Medium
Est time: <1 minute D. the price of the bonds will change by the same amount.
Learning Objective: 10-04 Calculate the price of a fixed-interest bond.
Section: 10.4 Calculations: fixed-interest securities Difficulty: Hard
Est time: <1 minute
Learning Objective: 10-04 Calculate the price of a fixed-interest bond.
66. When the coupon rate of a bond is below the current market interest rates, a bond will sell at: Section: 10.4 Calculations: fixed-interest securities
71. A $1000 face value bond, with coupon rate of 8% paid annually, has five years to maturity. If bonds of
A. discount. similar risk are currently earning 6%, what is the current price of the bond?
B. its original value.
C. premium.
D. book value. A. $920.15
B. $1000
Difficulty: Easy
Est time: <1 minute C. $1084.25
Learning Objective: 10-04 Calculate the price of a fixed-interest bond. D. None of the given answers
Section: 10.4 Calculations: fixed-interest securities
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10-04 Calculate the price of a fixed-interest bond.
Section: 10.4 Calculations: fixed-interest securities
72. A $1000 face value bond, with coupon rate of 9% paid annually, has six years to maturity. If bonds of 76. When market interest rates increase after a bond is issued, the:
similar risk are currently earning 11%, what is the current price of the bond?
A. face value of the bond decreases. A. at a premium; equal to the face value; at a discount
B. market value of the bond increases. B. at a premium; at a discount; equal to the face value
C. market value of the bond decreases. C. at a discount; at a premium; equal to the face value
D. bond price is at a discount. D. equal to the face value; at a discount; at a premium
Difficulty: Medium Difficulty: Medium
Est time: <1 minute Est time: <1 minute
Learning Objective: 10-04 Calculate the price of a fixed-interest bond. Learning Objective: 10-04 Calculate the price of a fixed-interest bond.
Section: 10.4 Calculations: fixed-interest securities Section: 10.4 Calculations: fixed-interest securities
80. What is the current price of a debenture with a $500 000 face value, a coupon rate of 9.5% paid semi- 84. When a finance company purchases assets with its own funds and leases them to a lessee for a
annually, six years remaining to maturity and market interest rates increased to 14%? negotiated long-term period this is called a/an:
81. Which of the following statements about ‘net' finance leases is incorrect? 85. 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?
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. A. An equity lease
D. The lessor's role is one of financing, while the lessee makes regular rental payments. B. A leveraged lease
C. A sale and leveraged lease
Difficulty: Medium
Est time: <1 minute D. A financial lease
Learning Objective: 10-05 Explain lease financing, including types of lease arrangements and lease structures.
Section: 10.5 Leasing Difficulty: Medium
Est time: <1 minute
Learning Objective: 10-05 Explain lease financing, including types of lease arrangements and lease structures.
82. A/An _______ lease is a short-term arrangement where the lessee agrees to make periodic payments to Section: 10.5 Leasing
the lessor for the right to use the asset. This arrangement usually contains only minor or no penalties for
cancellation of the lease. 86. A direct finance lease is best described as a/an:
83. The type of lease where the costs of ownership and operation are borne by the lessee, who agrees to 87. Compared with missing an interest payment on debt, the penalties for missing a financial lease payment
make a residual payment at the end of the lease period, is a/an: are:
95. Apart from an interest charge on funds advanced to a borrower, a bank will charge a service fee for
True / False Questions considering the loan application and loan preparation.
FALSE
91. A term loan is referred to as a fully drawn advance when the borrower obtains the full amount at the
start of the loan. Apart from an establishment fee, a bank will charge a service fee for ongoing loan account
administration costs, not for considering the loan application—that is the establishment fee.
TRUE
Difficulty: Medium
The full amount of the loan is provided to the borrower at the start of the loan. Est time: <1 minute
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
Difficulty: Easy
Est time: <1 minute
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
96. A positive loan covenant can state that a company must maintain a minimum level of working capital. 100. The terms subordinated debt and unsecured note are interchanged as they are both corporate bonds that
have identical features.
TRUE
FALSE
Loan covenants are rules in the actual loan contract about how much borrowing a borrower may do and
a positive covenant specifies acts to be taken by the borrower. Subordinated debt refers to different debt issues with different ranking in respect to payment claims in
the case of default by the company. An unsecured note is a corporate bond with no security or collateral
attached.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10-02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate an instalment on a mortgage loan.
Section: 10.2 Mortgage finance Difficulty: Medium
Est time: <1 minute
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
97. The inclusion of covenants in a term loan is designed to protect the borrower from taking on too much Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
debt.
FALSE
Short Answer Questions
Covenants in loan contracts are designed to protect the lender's financial risk exposure by imposing
rules on the borrower.
101. Discuss major features of a term loan.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10-02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate an instalment on a mortgage loan.
Section: 10.2 Mortgage finance
A term loan is the main type of intermediated finance provided by financial institutions. It is a loan
98. Under mortgage financing, the mortgagor is the lender of the mortgage funds. advanced for a specific period for a variety of purposes such as purchase of real estate, construction of
premises or for buying plant and equipment. It is generally granted for a period from between three and
FALSE 15 years and the lender generally requires some form of security to be attached to the loan that may be
structured as an amortised loan or an interest-only loan.
The mortgagor is the borrower who issues a mortgage contract to the lender of funds with the land and
property as collateral. Est time: 1-3 minutes
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
Difficulty: Medium
Est time: <1 minute 102. Define and discuss a reference interest rate in relation to lending.
Learning Objective: 10-02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate an instalment on a mortgage loan.
Section: 10.2 Mortgage finance
99. A bond is a long-term debt instrument issued directly into the capital markets.
A loan agreement will generally specify a reference interest rate that will apply for the loan and any
TRUE subsequent reset of the loan, such as the BBSW rate, which is an adjusted average of the bank bill rate
in the Australian money market. Published benchmarks are used as benchmarks for pricing loans. Banks
It is the long-term financial instrument when a borrower issues a financial security directly into the debt also calculate their own reference benchmark called a prime rate.
markets. A bond promises to pay its holder regular coupon payments and principal is repaid at maturity.
Est time: 1-3 minutes
Learning Objective: 10-01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Difficulty: Easy Section: 10.1 Term loans or fully drawn advances
Est time: <1 minute
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
103. Discuss the features of mortgage agreements for commercial loans.
Chapter 10 - Test Bank Summary
Category # of Question
s
Companies may obtain debt finance by providing security to the lender by way of a mortgage over land Difficulty: Easy 34
and in some cases leasehold land. Commercial mortgage finance tends to be provided on shorter terms Difficulty: Hard 5
to maturity than retail mortgage loans. In Australia commercial property mortgages typically range up to Difficulty: Medium 62
10 years and are available with a choice of variable interest rate or fixed interest rate. Est time: <1 minute 101
Est time: 1-3 minutes 5
Learning Objective: 10- 40
Est time: 1-3 minutes
Learning Objective: 10-02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate an instalment on a mortgage loan. 01 Explain term loans and fully drawn advances, including their structure, loan covenants and the calculation of a loan instalment.
Section: 10.2 Mortgage finance Learning Objective: 10- 12
02 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and calculate an instalment on a mortgag
104. Identify the main debt securities of the Australian bond market. e loan.
Learning Objective: 10- 21
03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Learning Objective: 10-04 Calculate the price of a fixed-interest bond. 22
Learning Objective: 10-05 Explain lease financing, including types of lease arrangements and lease structures. 11
The main debt securities are bonds issued by the Australian government, bonds issued by state
Section: 10.1 Term loans or fully drawn advances 40
government borrowing authorities known as semis, bonds issued by financial institutions such as
Section: 10.2 Mortgage finance 12
National Bank of Australia, bonds issue by Australian corporations, asset-backed securities and
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt 21
Kangaroo bonds, which are Australian dollar bonds issued by non-residents.
Section: 10.4 Calculations: fixed-interest securities 22
Section: 10.5 Leasing 11
Est time: 1-3 minutes
Learning Objective: 10-03 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
105. Discuss the use of a prospectus in relation to the issue of debt securities.
In most countries where a corporate bond market exists, legislation will require any invitation to the
public to deposit money with or lend to a corporation to be accompanied by a prospectus. A prospectus
is a formal written offer to sell securities and will generally contain specified details about the business
such as financial statements, and specialist accounting, taxation and legal reports. It is intended to
protect the investor but does create certain disadvantages for the borrower such as being time
consuming to prepare.