Module 6: Multiple Choice Questions
Last updated: 08/01/2026 17:38
The questions are based on or inspired by the following references:
- Berk & DeMarzo, Corporate Finance, 5th ed. (2020)
- Brealey & Myers, Principles of Corporate Finance, 13th ed. (2020)
💡 You can also press Ctrl + P (or Cmd + P on Mac) to print or save your responses as a .pdf file.
⚠️ These exercises are powered by AI-assisted technologies and may contain occasional formatting or logic errors. Please report any issues you encounter so I can improve the experience.
📙 Part 2 (Midterm to Final)
| Module | Chapter |
|---|---|
| 6 | ch23 |
Select the correct answers.
✅ Correct: A. BB+ is the first speculative-grade rating at S&P; BBB– is the lowest investment-grade tier.
✅ Correct: B. A prohibition or cap on additional borrowing is a classic negative covenant; items like reporting, insurance, and minimum coverage are affirmative (positive) covenants.
✅ Correct: C. Subordinated debentures are unsecured and have lower seniority in bankruptcy claims.
✅ Correct: A. The trustee monitors compliance with the indenture and protects bondholders’ interests.
✅ Correct: E. Secured debt is supported by collateral, providing stronger protection to lenders.
✅ Correct: B. A callable bond allows the issuer to redeem the bond early, usually when interest rates fall.
✅ Correct: D. Bonds with frequent coupon payments expose investors to reinvestment risk when rates change.
✅ Correct: C. Lower seniority and credit quality lead to higher yields as compensation for risk.
✅ Correct: A. Secured creditors are repaid first, as they hold claims on pledged collateral.
✅ Correct: E. YTM represents the IRR of a bond’s cash flows given its current market price and scheduled payments.
✅ Correct: C. Bond ratings measure credit risk and default probability, not price forecasts.
✅ Correct: B. Bond prices move inversely to interest rates.
✅ Correct: A. Mortgage bonds are secured by specific real assets.
✅ Correct: D. Affirmative covenants require the issuer to take certain actions, such as maintaining liquidity or capital levels.
✅ Correct: E. Private debt involves direct lending arrangements rather than public bond offerings.
✅ Correct: C. Long-duration zero-coupon bonds have the highest price sensitivity to interest rate changes.
✅ Correct: B. A sinking fund obligates the issuer to redeem a portion of bonds each year, reducing credit risk.
✅ Correct: A. Eurobonds are issued in a currency that differs from the country where they are sold.
✅ Correct: D. The credit spread represents the extra yield investors demand over risk-free Treasuries.
✅ Correct: E. A putable bond allows investors to return the bond to the issuer, protecting against rising interest rates.
✅ Correct: B. Debentures are unsecured corporate bonds supported by the issuer’s credit reputation.
✅ Correct: A. Call provisions cap upside potential because the issuer can redeem the bond when rates fall.
✅ Correct: E. Zero-coupon bonds trade at a discount and return face value at maturity.
✅ Correct: B. Covenants are protective clauses that limit borrower behavior to safeguard lenders and reduce credit risk.
✅ Correct: A. Inflation-indexed bonds protect real returns by adjusting payments with inflation.
✅ Correct: C. Secured debt is backed by collateral, whereas unsecured debt depends solely on the issuer’s promise to pay.
✅ Correct: D. Credit rating agencies evaluate the probability of default, providing investors with a measure of credit risk.
✅ Correct: A. A downgrade indicates rising credit risk, causing prices to fall and yields to rise.
✅ Correct: C. Convertible bonds include an embedded option allowing conversion into equity.
✅ Correct: E. Treasury bills are short-term government instruments used to cover immediate financing needs.
✅ Correct: A. Treasury bonds carry negligible credit risk and thus the lowest yields among major bond types.
✅ Correct: C. Credit spreads reflect the additional yield investors demand for taking on credit risk relative to Treasuries.
✅ Correct: E. Convertible bonds offer investors both interest income and potential equity upside through conversion.
✅ Correct: B. Investors receive a premium yield to offset the risk of the bond being called when rates fall.
✅ Correct: D. Long-term, low-coupon bonds have the highest duration and are most sensitive to rate increases.
✅ Correct: A. Junk bonds offer high yields to compensate for elevated default risk.
✅ Correct: C. The indenture defines the legal terms and covenants governing a bond issue.
✅ Correct: B. A stronger economy reduces perceived credit risk, leading to tighter spreads.
✅ Correct: E. Subordinated junk bonds rank lowest in repayment priority and have the highest credit risk.
✅ Correct: C. Tesouro Direto is a government program that enables individuals to buy and sell Brazilian Treasury bonds directly through an online platform.
✅ Correct: B. Tesouro IPCA+ provides a fixed real interest rate plus the inflation rate (IPCA), ensuring the preservation of purchasing power over time.
✅ Correct: A. A discount bond trades below par because its coupon rate is less than the market yield.
✅ Correct: C. Debentures are long-term debt instruments issued by corporations to obtain financing, typically governed by an indenture defining terms, guarantees, and covenants.
✅ Correct: B. Covenants are protective clauses in bond contracts that limit issuer behavior or require specific actions to safeguard bondholder interests.
✅ Correct: B. Callable bonds expose investors to reinvestment risk if the issuer redeems the bond when rates fall.
✅ Correct: B. The coupon rate is the fixed interest rate paid annually by the bond issuer, based on the bond’s face value.
✅ Correct: E. Positive (affirmative) covenants require actions such as maintaining insurance or submitting reports.
✅ Correct: D. TIPS increase their principal value with inflation, ensuring real returns for investors.
✅ Correct: C. Secured bonds are backed by collateral, which makes them a safer investment and gives them higher priority in case of the issuer’s liquidation.
✅ Correct: A. Secured bonds are backed by specific assets, which provides higher security and priority in case of liquidation compared to unsecured bonds.
✅ Correct: C. When yields rise, bond prices fall, and vice versa — the fundamental inverse relationship.
✅ Correct: B. Common stock is equity financing, not debt financing.
✅ Correct: D. Callable bonds permit issuers to redeem early, often when interest rates decline.
✅ Correct: E. Worsening credit quality widens spreads as investors demand more yield for risk.
✅ Correct: A. Investment-grade bonds have moderate to low credit risk (BBB–/Baa3 or above).
✅ Correct: B. Sinking funds help issuers retire debt gradually, reducing default risk.
✅ Correct: C. Floating-rate notes have very short durations since their coupons reset frequently.
✅ Correct: A. Downgrades increase credit risk, leading to falling prices and higher yields.
✅ Correct: E. Foreign bonds expose investors to both credit risk and currency fluctuations.
✅ Correct: D. Par value (face value) is the amount repaid by the issuer at maturity.
✅ Correct: E. Covenants are clauses in the bond indenture defining what issuers must or must not do.
✅ Correct: C. Rating outlooks (positive, stable, negative) signal the likely direction of upcoming rating actions.
✅ Correct: A. Credit spreads expand when default risk rises or market confidence declines.
✅ Correct: D. Foreign bonds are sold in a country’s market by an issuer from another nation.
✅ Correct: B. Convertible bonds include an embedded option to exchange debt for stock.
✅ Correct: A. Secured creditors have first claim on pledged assets during bankruptcy.
✅ Correct: E. Credit enhancement (e.g., guarantees or insurance) improves creditworthiness and reduces yield requirements.
✅ Correct: C. Eurobonds are issued in a foreign market and currency unrelated to the country of issuance.
✅ Correct: A. The corporate–Treasury yield spread tracks credit risk, liquidity, and economic sentiment.
✅ Correct: B. Municipal bonds are issued by state or local governments to fund infrastructure and other public projects.
✅ Correct: A. The default risk premium compensates investors for the possibility of issuer default.
✅ Correct: D. Subordinated debt holders are paid only after senior creditors during liquidation.
✅ Correct: B. Sovereign debt represents government borrowing, typically via Treasury securities.
✅ Correct: E. Liquidity allows investors to trade bonds efficiently without large price deviations.
✅ Correct: C. Callable bonds allow issuers to refinance debt when interest rates fall.
✅ Correct: B. Subordinated debt compensates investors with higher yields due to lower repayment priority.
✅ Correct: A. YTM is the internal rate of return on a bond’s total future payments.
✅ Correct: D. Investment-grade bonds are considered safe, offering lower yields than speculative bonds.
✅ Correct: C. ABS instruments are secured by underlying financial assets that generate cash flows.
✅ Correct: E. Credit ratings evaluate the likelihood that a borrower will meet its debt obligations.
✅ Correct: C. When a bond is downgraded, its credit risk rises, causing higher yields and lower prices.
✅ Correct: A. Junk bonds are speculative-grade securities with higher yields and higher risk of default.
✅ Correct: E. Yankee bonds are foreign issues sold in the U.S. market and denominated in U.S. dollars.
✅ Correct: B. Bond prices fall when interest rates rise and rise when rates fall.
✅ Correct: C. Callable bonds give the issuer the right to redeem early, typically when rates fall.
✅ Correct: A. Putable bonds protect investors by allowing them to sell the bond back before maturity.
✅ Correct: D. Debt financing provides tax shields through deductible interest expenses.
✅ Correct: B. Zero-coupon bonds have no periodic payments and mature at face value.
✅ Correct: E. Convertible bonds combine features of debt and equity, allowing conversion into shares.
✅ Correct: A. The indenture is a legal contract detailing obligations, covenants, and repayment terms.
✅ Correct: B. Sinking funds reduce default risk by requiring gradual debt repayment.
✅ Correct: D. Longer-duration bonds experience larger price changes when interest rates shift.
✅ Correct: C. Tesouro Selic bonds are short-term, government-issued securities that are pegged to the Selic rate, providing low-risk returns that fluctuate with this benchmark interest rate.
✅ Correct: E. Secured bonds are collateralized by specific assets such as property or equipment.
✅ Correct: C. Corporate bonds finance private sector operations, unlike government debt for fiscal policy.
✅ Correct: B. The yield curve shows yields across different maturities for similar-risk securities.
✅ Correct: B. The returns of Tesouro IPCA+ bonds are closely tied to inflation expectations, as they offer a fixed real return above the inflation rate (IPCA).
✅ Correct: A. T-bills are short-term, zero-coupon government securities sold below face value.
✅ Correct: E. Convertible bonds let investors convert bonds into shares if the stock performs well.
✅ Correct: C. Public debt is broadly traded, whereas private debt involves direct lender–borrower agreements.
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