Part 6 (ch24) Questions T/F & Multiple Choice
Last updated: 28/04/2025
Below you find many questions to this chapter.
As this link is continuously updated with new questions, you might expect some changes from time to time.
The Questions are based or inspired on either Berk & DeMarzo, Corporate Finance, 5th ed. 2020 or Brealey & Myers, Principles of Corporate Finance, 13th ed. 2020.
If you are interest in getting a .pdf version of your answers, hit Ctrl + P to print
Mark T (True) or F (False) in each of the following sentences.
1 Corporate debt is typically considered a risk-free investment.
2 Sovereign debt is a type of corporate debt.
3 Private placement is a method of raising capital that involves selling securities to the general public.
4 Collateralized Debt Obligations (CDOs) are financial instruments that are typically backed by a diversified pool of assets, such as mortgages and loans.
5 Syndicated bank loans are typically provided by a single bank to a borrower.
6 In a perfect capital market, a firm’s market capitalization would change when it borrows to repurchase shares.
7 Callable bonds give the issuer the right to redeem the bonds before their maturity date, while non-callable bonds cannot be redeemed by the issuer before maturity.
8 Callable bonds usually offer a lower yield than non-callable bonds, which makes them less attractive to investors.
9 Bond covenants are legally binding agreements that set specific terms and conditions for bond issuers and bondholders, but they cannot include restrictions on the issuer’s activities.
10 Junk bonds typically offer lower yields compared to investment-grade bonds.
11 Commercial paper is a short-term debt instrument typically issued by large corporations to meet short-term obligations.
12 Convertible bonds give bondholders the option to convert their bonds into a predetermined number of the issuer’s common shares.
13 Credit ratings provided by agencies like Moody’s and Standard & Poor’s assess the creditworthiness of corporate debt issuers.
14 Asset-backed securities (ABS) are financial instruments backed by pools of assets such as credit card receivables, auto loans, or mortgages.
15 The debt-to-equity ratio measures a company’s financial leverage by comparing its total debt to its total equity.
16 Bond indenture is a legal document outlining the terms and conditions of a bond issue, including its interest rate, maturity date, and any special features.
17 Zero-coupon bonds pay periodic interest payments to bondholders.
18 Treasury bills are long-term debt securities issued by the federal government with maturities typically ranging from 20 to 30 years.
19 Investment banks often assist corporations in the process of issuing bonds to the public.
20 A sinking fund provision in a bond contract requires the issuer to pay off the entire bond issue at maturity without any intermediate payments.
21 In a private placement, securities are sold directly to a small number of investors rather than through a public offering.
22 An underwriter in a bond offering typically guarantees the purchase of the entire bond issue and resells it to investors.
23 The coupon rate of a bond is the interest rate the issuer agrees to pay each year.
24 The prospectus is a legal document provided to potential investors that describes a bond offering in detail.
25 Subordinated debt has lower priority than senior debt in the event of liquidation.
26 Debentures are secured by collateral such as property or equipment.
27 Bond prices move in the same direction as market interest rates.
28 An indenture may include restrictive covenants to protect bondholders.
29 If a bond is downgraded by a credit rating agency, its yield typically increases.
30 A call provision in a bond increases the value of the bond to investors.
31 Debt issuance costs reduce the net proceeds a firm receives from selling bonds.
32 A company’s credit rating can affect the interest rate it must pay when issuing bonds.
33 Public bond offerings are exempt from securities regulations and do not require SEC or CVM registration.
34 Convertible bonds cannot be exchanged for equity under any circumstances.
35 Senior secured bonds have lower claim priority than subordinated bonds in bankruptcy proceedings.
36 The yield to maturity (YTM) is the total return an investor can expect if the bond is held until maturity.
37 High-yield bonds are rated AAA or AA by credit rating agencies.
38 A call provision allows a company to call bonds early but usually requires it to pay bondholders a premium.
39 Debt securities can be either secured or unsecured, depending on whether specific collateral backs them.
40 Debt offerings by corporations are always for terms longer than 10 years.
41 When a company issues public debt, it does not need to disclose financial information to investors.
42 Companies usually prefer issuing debt with restrictive covenants to maximize financial flexibility.
43 In debt financing, principal repayment schedules are always flexible and determined solely by the borrower’s preferences.
44 Syndicated loans help spread the credit risk of lending among several banks or financial institutions.
45 The primary market for debt securities refers to the buying and selling of bonds between investors after issuance.
46 The secondary market for bonds provides liquidity for investors who want to buy or sell debt securities after the initial issuance.
47 A bond’s credit spread reflects the additional yield over a risk-free rate that compensates investors for credit risk.
48 Debt covenants are optional guidelines that companies can choose to follow but are not legally enforceable.
49 A bond with a higher duration is generally more sensitive to changes in interest rates.
50 Debt financing allows a company to raise capital without diluting ownership of existing shareholders.