Long Term Debt and Lease Financing

1) Corporate debt has increased rapidly since World War II.

2) The greater use of debt by corporations since the late 1960s is best shown by the declining interest coverage ratio.

3) The main causes for the increase in corporate debt in America is rapid business expansion, inflationary impacts, and inadequate internally-raised funds.

4) The term debenture refers to long-term, unsecured debt.

5) The document that outlines the covenants and duties existing between bondholders and the issuing corporation is called an indenture.

6) Bonds that offers the most security to the bondholder are senior mortgage bonds.

7) An indenture is the contract between a corporation and a trustee acting for bondholders.

8) A debenture represents unsecured debt.

9) Common stock is the lowest in priority of claims against a bankrupt firm.

10) Many bonds have some orderly, preplanned, alternative system of repayment. Examples are sinking funds and serial bonds.

11) A serial bond repayment plan involves a series of installments to retire the debt over the life of the issue.

12) Senior secured debt, subordinated debentures, and common stock best represents the hierarchy of creditor and stockholder claims.

13) A “subordinated debenture” is an unsecured bond with an inferior claim on assets in the event of liquidation.

14) Debentures, preferred stock, and common stock properly represents the hierarchy of creditor and stockholder claims.

15) A call provision, which allows the corporation to force an early maturity on a bond issue, usually contains the following characteristics: most bonds must be outstanding at least 5 years before being called. After the call date, the call premium tends to decline over time. The corporation will pay a premium over par for the bonds.

17) A bond with a call provision would generally be sold to yield more than a noncallable bond of similar character.

18) A call feature allows the corporation to redeem the bond before the maturity date.

19) The “call” provision on some bonds allows the corporation to redeem the bonds earlier than maturity but usually for a premium over the par value.

20) A conversion feature allows the bondholder to convert the bond to common stock.

21) The dollar interest received divided by the market price of the bond is called the current yield.

22) Prices of existing bonds move up as market interest rates move down.

23) Dividend yield is not a form of yield on a bond.

24) With regard to interest rates and bond prices it can be said that a 1% change in interest rates will cause a greater change in long-term bond prices than short-term prices.

25) Short-term bond yields are generally more volatile than long-term bond yields whereas long-term bond prices are generally more volatile than short-term bond prices.

26) Moody’s Investor Service is a leader in rating bonds.

27) The higher the bond rating the lower the interest rate on a bond.

28) Investors consider yield to maturity to be the most important measure of bond returns.

29) A bond’s rating can depend on the corporation’s debt-equity ratio, the corporation’s size, and the ability of the firm to make interest payments.

30) Aa2 bond is rated lower than a Aa1 bond.

31) If investors are pessimistic about the future, the spread between yields on high-grade and low-grade bonds increases.

32) Bond refunding occurs when interest rates in the market are sufficiently less than the coupon rate on the old bond.

33) The underwriting cost on a new bond issue is an immediate outflow and deferred tax write-off.

34) The higher the tax rate, the lower the net underwriting cost on the new bond issue.

35) Call premium, cost savings in lower interest rates, and underwriting costs of new issue represent a tax implication in the bond refunding.

36) The after-tax cost of new debt discount rate is used in the net present value of the refunding decision.

37) Characteristics of a zero-coupon bond: It doesn’t pay interest. It is sold at a deep discount from face value. It provides a means for corporations to take annual deductions without current cash outflow.

38) From the corporate issuer viewpoint, a zero-coupon bond allows the firm to defer payment obligations.

39) Zero-coupon bonds provide no annual interest payments.

40) Floating rate bonds have interest payments, have the capacity for constant market value.nts based on some overall market rate, and usually have very broad limits that interest payments cannot exceed.

41) An advantage of floating rate bonds to investors are their prices tend to be highly stable regardless of interest rate changes.

42) In general, how often are floating rate bonds adjusted to meet the market demands quarterly.

43) Floating rate bonds are most likely to be popular with investors when it is anticipated that interest rates will go up.

44) A Eurobond is a bond payable in the borrower’s currency but sold outside the borrower’s country.

45) Disclosure requirements for a Eurobond are less demanding than those of the Securities and Exchange Commission or other domestic regulatory agencies.

46) The disadvantages of debt to the corporation include: interest and principal payments must be met, indenture agreements may place burdensome restrictions on the firm, and too much debt may depress the firm’s stock price.

47) Financial advantages to companies using debt are that debt is paid back in “cheaper” dollars during inflationary periods, cost of debt can lower the weighted overall cost of capital, and interest payments are tax deductible.

48) Leasing is a popular form of financing because lease provisions are generally less restrictive than a bond indenture, the lessor likely has experience with the equipment being leased, and the lessee may not be financially able to purchase.

49) Advantages of leasing are that a lease obligation may be substantially less restrictive than the provisions of a bond indenture, there may be no down payment as in a purchase, and the negative effects of obsolescence may be eliminated.

50) A lease to qualify as a capital leasemeans the lease contains a bargain purchase price at the end of the lease.

51) An operating lease is usually short-term and is often cancelable at the option of the lessee.

52) Long-term financing leases currently show up on the balance sheet.

53) Bonds ratings are significantly based on the times interest earned ratio, debt-equity ratio, and current ratio.

54) An investor would consider investing in a zero coupon bond because of the ability to lock in to multiplier of investment.

55) The benefits of debt to the corporation include tax-deductible interest payments, fixed obligation, and generally a lower overall cost than equity.

56) Many companies try to maintain investment grade status due to the significant yield differential when rated with a junk-bond status.

57) The essence of the treatment of long-term, non-cancelable leases is the same as if the company had borrowed the money and bought the asset.

58) Leasing land provides a tax advantage to the lessee in that lease payments are tax deductible, while there is no deduction for depreciation for a landowner.

59) A floating rate bond has a reasonably stable price but actual interest payments received change often over the life of the bond.

60) The payment of a call premium may generally be taken as an immediate tax write-off.