Chapter 10

Multiple Choice Questions

1. In relation to long-term financing, a fully drawn advance is a:
A.a bank loan advanced for a precise period for an unspecified purpose.
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.
D.A term loan where the bank does not pay out the loan until after a specified
period.
2. If a company wishes to finance a printing press with a five-year life, it
would be advisable to finance it with a/an:
A.overdraft.
B.bank bill.
C.commercial paper.
D.fully drawn advance.
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:
A.fully drawn advance.
B.term loan.
C.interest-only loan.
D.deferred payment loan.
4. Long-term debt can be categorised as financing with an initial maturity:
A.over 180 days and less than a year.
B.between 1 and 3 years.
C. over 1 year.
D.between 3 and 12 years.
5. In relation to long-term financing, an amortised loan involves:
A.periodic payments principal and interest repaid at maturity.
B.periodic interest and principal repayments when positive cash flows begin.
C.periodic interest payments and principal repaid at maturity.
D.periodic equal repayments of interest and principal throughout the term.
6.Which of the following statements best describes a fully amortised term
loan?
A.A fully amortised term loan is an interest-only loan with principal repayable
at maturity.
B. A fully amortised term loan has periodic repayments, including
interest and principal reduction.
C.Interest repayments on a fully amortised term loan are fixed for the period of
the loan.
D.A fully amortised term loan is a ‘low-start' loan whose repayments are
increased over the term.
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 advances.
B.amortised loans.
C. interest-only loans.
D.credit foncier loans.
8. The fees that represent bank costs in considering loan applications and
document preparation are called:
A.commitment fees.
B.establishment fees.
C.line fees.
D.service fees.
9. The fees charged by banks onto the total amount of the loan facility and
are normally payable in advance are:
A.commitment fees.
B.establishment fees.
C. line fees.
D.service fees.
10.Compared with an amortised loan, a deferred repayment loan involves:
A.periodic interest and principal repayments.
B.periodic interest and principal repayments when positive cash flows begin.
C.periodic interest payments and principal repaid at maturity.
D.periodic principal payments and interest repaid at maturity.
11. The main longer-term finance provided by financial intermediaries is/are:
A.certificates of deposit.
B.commercial paper.
C.corporate bonds.
D.term loans.
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.Debentures
B.Mortgage bonds
C. Term loans
D.Capital leases
13. A term loan is:
A.a bill issued to finance a specific trade transaction.
B.a bill issued to raise funds for general purposes.
C.a flexible funding arrangement for companies.
D.when funds are borrowed for a set period.
14. Banks usually charge a/an for any portion of a term loan that has
not been drawn down.
A.establishment fee
B.service fee
C. commitment fee
D.term fee
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.establishment fee.
B.commitment fee.
C.line fee.
D.service fee.
16. All of the following affect interest rates charged on term loans except:
A.default risk.
B.the maturity.
C. the repayment schedule.
D.refinancing risk.
17.Which of the following rates serves as a reference interest rate in Australia?
A.BBSW
B.LIBOR
C.USCP
D.SIBOR
18.If the interest rates on shorter term-to-maturity deposits are higher than
those of longer term deposits, it is likely that the costs for the longer term
financing for a company are:
A.higher.
B.lower.
C.the same.
D.not related.
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.changes in the bank bill swap rate.
B.short-term market illiquidity.
C. short-term credit fluctuations.
D.all of the given answers.
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.the credit risk of the company.
B.the term of the loan.
C. the term structure of interest rates.
D.the loan repayment schedule.
21.Compared with a company with a strong financial rating, a company with
a weaker rating is likely to be charged:
A.LIBOR.
B.LIBOR plus 10 basis points.
C.LIBOR plus 25 basis points.
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.loan agreements.
B.loan covenants.
C.loan terms.
D.loan actions.
23. When a loan agreement contains actions for a borrowing company to
comply with, such as supplying financial statements, these are called:
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?
A.Limitations on additional borrowing
B.Constraints on disposal of non-current assets
C. Minimum levels of cash flow
D.Supplying the creditors with annual, audited financial statements
25.Which of the following is NOT an example of negative debt covenants?
A.Specifying what activities the business can enter into
B.Restrictions on amalgamation with other companies
C. Supplying creditors with annual audited reports
D.Limiting annual dividend payments to shareholders
26.Which of the following is NOT an example of a positive debt covenant?
A.The company has to maintain a minimum level of working capital.
B.The company is restricted from doing mergers and acquisitions.
C.The company has to supply periodic cash flow statements to the lender.
D.The company has to supply annual audited statements to the lender.
27.The purpose of debt covenants that require the firm to rank any
subsequent borrowing below the original loan is to:
A.limit the amount of fixed-interest payments.
B.make sure that any cash restraints do not affect current obligations.
C. protect the lender in their claim over pledged assets in the event of failure.
D.protect the shareholders' claims over assets.
28.The purpose of debt covenants that ban borrowers from entering into
certain types of leases is to:
A.limit the amount of fixed-interest payments.
B.prevent the firm from supplying too many cars to employees.
C.protect the lender in their claim over pledged assets in the event of failure.
D.protect the shareholders' claims over assets.
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.increase the interest rate.
B.demand immediate repayment of the loan.
C.alter the term of the agreement, such as by reducing the maturity date.
D.insist the company hand over its assets.
30. A key difference between a positive covenant and a negative covenant is,
for a:
A.positive covenant, a company must comply with restrictions on its financial
structure.
B.negative covenant, a company must maintain a minimum level of working
capital.
C.negative covenant, a company must provide annual audited financial
statements.
D.positive covenant, a company must maintain a minimum debt to gross cash
flow ratio.
31.Which of the following is a positive loan covenant?
A.A minimum working capital ratio
B.A maximum gearing ratio
C.A maximum level of unsecured debt
D.All of the given answers
32.A is provided to a business by a financial institution and has a
maturity of more than one year.
A.debenture
B.mortgage bond
C. term loan
D.zero-coupon bond
33. The type of loan where a company pays periodic interest payments
over its term and the principal at maturity to a lender is called:
A.amortised.
B. a debit foncier.
C. deferred payment.

D. interest-only.

34. All of the following financial institutions arrange mortgage finance for
companies except:
A.commercial banks.
B.insurance companies.
C.building societies.
D.investment banks.
35.The lender who registers a mortgage as a security for a loan is the:
A.mortgagor.
B.mortgagee.
C.mortgager.
D.mortgage.
36.The borrower who issues a mortgage with real property as collateral to the
bank is the:
A.mortgagor.
B.mortgagee.
C.mortgager.
D.mortgage.
37.A company borrows $75 000 from a bank, to be amortised over five years
at 8.5% per annum. The annual instalment is:
A.$12 657.43
B.$16 275.00
C. $19 032.43
D.none of the given answers
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.$1861.11
B.$2143.15
C.$7274.21
D.$26 386.61
39.In Australia which of the following long-term debt markets are the largest?
A.The corporate bond market
B.The mortgage market
C.The unsecured note market
D.The leasing market
40.When illiquid assets are transformed into new asset-backed securities, the
 process is called:
A.conversion.
B.liquidisation.
C. securitisation.
D.transformation.
41.Many years ago, banks:
A.could make mortgage loans to households but not to businesses.
B.could make loans to businesses but not make mortgage loans.
C. held most loans on their books until they were paid off.
D.repackaged and sold most loans to investors.
42.The value of a bond is the present value of the:
A.dividends and coupon payments.
B.dividends and maturity value.
C.maturity value.
D.coupon payments and maturity value.
43.The coupon interest of a bond is calculated based on its , and is paid
periodically.
A.market value
B.book value
C. face value
D.surrender value
44.Which of the following types of bond generally has the lowest interest rate?
A.Treasury bonds
B.Corporate BAA bonds
C.Semi-government bonds
D.Corporate ABB bonds
45.Corporations and governments use long-term debt financing called:
A.retained earnings.
B.bonds.
C.shares.
D.preferred stock.
46.Bonds are:
A.a type of equity financing.
B. a short-term financial arrangement with periodic interest payments.
C.a debt instrument issued at discount with interest and principal repaid at
maturity.
D.long-term debt instruments.
47.Compared with unsecured notes, a debenture can offer:
A.a fixed charge over the issuer's already pledged assets.
B.a floating charge over the issuer's unpledged assets.
C.less chance of sale before maturity, as they are not usually traded.
D.provisions for interest rate changes.
48. An unsecured note differs from a debenture in that it has:
A.as security only unpledged assets.
B.as security a floating charge over assets.
C.as security a fixed charge over assets.
D.no supporting security.
49. A debt security supported or secured by mortgage assets held by a bank is
a/an:
A.debenture.
B.income bond.
C. mortgage bond.
D.fixed-charge debenture.
50. All of the following are examples of long-term debt instruments except:
A.term loans.
B.debentures.
C. promissory notes.
D.bonds.
51.In relation to an issue of bonds, the method where the bond offer is made
only to institutions that deal regularly in securities is called:
A.public issue.
B.family issue.
C. private placement.
D.institutional issue.
52. A debenture is a/an:
A.unsecured bond that only best-name corporate borrowers can issue.
B.legal document stating the restrictive covenants on the loan.
C. bond secured by a charge over the assets of the issuer.
D.corporate bond with a credit enhancement.
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.Subordinated debt
B.Unsecured notes
C.Commercial mortgage
D.Debenture
54.When a company defaults on interest payments for a debenture, the
floating charge is said to
a fixed charge.
A.transform into
B.crystallise into
C.originate as
D.adjust to
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.floating-charge debenture holders.
B.fixed-charge debenture holders.
C.unsecured note holders.
D.the shareholders.
56. A holder of has generally no charge over the issuing company's
 unpledged assets.
A.a debenture
B. a subordinated debenture
C.a floating charge debenture
D.an unsecured note
57.Many securities contain an option that is included as part of a bond or
preferred share, which allows the holder to convert the security into a
predetermined number of shares. This feature is called a:
A.conversion feature.
B.put option.
C.repurchase agreement.
D.warrant.
58.Which type of financial claim is not satisfied until those of the creditors
holding certain senior debts have been fully satisfied?
A.Mortgage bonds
B.Unsecured notes
C. Subordinated debentures
D.Deferred interest debentures
59. If a bond investor pays $1030 for an annual coupon bond with a face
value of $1000, it follows that:
A.the coupon rate is higher than the current market yield.
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?
A.Most bonds pay interest annually.
B.The yield on a bond for a bond investor is generally a fixed rate.
C. Bond prices vary inversely with interest rates.
D.Bond coupon rates vary with interest rates.
61. The value of a bond is also called its par value. Bonds with a current
price greater than their par value sell at , while bonds with a current price
less than their par value sell at .
A.premium; face value; a discount
B.discount; a premium; face value
C. face; a premium; a discount
D.premium; a reduction; a discount
62.What happens to the coupon rate of a $100 face value bond that pays $7
coupon annually, if market interest rates change from 8 to 9%? The coupon
rate:
A.increases to 8%.
B.increases to 9%.
C. remains at 7%.
D.increases to nearly 9%.
63.The market price of previously issued bonds is often different from face
value because:
A.the coupon rate has altered.
B.the maturity date has altered.
C. the market rate of interest has altered.
D.previously issued bonds sell at a discount to new bonds.
64. The price of a bond with a fixed coupon has a/an relationship with
the market interest rates.
A.constant
B.linear
C.varying
D.inverse
65. When the coupon rate of a bond is above the current market interest
rates, a bond will sell at:
A.discount.
B.its original value.
C. premium.
D.face value.
66. When the coupon rate of a bond is below the current market interest
rates, a bond will sell at:
A.discount.
B.its original value.
C.premium.
D.face value.
67.When the coupon rate of a bond is equal to the current market interest
rates, a bond will sell at:
A.discount.
B.its original value.
C.premium.
D.book value.
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.bond A will have the greater change in price.
B.bond B will have the greater change in price.
C.the price of the bonds will not alter.
D.the price of the bonds will change by the same amount.
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.bond A will have the greater change in price.
B.bond B will have the greater change in price.
C.the price of the bonds will not alter.
D.the price of the bonds will change by the same amount.
70.Which of the following statements is correct?
A.Short-term debt instruments are more volatile in price than long-term
 instruments.
B.Coupon rates are generally fixed when the bond is issued.
C.Bond prices and market interest rates move together.
D.The higher the coupon of a bond, the lower its price.
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.$920.15
B.$1000
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 similar risk are currently earning 11%, what is
the current price of the bond?
A.$915.39
B.$1000
C.$1089.72
D.None of the given answers
73. All of the following features of a bond are fixed except the:
A.coupon rate.
B.face value.
C. price.
D.interest payments.
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?
A.$1000
B.$1045.84
C. $1046.44
D.$1079.45
75.When the market interest rates decline after a bond is issued, the:
A.face value of the bond decreases.
B.market value of the bond increases.
C.market value of the bond decreases.
D.bond price is at a discount.
76.When market interest rates increase after a bond is issued, the:
A.face value of the bond increases.
B.market value of the bond increases.
C. market value of the bond decreases.
D.bond price is at a premium.
77.If a bond's price is at a premium to face value, it has a:
A.yield below its coupon rate of interest.
B.yield equal to its coupon rate of interest.
C.yield above its coupon rate.
D.decreased risk premium.
78.If a bond's price is at a discount to face value, it has a:
A.yield below its coupon rate of interest.
B.yield equal to its coupon rate of interest.
C. yield above its coupon rate.
D.decreased risk premium.
79.A bond's price will be when the coupon rate is higher than current
market interest rates; when the coupon rate is equal to the current
market interest rates; and when the coupon rate is less than the current
market interest rates.
A.at a premium; equal to the face value; at a discount
B.at a premium; at a discount; equal to the face value
C.at a discount; at a premium; equal to the face value
D.equal to the face value; at a discount; at a premium
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.$320 149.12
B.$401 613.48
C. $410 644.78
D.$688 638.80
81.Which of the following statements about ‘net' finance leases is incorrect?
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.
D.The lessor's role is one of financing, while the lessee makes regular rental
payments.
82. A/An lease is a short-term arrangement where the lessee agrees to
make periodic payments to the lessor for the right to use the asset. This
arrangement usually contains only minor or no penalties for cancellation of
the lease.
A.financial
B.operating lease
C.direct
D.leveraged
83. The type of lease where the costs of ownership and operation are borne
by the lessee, who agrees to make a residual payment at the end of the lease
period, is a/an:
A.direct lease.
B.financial lease.
C.operating lease.
D.leveraged lease.
84.When a finance company purchases assets with its own funds and leases
them to a lessee for a negotiated long-term period this is called a/an:
A.direct lease.
B.sale and lease-back.
C.operating lease.
D.leveraged lease.
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.An equity lease
B.A leveraged lease
C.A sale and leveraged lease
D.A financial lease
86. A direct finance lease is best described as a/an:
A.operating lease.
B.sale and leaseback arrangement.
C.full-service lease.
D.leveraged lease
87.Compared with missing an interest payment on debt, the penalties for
missing a financial lease payment are:
A.less severe.
B.the same.
C.more severe.
D.not related.
88.Which of the following is NOT an advantage of leasing from the lessee's
viewpoint?
A.100% financing
B.The company's capital is not involved
C.Flexible repayment scheduling
D.With a net lease, costs of ownership remain with the lessee
89. Which of the following is NOT an advantage of leasing from the lessor's
perspective (compared with offering a straight loan)?
A.Leasing has a relatively low default risk.
B.Administration costs may be lower for a lease than for a straight loan.
C.The return to the lessor may be higher than for a straight loan.
D.The lessor may use the funds for other investment opportunities.
90.For what type of lease does the lessee provide a significant part of the
funds to purchase the asset, often losing the advantage of leveraged leasing,
while a financial institution provides the remainder?
A.A capital lease
B.An equity lease
C.A sale and leveraged lease
D.A financial lease
True / False Questions
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. TRUE/FALSE
92. A term loan with interest and principal repayments that are amortised
over the term are sometimes called credit foncier loans. TRUE/FALSE
93. A long-term loan will generally attract a higher rate of interest
than a short-term loan. TRUE/FALSE
94. Banks often calculate a prime rate lending as they can adjust it more
quickly than other reference money market rates. TRUE/FALSE
95.Apart from an interest charge on funds advanced to a borrower, a bank
will charge a service fee for considering the loan application and loan
preparation. TRUE/FALSE
96.A positive loan covenant can state that a company must maintain a
minimum level of working capital. TRUE/FALSE
97.The inclusion of covenants in a term loan is designed to protect the
borrower from taking on too much 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
100. The terms subordinated debt and unsecured note are interchanged as
they are both corporate bonds that have identical features. TRUE/FALSE