Charles Darwin University ACCOUNTING Week 11 Quiz 1 1)You are contemplating leasing a new car

Question

Charles Darwin University

a. $331

b. $299

c. $413

d. $199

A bond where the investor is granted the right to receive payment in shares of underlying stock rather than in cash is called a
1. junk bond
2. zero-coupon bond
3. convertible bond
4. bearer bond

Callable bonds may not be called immediately after a rate decrease because
1. the call price if often at a premium above par value.
2. the call provision is often deferred for several years after the bond's issue.
3. recalling the old bonds and issuing new ones involves non-trivial flotation costs.
4. all of the above.
A call feature
1. allows the bondholder to redeem the bond prior to maturity.
2. allows the bond issuer to redeem the bond prior to maturity.
3. allows the bondholder to increase the coupon rate on the bond at specific points in time over the bond's life.
4. forces the bond issuer to buy back the bond prior to maturity at the bondholder's discretion.

An important consideration in the lease versus purchase decision is
1. the loss of the depreciation tax shield if leased.
2. the benefit of the lease payment as a tax deduction.
3. the effect on financial structure and future funding needs.
4. all of the above.

The feature in a bond indenture that requires systematic retirement of the bond issue is a
1. planned call provision.
2. sinking fund provision.
3. forced conversion provision.
4. mandated redemption provision.

The legal document stating the conditions under which a bond is issued is called the
1. indenture
2. trustee
3. covenant
4. call provision

$83,724 and an annual payment of $13,965 is to be made, what will the allocation of principal and interest be?

1. $9,000 interest, $4,965 principal
2. $7,535 interest, $6,430 principal
3. $6,430 interest, $7,535 principal
4. $4,965 interest, $9,000 principal

A contractual clause that requires a borrower to pay taxes and other liabilities when due is an example of a
1. positive covenant
2. negative covenant
3. lien

Quiz Company has a 12 year lease, with payments of $250,000 made at the beginning of each year. If no purchase option exists, and the company is in the 40% tax bracket, what is the annual after-tax cash outflow on the lease?

a. $416,667

b. $250,000

c. $150,000

d. $100,000

All else equal, the higher the call premium,
1. the smaller the drop in rates necessary for a call to be beneficial.
2. the larger the drop in rates necessary for a call to be beneficial.
3. the more likely any rate drop will lead to a call.
4. none of the above; the call premium does not affect the call decision.

You are contemplating leasing a new car. The monthly lease payments (to be made at the end of each months) are $299 for 36 months. At the end of the lease you have the option of purchasing the car for $17,800. If you could buy the car today for $22,500, what is the implicit interest on the lease?

a. 9.942%

b. 8.285%

c. 2.345%

d. 7.852%

A balloon payment is
1. payment made on circus debt.
2. a large front-end debt payment, followed by smaller payments.
3. a large lump-sum payment at maturity of a debt.
4. none of the above.

Suppose a firm is asked to pledge collateral for a term loan. Which of the following is likely to be least acceptable to the lender?
1. a rare book collection owned by the company.
2. the firm's inventory of industrial chemicals.
3. the firm's real estate holding.
4. securities held by the firm for investment.

How do project finance (PF) loans differ from other syndicated loans?
1. PF loans are guaranteed by the borrower, while other syndicated loans are not.
2. PF loans are issued to special stand-alone companies whose sole purpose is the

construction and operation of a single project.

1. PF loans are issued in multiple currencies, while most other syndicated loans are issued in a single currency.
2. All of the above are true.

Bonds that received investment-grade ratings when first issued but later fell to junk status are known as:
1. disgraced stars.
2. shamed debt.
3. fallen angels.
4. dead wood.

Contract terms that specify things a borrower "must" do are referred to as
1. instructive covenants
2. informative covenants
3. negative covenants
4. positive covenants

The yield curve's typical shape suggests
1. short term debt will carry higher interest rates than long term debt.
2. short term debt will carry about the same rates as long term debt.
3. short term debt will carry lower rates than long term debt.
4. nothing about the differences in rates due to maturity difference.

An unsecured bond that only creditworthy firms can issue is called
1. mortgage bond
2. collateral trust bond
3. debentures
4. junk bond

Booyah Company has a callable bond issue, with 55,000 bonds with $1000 par outstanding. If the call price is $1125 per bond, and Booyah's tax rate is 35%, what is the after-tax cost of calling the bonds?

a. $10,576,925

b. $2,406,250

c. $6,875,000

d. $4,468,750