15. Which of the following are generally considered advantages of term loans over publicly issued bonds? a. Lower flotation costs. b. Speed or how long it takes to bring the issue to market. c. Flexibility or the ability to adjust the bond’s terms after it has been issued. d. All of the above. e. Only answers b and c above. 16. Eurodebt is the term used to designate a. Debt sold by a foreign borrower that is denominated in the currency of the country where it is sold. b. European bank loans that are denominated in the new Euro currency. c. Debt that is denominated in a currency that is different than the currency of the country in which it is sold. d. Equity instruments of one country that are sold in another country. e. The certificates that represent ownership in foreign companies that are sold in the United States. 17. An American Depository Receipt (ADR) represents a. Debt sold by a foreign borrower that is denominated in the currency of the country where it is sold. b. Stock of foreign companies that is sold directly to investors in the United States. c. Equity instruments of one country that are sold in another country. d. The certificates that represent ownership in foreign companies that are sold in the United States. e. Certificates representing ownership in stocks of foreign companies that are held in trust by a bank located in the country the stock is traded. 18. Which of the following types of debt protect a bondholder against an increase in interest rates? a. Floating rate debt. b. Bonds that are redeemable (“putable”) at par at the bondholders’ option. c. Bonds with call provisions. d. All of the above. e. Only answers a and b above. 19. Assume the securities are all issued by the same firm. From the investor’s standpoint rank the following securities in order of increasing risk (the number of the least risky security is placed first or to the left in the answer set). (1) Preferred stock. (2) Income bonds. (3) Convertible preferred stock. (4) Mortgage bonds. a. 1 2 3 4 b. 4 1 2 3 c. 4 1 3 2 d. 4 2 1 3 e. 4 2 3 1 20. Companies A and B recently established a new jointly owned subsidiary ABBA Corporation. ABBA now requires $100 million of capital. A and B will supply $40 million of common equity $20 million each. The remaining $60 million will be raised by using some combination of debt and preferred stock. Which of the following statements is most correct? a. The interest rate on the debt would be higher if ABBA uses $60 million of debt and $0 preferred than it would be if ABBA uses $30 million of debt and $30 million of preferred. b. Because 70 percent of preferred stock dividends received are excluded from a corporation’s taxable income (1) most preferred stock is owned by corporations and (2) frequently a company’s bond interest rate is higher than its preferred stock dividend yield. c. If ABBA’s preferred stock were made convertible into its common the preferred would have a lower dividend yield than if the preferred were nonconvertible. d. All of the above statements are true. e. Only answers a and b above are true. 21. A company is planning to raise $1 000 000 to finance a new plant. Which of the following statements is correct? a. If debt is used to raise the million dollars the cost of the debt would be lower if the debt is in the form of a fixed rate bond rather than a floating rate bond. b. If debt is used to raise the million dollars the cost of the debt would be lower if the debt is in the form of a bond rather than a term loan. c. If debt is used to raise the million dollars but $500 000 is raised as a first mortgage bond on the new plant and $500 000 as debentures the interest rate on the first mortgage bond would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds. d. The company would be especially anxious to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future. e. All of the above statements are false.
