Question: 1 Which of the following statements about debt is incorrect

1. Which of the following statements about debt is incorrect?
a. Interest payments and principal payments are fixed commitments.
b. Interest payments are not tax deductible.
c. Bond holders are paid a series of fixed periodic amounts before the maturity date.
d. Debt indenture is a legal document, specifying payment requirements.

2. What is the after-tax cost of debt, assuming T = 30%; before-tax cost of debt = 8%.
a. 3.2%
b. 7.5%
c. 5.6%
d. 6.0%

3. What is the promised yield to issue at PAR, assuming RECOVER = 0, P = 90%, and K = KTB = 2%?
a. 12%
b. 13.33%
c. 11%
d. 10%

4. What is the yield spread, if the promised yield on 30-day CP is 6 percent, the yield on the 91-day T-bill is 3 percent, and the yield on the 30-day T-bill is 1 percent?
a. 2%
b. 3%
c. 4%
d. 5%

5. Which of the following money market instruments could a firm without a very sound credit rating use when seeking financing?
a. Commercial paper
b. Bankers’ acceptance
c. Bill of exchange
d. Both A and B

6. Which of the following investments is considered to be the safest?
a. Commercial paper
b. Corporate bonds
c. Treasury bills
d. Treasury bonds

7. Which of the following sources of financing is likely to provide the most favorable rates for large, highly rated firms seeking short-term financing?
a. Selling commercial paper
b. Selling secured long-term debt
c. Getting an unsecured line of credit from a bank
d. Selling bankers’ acceptances

8. Parts of the indenture that limits certain actions a company takes during the term of the loan to protect the lender’s interests are called
a. Debentures.
b. Negative pledge clauses.
c. Bond ratings.
d. Covenants.

9. Which of the following reflects the negative pledge clause?
a. The issuing firm must make its interest payments.
b. The issuing firm must fulfill its supplies to promised customers.
c. The issuing firm has to maintain a current ratio of more than 2.5.
d. The issuing firm must not issue any new debt with existing assets as collateral.

10. Which of the following statements about lines of credit is false?
a. An operating or demand line of credit is the standard type.
b. A revolver has less stability than an operating line of credit.
c. Prime is the cost base of an operating line of credit and is a floating rate.
d. A revolver is usually at least 364 days.

11. Which of the following ratings is the highest?
a. BB
b. CCC
c. A
d. AA

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