QUESTION: 122 Topic 3: Part 2 Sec Three (101 to 203)

The best reason corporation issue Eurobonds rather than domestic bonds is that

These bonds are denominated in the currency of the country in which they are issued.
These bonds are normally a less expensive form of financing because of the absence of government regulation
Foreign buyers more readily accept the issues of both large and small U.S corporations than do domestic investors
Eurobonds carry no foreign exchange risk

Answer(s): B

Explanation:

International bonds are of two types: foreign bonds and Eurobonds. Foreign bonds are denominated in the currency of the nation in which they are sold. Eurobonds are denominated in a currency other than that of the nation where they are sold. Foreign bonds issued in the United States and denominated in dollars must be registered with the SEC, but such extensive disclosure is not required in most European nations. Thus, an American company may elect to issue Eurobonds denominated in dollars in a foreign nation because of the convenience of not having to comply with governmental registration requirements.

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QUESTION: 123 Topic 3: Part 2 Sec Three (101 to 203)

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Which one of the following statements is true when comparing bond financing alternatives?

A bond with a call provision typically has a lower yield to maturity than a similar bond without a call provision.
A convertible bond must be converted to common stock prior to its maturity.
A call provision is generally considered detrimental to the investor.
A call premium requires the investor to pay an amount greater than par at the time of purchase.

Answer(s): C

Explanation:

A callable bond can be recalled by the issuer prior to maturity. A call provision is detrimental to the investor because the issuer can recall the bond when market interest rates decline. It is usually exercised only when a company wishes to refinance high- interest debt.

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QUESTION: 124 Topic 3: Part 2 Sec Three (101 to 203)

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All of the following may reduce the coupon rate on a bond issued at par except a

Sinking fund
Call provision.
Change in rating from Aa to Aaa.
Conversion option.

Answer(s): B

Explanation:

A bond issued at par may carry a lower coupon rate than other similar bonds in the market if it has some feature that makes it more attractive to investors. For example, a sinking fund reduces default risk. Hence, investors may require a lower risk premium and be willing to accept a lower coupon rate. Other features attractive to investors include covenants in the bond indenture that restrict risky undertakings by the issuer and an option to convert the debt instruments to equity securities. The opportunity to profit from appreciation of the firm's stock justifies a lower coupon rate. An improvement in a bond's rating from Aa to Aaa (the highest possible) also justifies reduction in the risk premium and a lower coupon rate. However, a call provision is usually undesirable to investors. The issuer may take advantage of a decline in interest rates to recall the bond and stop paying interest before maturity.

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QUESTION: 125 Topic 3: Part 2 Sec Three (101 to 203)

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A firm has $3 million in total assets and $1.65 million in equity. How much of its $500,000 capital budget should be debt- financed to retain the same debt-equity ratio?

$50,000
$225,000
$275,000
$450,000

Answer(s): B

Explanation:

The firm's total assets are $3 million and total equity is $1.65 million. Thus, liabilities are $1.35 million ($3 million - $1.65 million). The current debt-equity ratio is 1.35 to 1.65, or 45% ($1.35 million ÷ $3 million) to 55% ($1.65 million ÷ $3 million). Thus, to maintain this ratio, 45% of all new investment should come from debt financing. Multiplying 45% times the $500,000 capital budget results in a need for $225,000 in debt financing.

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Free CMA Exam Braindumps (page: 142)

QUESTION: 122 Topic 3: Part 2 Sec Three (101 to 203)

Explanation:

QUESTION: 123 Topic 3: Part 2 Sec Three (101 to 203)

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QUESTION: 124 Topic 3: Part 2 Sec Three (101 to 203)

Explanation:

QUESTION: 125 Topic 3: Part 2 Sec Three (101 to 203)

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