FIN 3403 EXAM 2 REVIEW QUESTIONS WITH
VERIFIED SOLUTIONS
What is debt capital?
Capital a business gets by taking out a loan.
What are characteristics of debt?
Money owed to a second party
Must be repaid in a timely manor
Comes with interest
What is a syndicated loan?
Loan from a group of lenders and is set up and administered by one or many banks.
Explain key points about revolving credit, swingline and term loans. Why is each used by
companies?
Revolving credit is basically a credit card. Companies use them for day-to-day operations.
Swingline loan is a large loan used to cover possible shortfalls from other debt commitments.
Companies use this because it gives them access to large sums of money quickly.
Term loan- is a specific amount loaned and has repayment schedule and floating interest rate.
Small companies use this to purchase fixed assets.
Securitizations
taking a large sum of assets and combining it into one asset. This makes it easier for the issuer to
divide it into smaller shares. In turn this makes it more accessible for smaller businesses to buy.
Lease
Legal document that describes the terms of you the lessee use of the building. The benefits for
this document is that it keeps the lessee from doing something the lessor would not allow.
Indenture
Legal contract between bond issuer and the bondholder. It specifies all the important features of
the bond like maturity date, timing of interest payment method of interest calculation and
convertible features.
Par value
is the face value of the bond. Usually $100 or $1,000 dollars
Face amount
Nominal value of a security stated by the issuer.
Coupon
, Interest rate of a bond. Typically semiannual.
Coupon rate
Same as coupon. Interest rate of a bond.
Security
Interchangeable and negotiable financial instrument that represents some time of financial value.
Protective covenants
Formal debt agreement that says certain things will or will not be carried out. Put in place to
protect the lender from the borrower defaulting on their obligations.
Seniority
is the order of repayment in the event of sale or bankruptcy.
Sinking fund
A means of repaying funds that were borrowed through a bond issue. If the interest rate of the
bond goes down, this allows the company to replace the bonds with lower yielding bonds.
Call provision
When the issuer of a bond calls it back to repurchase it. Happens when the company can issue
bonds at a lower interest rate.
Put provision
Condition that allows bondholders to resell bond back to issuer. Establishes a floor price for the
bond.
Debenture
Not backed by any assets. Only by the general reputation of the issuer. T-bonds are an example.
Note
Investment that has a longer term that a bill, but shorter that a bond. U.s treasury issues some that
are in $100 increments and come in terms of 2,3,5,7 and 10 years.
Compare and contrast public bonds and private placements
Public bonds are open to the public where private placement is sold to a large bank, mutual fund
or insurance company.
Private placement is not registered with the Securities and Exchange Commission.
Both are a way of raising capital.
How are ratings used with respect to bonds?
VERIFIED SOLUTIONS
What is debt capital?
Capital a business gets by taking out a loan.
What are characteristics of debt?
Money owed to a second party
Must be repaid in a timely manor
Comes with interest
What is a syndicated loan?
Loan from a group of lenders and is set up and administered by one or many banks.
Explain key points about revolving credit, swingline and term loans. Why is each used by
companies?
Revolving credit is basically a credit card. Companies use them for day-to-day operations.
Swingline loan is a large loan used to cover possible shortfalls from other debt commitments.
Companies use this because it gives them access to large sums of money quickly.
Term loan- is a specific amount loaned and has repayment schedule and floating interest rate.
Small companies use this to purchase fixed assets.
Securitizations
taking a large sum of assets and combining it into one asset. This makes it easier for the issuer to
divide it into smaller shares. In turn this makes it more accessible for smaller businesses to buy.
Lease
Legal document that describes the terms of you the lessee use of the building. The benefits for
this document is that it keeps the lessee from doing something the lessor would not allow.
Indenture
Legal contract between bond issuer and the bondholder. It specifies all the important features of
the bond like maturity date, timing of interest payment method of interest calculation and
convertible features.
Par value
is the face value of the bond. Usually $100 or $1,000 dollars
Face amount
Nominal value of a security stated by the issuer.
Coupon
, Interest rate of a bond. Typically semiannual.
Coupon rate
Same as coupon. Interest rate of a bond.
Security
Interchangeable and negotiable financial instrument that represents some time of financial value.
Protective covenants
Formal debt agreement that says certain things will or will not be carried out. Put in place to
protect the lender from the borrower defaulting on their obligations.
Seniority
is the order of repayment in the event of sale or bankruptcy.
Sinking fund
A means of repaying funds that were borrowed through a bond issue. If the interest rate of the
bond goes down, this allows the company to replace the bonds with lower yielding bonds.
Call provision
When the issuer of a bond calls it back to repurchase it. Happens when the company can issue
bonds at a lower interest rate.
Put provision
Condition that allows bondholders to resell bond back to issuer. Establishes a floor price for the
bond.
Debenture
Not backed by any assets. Only by the general reputation of the issuer. T-bonds are an example.
Note
Investment that has a longer term that a bill, but shorter that a bond. U.s treasury issues some that
are in $100 increments and come in terms of 2,3,5,7 and 10 years.
Compare and contrast public bonds and private placements
Public bonds are open to the public where private placement is sold to a large bank, mutual fund
or insurance company.
Private placement is not registered with the Securities and Exchange Commission.
Both are a way of raising capital.
How are ratings used with respect to bonds?
