Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 15 Debt Financing
15.1 Corporate Debt
1) The chief advantage of debt financing over financing through raising equity capital is
that the former does not dilute the current owner's share of the business.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) A bond that makes payments in a certain currency contains the risk of holding that
currency and so is priced according to the yields of similar bonds in that currency.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Private debt cannot be in the form of bonds.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) By definition, a preferred stock is a form of debt security.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
1
Copyright © 2015 Pearson Education, Inc.
,5) Which of the following is usually a form of public debt?
A) a preferred stock
B) a bank loan
C) a bond issue
D) a revolving line of credit
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
6) Which of the following is NOT an advantage of private debt over public debt?
A) It is liquid.
B) It need not be registered with the U.S. Securities and Exchange Commission.
C) It has to have interest and principal payments made upon it.
D) It does not dilute the ownership of a firm.
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) Which of the following terms best describes a loan where a larger line of credit or lower
interest rate has been obtained by providing collateral to back that loan?
A) a term loan
B) a revolving line of credit
C) an asset-backed line of credit
D) a private placement
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) Which of the following is an advantage of a public bond issue over private placement?
A) It can be tailored to a particular situation.
B) It is less costly to issue.
C) It does not need to be registered with the SEC.
D) It is freely tradable on the bond market.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
9) In terms of public offerings of bonds, what is an indenture?
A) a list of the duties of a trust company representing the bondholders' interests
B) a memorandum that must be produced to describe the details of a bond offering
C) a formal contract that specifies a firm's obligations to the bondholders
D) a schedule of the fees charged by an underwriting company
Answer: C
Diff: 1 Var: 1
2
Copyright © 2015 Pearson Education, Inc.
,Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) In terms of public offerings of bonds, what is a prospectus?
A) a list of the duties of a trust company representing the bondholders' interests
B) a memorandum that must be produced to describe the details of a bond offering
C) a formal contract that specifies a firm's obligations to the bondholders
D) a schedule of the fees charged by an underwriting company
Answer: B
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) Smithfield Enterprises issues debt with a maturity of 7 years. In the case of bankruptcy,
holders of this debt may only claim those assets of the firm that are not already pledged as
collateral on other debt. Which of the following best describes this type of corporate debt?
A) a note
B) a mortgage bond
C) an asset-backed bond
D) unsecured debt
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
Copyright © 2015 Pearson Education, Inc.
, 12) Gepps Cross Industries issues debt with a maturity of 25 years. In the case of
bankruptcy, holders of this debt may only claim those assets of the firm that are not already
pledged as collateral on other debt. Which of the following best describes this type of
corporate debt?
A) a note
B) a debenture
C) an asset-backed bond
D) unsecured debt
Answer: B
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy,
holders of this debt may claim the property held by Athelstone Realty. Which of the
following best describes this type of corporate debt?
A) a note
B) a debenture
C) a mortgage bond
D) an asset-backed bond
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) Clearview Corporation, a company that deals mainly with the financing and distribution
of music, issues debt with a maturity of 15 years. In the case of bankruptcy, holders of this
debt will have claim to the intellectual property of Clearview. Which of the following best
describes this type of corporate debt?
A) a note
B) a debenture
C) a mortgage bond
D) an asset-backed bond
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4
Copyright © 2015 Pearson Education, Inc.
Chapter 15 Debt Financing
15.1 Corporate Debt
1) The chief advantage of debt financing over financing through raising equity capital is
that the former does not dilute the current owner's share of the business.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) A bond that makes payments in a certain currency contains the risk of holding that
currency and so is priced according to the yields of similar bonds in that currency.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Private debt cannot be in the form of bonds.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) By definition, a preferred stock is a form of debt security.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
1
Copyright © 2015 Pearson Education, Inc.
,5) Which of the following is usually a form of public debt?
A) a preferred stock
B) a bank loan
C) a bond issue
D) a revolving line of credit
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
6) Which of the following is NOT an advantage of private debt over public debt?
A) It is liquid.
B) It need not be registered with the U.S. Securities and Exchange Commission.
C) It has to have interest and principal payments made upon it.
D) It does not dilute the ownership of a firm.
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) Which of the following terms best describes a loan where a larger line of credit or lower
interest rate has been obtained by providing collateral to back that loan?
A) a term loan
B) a revolving line of credit
C) an asset-backed line of credit
D) a private placement
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) Which of the following is an advantage of a public bond issue over private placement?
A) It can be tailored to a particular situation.
B) It is less costly to issue.
C) It does not need to be registered with the SEC.
D) It is freely tradable on the bond market.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
9) In terms of public offerings of bonds, what is an indenture?
A) a list of the duties of a trust company representing the bondholders' interests
B) a memorandum that must be produced to describe the details of a bond offering
C) a formal contract that specifies a firm's obligations to the bondholders
D) a schedule of the fees charged by an underwriting company
Answer: C
Diff: 1 Var: 1
2
Copyright © 2015 Pearson Education, Inc.
,Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) In terms of public offerings of bonds, what is a prospectus?
A) a list of the duties of a trust company representing the bondholders' interests
B) a memorandum that must be produced to describe the details of a bond offering
C) a formal contract that specifies a firm's obligations to the bondholders
D) a schedule of the fees charged by an underwriting company
Answer: B
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) Smithfield Enterprises issues debt with a maturity of 7 years. In the case of bankruptcy,
holders of this debt may only claim those assets of the firm that are not already pledged as
collateral on other debt. Which of the following best describes this type of corporate debt?
A) a note
B) a mortgage bond
C) an asset-backed bond
D) unsecured debt
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
Copyright © 2015 Pearson Education, Inc.
, 12) Gepps Cross Industries issues debt with a maturity of 25 years. In the case of
bankruptcy, holders of this debt may only claim those assets of the firm that are not already
pledged as collateral on other debt. Which of the following best describes this type of
corporate debt?
A) a note
B) a debenture
C) an asset-backed bond
D) unsecured debt
Answer: B
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy,
holders of this debt may claim the property held by Athelstone Realty. Which of the
following best describes this type of corporate debt?
A) a note
B) a debenture
C) a mortgage bond
D) an asset-backed bond
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) Clearview Corporation, a company that deals mainly with the financing and distribution
of music, issues debt with a maturity of 15 years. In the case of bankruptcy, holders of this
debt will have claim to the intellectual property of Clearview. Which of the following best
describes this type of corporate debt?
A) a note
B) a debenture
C) a mortgage bond
D) an asset-backed bond
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4
Copyright © 2015 Pearson Education, Inc.
