Topic 10-2

Question 1

One consequence of debt financing is the possibility of bankruptcy. Events preceding bankruptcy are referred to as __________.

Answer 1

financial distresss

Question 2

Securities issued by corporations may be classified roughly as _________ and ________.

Answer 2

equity securities

debt securities

Question 3

The person or firm making the loan is called the _________ or _________.

Answer 3

creditor

lender

Question 4

The corporation borrowing the money is called the ________ or _________.

Answer 4

debtor

borrower

Question 5

From a financial point of view, the main differences between Debt and Equity are the following:

1. Debt is not an ownership interest in the firm. Creditors generally do not have voting power.
2. The corporation’s payment of interest on debt is considered a _____________ and is fully tax-deductible.
3. Unpaid debt is a liability of the firm. If it is not paid, the creditors can legally calim the assets of the firm. This action can result in liquidation or reorganisation, two of the possible consequences of bankruptcy. Thus, one of the costs of issuing debt is the possibilty of financial failure. This problem does not arise when equity is issued.

Answer 5

cost of doing business

Question 6

__________ : written agreement between the corporation and the lender detailing the terms of the debt issue

Answer 6

Debenture trust deed

Question 7

___________ is payable semi-annually on 1 July and 1 January of each year to the person in whose name the debenture is registered at the close of business on 15 June or 15 December, respectivly

Answer 7

Interest

Question 8

__________ : account managed by the debenture trustee for early debenture redemption

Answer 8

Sinking fund

Question 9

_____________ allows the company to repurchase or “ call” part or all of the debt issue at stated prices over a specific period. Corporate debt is usually callable

Answer 9

A call provision

Question 10

Generally, __________ is above the debenture’s face value. The difference beteen the call price and the face value is the call- premium

Answer 10

the call price

Question 11

_________ are not usually operative during the first part of the debt’s life. This makes the call provision less of a worry for debtholders int he debt’s early years. For example, a company might be prohibited from calling its debts for the first 10 years. This is a deferred call

Answer 11

Call provisions

Question 12

_________ part of the trust deed limiting certain transactions that can be taken during the term of the loan, usually to protect the lender’s interest

Answer 12

Protective covenant:

Question 13

__________ : a debenture that makes no coupon payments, thus initially priced at a deep discount.

Answer 13

Zero coupon debenture

Question 14

____________ the process of replacing all or part of an issue of outstanding debentures

Answer 14

Debenture refunding:

Question 15

Most corporate debt is _______

Answer 15

callable

Question 16

Most _________ issued are cumulative, irredeemable and non-participating.

Answer 16

preference shares

Question 17

___________ : Registra of company records ownership of each note; payment is made directly to the owener of record

Answer 17

Registered form

Question 18

__________ : a security whose ownership is not registered by the issuer and possession of the physical document is primary evidence of ownership.

Answer 18

Bearer security

Question 19

Cost of call provision = __________

Answer 19

Value of call position