Debt – I FiniteQuest

Debt – I

Debt instruments, Cost of debt, Leverage, and Capital structure. They challenge the understanding of key concepts such as YTM, debt covenants, and the impact of inflation on debt.

1 / 10

Debt restructuring is a process where

A company liquidates its assets to repay its debts.

A company negotiates new terms with its creditors to alter the original debt agreement.

A company issues new equity to reduce its debt.

A company refinances its debt at a higher interest rate.

2 / 10

What is convertible debt?

A type of loan that can be converted into another currency

A debt instrument that can be converted into equity at a future date.

A type of bond that converts to a fixed rate after a certain period.

Debt that automatically repays itself over time.

3 / 10

Which of the following is TRUE regarding the impact of inflation on debt?

Inflation reduces the real value of fixed-interest debt.

Inflation increases the real value of debt repayments.

Inflation has no impact on the real value of debt.

Inflation increases the nominal value of debt.

4 / 10

Debt covenants are designed to:

Protect the interests of equity shareholders

Restrict the company’s dividend payouts.

Protect the lender by imposing certain restrictions on the borrower.

Ensure that the company maximizes its leverage.

5 / 10

A company issues a bond with a face value of $1,000, an annual coupon rate of 5%, and a maturity of 10 years. If the bond is currently trading at $900, what is the approximate yield to maturity?

5.00%

5.56%

6.17%

7.22%

6 / 10

If a company has $100,000 in debt with an interest rate of 8% and the corporate tax rate is 30%, what is the value of the tax shield?

$2,400

$3,200

$8,000

$24,000

7 / 10

Which of the following is TRUE about financial leverage?

Higher leverage decreases the company’s financial risk.

Higher leverage increases the company’s financial risk.

Leverage only affects operational risk, not financial risk

Leverage has no impact on a company’s earnings volatility.

8 / 10

If a company has $200 million in debt and $400 million in equity, what is its debt-to-equity ratio?

0.5

1.5

2.0

0.33

9 / 10

A company issues bonds with a face value of $1,000 and an annual coupon of $50. If the bonds are trading at $950, what is the company’s cost of debt before taxes?

4.8%

5.26%

6.31%

5.00%

10 / 10

Which of the following is NOT considered a debt instrument?

Bonds

Debentures

Preferred Stock

Commercial Paper

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