Corporate Bonds and Yield Analysis

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Questions and Answers

What are the typical types of debt discussed?

Public debt and private debt (correct)

Federal debt and corporate debt

Short-term debt and long-term debt

Bond debt and equity debt

What is the yield to maturity for a zero-coupon bond primarily based on?

The coupon payments of the bond

The bond’s face value only

The market price of the bond (correct)

The interest rates set by the Fed

Under what condition does a bond trade at a premium?

When it has a long time to maturity

When its yield equals the market rate

When its coupon rate exceeds its yield to maturity (correct)

When it is newly issued

What happens to bond prices when interest rates rise?

Bond prices decrease Signup and view all the answers

How are zero-coupon bonds impacted as they approach maturity?

Their price approaches the face value Signup and view all the answers

If a bond's coupon rate equals its yield to maturity, what is its trading status?

Trading at par Signup and view all the answers

Which of the following bonds is most sensitive to fluctuations in interest rates?

Long-term zero-coupon bonds Signup and view all the answers

What is the relationship between changes in market interest rates and bond prices?

Bond prices fall when interest rates rise Signup and view all the answers

What does the bond's yield to maturity (YTM) indicate over its life?

It fluctuates as the bond price converges to face value. Signup and view all the answers

What risk is associated with a bond issuer not making full payments?

Default or credit risk Signup and view all the answers

How is the expected return of a corporate bond calculated?

Risk-free rate plus risk premium Signup and view all the answers

What does the credit spread represent?

The difference between yields on Treasury securities and corporate bonds. Signup and view all the answers

What is a primary factor that causes yield spreads to fluctuate?

Investors' appetite for risk Signup and view all the answers

What was the total existing debt of Hertz Corporation that needed to be refinanced in mid-2005?

$9.1 billion Signup and view all the answers

Who led the private investment group to purchase Hertz Corporation?

Clayton, Dubilier & Rice (CDR) Signup and view all the answers

What is the relationship between yield to maturity and expected cash flows of a bond?

Yield to maturity is greater than expected cash flows. Signup and view all the answers

What happens to the stock when call options are exercised?

The stock is obtained from the secondary market. Signup and view all the answers

How do warrants affect the value of original equity when exercised?

They potentially dilute the value of original equity. Signup and view all the answers

Why can't investment bankers use the Black-Scholes model for warrants?

Warrants involve newly issued shares which complicates valuation. Signup and view all the answers

In comparison to convertibles, warrants generally have:

Shorter maturities and are non-callable. Signup and view all the answers

What characterizes mezzanine financing?

It provides rights to convert to equity in case of default. Signup and view all the answers

What is the typical interest rate range for mezzanine financing?

12 to 20% Signup and view all the answers

Why might firms issue debt with warrants instead of convertibles?

They are typically smaller and riskier companies. Signup and view all the answers

When warrants are not exercised, what remains outstanding?

The accompanying debt. Signup and view all the answers

What is the primary advantage of syndicated loans over traditional bilateral loans?

Syndicated loans are less expensive and more efficient to administer. Signup and view all the answers

What does the term 'default risk' refer to?

It is the likelihood of a borrower’s inability to pay interest or principal on time. Signup and view all the answers

In the context of a syndicated loan, what is meant by 'seniority'?

It indicates where an instrument ranks in priority of payment. Signup and view all the answers

Which of the following best describes 'loss-given-default risk'?

The severity of loss a lender may experience if the borrower defaults. Signup and view all the answers

What are the four primary purposes for which issuers utilize loan proceeds from syndicated loans?

M&A transactions, recapitalization, refinancing debt, and general corporate purposes. Signup and view all the answers

What is the main purpose of the road show during an IPO?

To promote the company and explain the offer price to potential investors. Signup and view all the answers

What trend is observed in the number of IPOs based on market conditions?

The number of IPOs is highly cyclical, increasing in good times and decreasing in bad times. Signup and view all the answers

Which type of syndication involves an arranger guaranteeing the entire commitment?

Underwritten deal Signup and view all the answers

What is a 'club deal' in the context of syndicated loans?

A syndicated loan involving a small number of pre-selected lenders. Signup and view all the answers

What typically happens to IPOs on their first day of trading?

They are often underpriced, leading to a higher price at the end of the trading day. Signup and view all the answers

In a typical payment structure during bankruptcy, who is paid first?

Secured creditors Signup and view all the answers

Who primarily participates in expressing interest during the IPO process?

Institutional investors such as mutual funds and pension funds. Signup and view all the answers

How is the final IPO price determined from the initial price range?

Based on the feedback received during the road show from institutional investors. Signup and view all the answers

What is one key benefit of mezzanine financing for borrowers?

Interest may be deferred, making it more manageable. Signup and view all the answers

In mezzanine financing, what may lenders receive in addition to interest payments?

Warrants for purchasing equity. Signup and view all the answers

How do operating leases differ from finance leases?

Ownership risks are transferred to lessee in finance leases. Signup and view all the answers

Which statement best describes a characteristic of leasing?

Leased assets act as collateral within the leasing contract. Signup and view all the answers

What effect does mezzanine financing have on an investor's potential rate of return?

It may significantly increase the investor's rate of return. Signup and view all the answers

What impact does IFRS 16 have on lease expense treatment?

It replaces straight-line operating lease expense with a depreciation charge. Signup and view all the answers

What is a potential disadvantage of mezzanine financing for owners?

Sacrifice of control and upside potential. Signup and view all the answers

What distinguishes an operating lease from other types of leases?

It is essentially a rental contract for temporary use. Signup and view all the answers

Study Notes

Module Information

Course Title: Corporate Finance
Course Code: WT 2024/25
Instructors: Bamberger / Breitkreuz / Zweigardt
Institution: ISM International School of Management GmbH
Location: Otto-Hahn-Str. 19, 44227 Dortmund, Germany
Website: www.ism.de

Course Content

Students will cover fundamental financing principles and optimizing a corporation's capital structure.
Topics include financing decisions, financial manager roles, corporate goals, agency problems, and corporate governance principles.
Sources of capital will be discussed (debt, bank loans, syndicated loans, private debt, bonds).
Hybrid capital includes preferred stock, convertibles, warrants, mezzanine financing, leasing, and factoring.
Equity financing and the cost of equity, using models like CAPM and dividend growth models, are key aspects.
Capital structure optimization to increase shareholder value by minimizing the weighted average cost of capital (WACC) will be examined.
Theoretical knowledge will be connected to real-world situations.

Course Schedule

Lectures: 18 hours of presence
Self-Study: 42 hours
Total Study load: 60 hours per module
SWS (Semester Work Units): 2 per Module

Examination Details

Written Exam: 90 minutes, 70% of total score, only non-programmable calculators allowed. The original textbook is provided as a reference.
Paper Presentation: 30% of total score, students will prepare and present a corporate finance related topic along with solutions to the exercises in the script.
Assignment Topics and dates will be provided by lecturer

Introduction:
- Corporate Investment and Financing Decisions
- Financial Managers and Opportunity Cost of Capital
- Goals of the Corporation
- Agency Problems and Corporate Governance
Debt:
- Bank Loans
- Syndicated Loan Facilities
- Private Debt
- Bonds
- Cost of Debt
- Exercises
Hybrid Capital:
- Preferred Stock
- Convertibles
- Warrants
- Mezzanine
- Leasing
- Factoring
- Exercises
Equity:
- Stocks
- Raising Equity Capital
- Payout Policy
- Cost of Equity
- Exercises
Capital Structure:
- Target Structure
- Business and Financial Risk
- Optimal Structure
- Theoretical Background
- Empirical Evidence
- Capital Structure in Practice
- Exercises

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Description

Explore essential concepts related to corporate bonds, including yield to maturity, interest rate effects, and credit spreads. This quiz delves into how various factors influence bond pricing and investment strategies. Assess your knowledge of bond types and their associated risks.