Module 24

Question 1

Covenants benefit a bond issuer by:

Answer 1

agreeing to restrict their actions protects the bondholder, and issuer reduces default risk and borrowing costs

Question 2

Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issue zero-coupon bonds, its debt-to-equity ratio will most likely

Answer 2

rise as the maturity date approaches
The value of the liability for zero-coupon bonds increases as the discount is amortised over time. Furthermore, the amortised interest will reduce earnings at an increasing rate over time as the value of the liability increases.

Question 3

A company selecting the fair value option for a liability with a fixed coupon rate will report a _____ when market interest rates decrease

Answer 3

loss

Question 4

What is the balance sheet value of a bond?

Answer 4

The PV of the bond

Question 5

Under US GAAP, any unamortized debt issuance costs must be:

Answer 5

Written off at the time of redemption and included in the gain or loss on debt extinguishment