14: Long-Term Debt and LeasingQUESTIONS
Q14-1 Comment on the following proposition:
The use of floating-rate debt eliminates
interest rate risk (the risk that interest
payment amounts will change in the
future) for both the borrower and the
lender.
Q14-2 What purpose do loan covenants serve in
a debt agreement? What factors should
a manager consider when negotiating
covenants?
Q14-3 List and briefly discuss the key features
that distinguish long-term debt issues
from each other.
Q14-4 Define the following: term loan, balloon
payment and share purchase warrants.
Q14-5 What is a syndicated loan? Why have
these loans proven so popular with
corporate borrowers?
Q14-6 What is a project finance (PF) loan? What
role does a stand-alone company play in
the typical project finance deal?
Q14-7 What is a debenture?
Q14-8 How do sinking funds reduce default risk?
Q14-9 What is a trustee? Why do bondholders
insist that a trustee be included in all
public bond offerings? Why are these less
necessary in private debt placements?
Q14-10 What is a bank-accepted commercial bill?
Q14-11 Why are most corporate bonds callable?
Who benefits from this feature, and what
is the cost of adopting a call provision in
a public bond issue?Q14-12 Why do corporations have their debt
rated? Compare the role played by rating
agencies and a company’s outside auditors.
Q14-13 What does investment grade mean in
the context of corporate bond issues?
How do these bonds differ from junk
bonds, and why have the latter proven so
popular with investors?
Q14-14 What is a Eurobond? Why did these
bonds come into existence? Why do
Eurobond investors like the fact that these
are typically ‘bearer bonds’? What risk
does an investor run from holding bearer
bonds rather than registered bonds?
Q14-15 Explain how uncertainty concerning
future interest rates would affect the
decision to refund a bond issue.Q14-16 Define the following: direct lease; sale-
leaseback arrangement; leveraged lease;
finance lease. What elements must be
included in a lease in order for it to be
considered a finance lease?
Q14-17 How would the availability of floating-rate
debt affect the lease-versus-purchase
decision?
Q14-18 For acquiring an asset, what are the
key advantages of leasing as compared
to borrowing? What are the key
disadvantages of leasing?PROBLEMS
CORPORATE BONDS
P14-1 The initial proceeds per bond, the size of the issue, the initial maturity of the bond and the years
remaining to maturity are shown in the following table for a number of bonds. In each case the
bond has a $100 face value, and the issuing company is in the 40% tax bracket.
Bond Proceeds per bond Size of issue Initial maturity of bond Years remaining to maturity
A $ 98.50 10,000 bonds 20 years 15 years
B 102.50 20,000 25 16
C 100.00 22,500 12 9
D 96.00 5,000 25 15
E 103.50 10,000 30 16