Which of the following is not true about junk bonds?
A. Junk bonds are either unrated or rated below investment grade by the credit rating agencies
B. Typically yield about 1-2 percentage points below yields on U.S. Treasury debt of comparable maturities.
C. Junk bonds are commonly used source of “permanent” financing in LBO transactions
During recessions, junk bond default rates often exceed 10%
E. Junk bond default risk on non-investment grade bonds tends to increase the longer the elapsed time since the original issue date of the bonds
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Security provisions and protective covenants are included in loan documents to increase the likelihood that the interest and principal of outstanding loans will be repaid in a timely fashion. Which of the following is not true about security provisions and protective covenants?
A. Security features include the assignment of payments due under a specific contract to the lender.
B. Negative covenants include limits on the amount of dividends that might be paid
C. Limitations on the amount of working capital that the borrower can maintain.
D. Periodically, financial statements must be sent to lenders.
E. Automatic loan repayment acceleration if the borrower is in default on any loans outstanding
Asset based lending is commonly used to finance leveraged buyouts. Which of the following is not true about such financing?
A. The borrower generally pledges tangible assets as collateral.
B. Lenders look at the target firm's assets as their primary protection.
C. Bank loans are secured frequently by receivables and inventory.
D. Loans maturing in more than one year are often referred to as term loans.
E. The target firm's most liquid assets generally secure longer-term loans.
Which of the following is generally not true about leveraged buyouts?
A. Borrowed funds are used to pay for all or most of the purchase price, perhaps as much as 90%
B. Tangible assets of the target firm are often used as collateral for loans.
C. Bank loans are often secured by the target firm's intangible assets
D. Secured debt is often referred to as junk bond financing.
E. C and D only
Which of the following is not true of a forward triangular cash merger?
A. It is considered by the IRS as a purchase of target assets.
B. It is generally followed by a liquidation of the target firm.
C. Target shareholders must recognize a gain or loss as if they had sold their shares.
D. The target's tax attributes carry over to the buyer.
E. Taxes are paid by the target firm on any gain on the sale of its assets and again by shareholders who receive a liquidating dividend.
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