C214: FINANCIAL MANAGEMENT: TOPIC 6 6.1 Debt—Loans and Bonds Introduction

6.1 Debt—Loans and Bonds Introduction
Assessment Section 1
1
1/1
Which of the following is an unsecured loan?

 A car title loan
 A furniture loan
 Correct


A credit card

 A mortgage

As explained in the text, loans that are not backed by specific assets (such as credit cards)
are known as unsecured loans. Loans that are backed by specific assets (such as a home
with a mortgage or a vehicle with a car loan) are known as secured loans.

2
1/1
Suppose that John has a 30-year mortgage on his house. If he fails to make the monthly
payments on time for a while, the lender will take the house away from him to sell it to pay
off the remaining balance of the mortgage. Which type of loan does this represent?

 Unsecured loan
 Correct


Secured loan

 Bond
 Mortgage-backed security

Since the house is used as collateral, this is an example of secured loan.

Unsecured loans are ones that are not backed by a specific assets. A mortgage-backed
security is an investment product that consists of hundreds of individual mortgages. A bond
is an investment security that is issued by government or corporate to raise capital.

3
1/1

,Suppose that Jane has not been able to make any payments on her credit card debts. The
credit card companies sued her to collect her debts. Why can’t the credit card companies
take away her house or her car to pay her debts?

 Because credit cards are secured loans
 Correct


Because credit cards are unsecured loans that have no collateral

 Because credit cards are secured loans but tied to her income
 Because credits cards are unsecured loans that are tied only to her income

Credit cards are an example of unsecured loans. Therefore, credit card companies cannot
take away her house or car to pay her debts.

4
1/1
Why are bonds the primary method for raising capital?

 Coupon payments are flexible from year to year.
 They repay the principal slowly over the life of the loan.
 Correct


They avoid the costs of the intermediary.

 Coupon payments may be skipped in times of financial distress.

Bonds are sold to investors directly and avoid fees paid to intermediary, which is why bonds
are the primary method for raising capital.

Coupon payments on bonds are fixed. The principal for a bond is paid back at the end of the
term. Coupon payments cannot be skipped, or firms will default.


6.2 Types of Bonds
Assessment Section 1
1
1/1
Which type of bond is most likely to be a secured bond?

 Correct


Mortgage bond

,  Debenture
 Muni-bond
 Subordinated debenture

A mortgage bond is a bond that has specific collateral backing. Thus, it is a “secured” bond.

2
1/1
Which type of bond is the lowest priority for repayment in the event of liquidation of a firm?

 Debenture
 Correct


Subordinated debenture

 Foreign bond
 Mortgage bond

Not only are debentures “unsecured” and thus have a lower claim on assets, but in addition,
subordinated debentures are debentures that have a lower claim to the assets of the firm in
the event of firm liquidation than normal debentures by definition of being “subordinated”
to other debentures.

3
1/1
Which type of bond is tax-exempt?

 Correct


Muni-bond

 Foreign bond
 Convertible bond
 Treasury bond

Muni-bonds are tax-exempt. Foreign bonds, convertible bonds, and Treasury bonds are not.

4
1/1
Which type of bond is issued in a currency not native to the country in which it is issued?

 Debenture
 Correct


Eurobond