Ch. 18

Question 1

Diffences between a corporate bond and common stock

Answer 1

1. Common stock reps a claim of ownership on the corp, bonds rep creditors claim on the corp
2. Promised cash flows to bond holders are stated in advance when bond is issued. Dividends can change
3. Most Corp condo are callable

Question 2

Biggest investor in corporate bonds

Answer 2

Insurance companies

Question 3

Unsecured debt

Answer 3

Bonds, notes, or other debt issued with no specific collateral pledged as security for the bond issue.

Question 4

Indenture summary

Answer 4

Description of the contractual terms of a new bond issue included in a bonds prospectus

Question 5

Prospectus

Answer 5

Document prepared as part of a security offering detailing information about a company’s financial position, it’s operations, and investment plans

Question 6

Private placement

Answer 6

A new bond issue sold to one or more parties in private transactions not available to the public

Question 7

Senior debentures

Answer 7

Bonds that have a higher claim on the firm’s assets than other bonds

Question 8

Subordinate debentures

Answer 8

Bonds that have a claim on the firm’s assets after those with a higher claim have been satisfied

Question 9

Negative pledge Claus

Answer 9

Bod indenture provision that prohibits new debt from ending issued with seniority over an existing issue

Question 10

Bond refunding

Answer 10

Process of calling an outstanding bond issue and refinancing it with a new bond issue

Question 11

Features commonly used to restrict an issuers call privilege

Answer 11

1 callable bonds have deferred call provision that provides a call protection period

2. A call price often includes a call premium over par value.
3. Come indentures specifically prohibit an issuer from calling outstanding bonds for the purpose of refunding at a lower coupon rate

Question 12

Make whole call provision

Answer 12

Bond holders receive approx what the bond is worth if it is called. Allows borrowers or pay off debt early

Question 13

Put bonds

Answer 13

Bonds that can be sold back to the issuer at a pre specified price on any of a sequence of pre specified dates.

Question 14

Convertible bonds

Answer 14

Bonds that holders can exchange for common stock according to a pre specified ratio

Question 15

Conversion ratio

Answer 15

Number of common stock shares acquired in exchange for each converted bond

Question 16

Conversion price

Answer 16

Par value of a convertible bond divided by its conversion ratio

Question 17

Conversion value

Answer 17

Price per share of stock x conversion ratio

Question 18

In the Money bond

Answer 18

When conversion value of a bond is greater than call price

Question 19

Intrinsic bond value

Answer 19

Price below which a convertible bond can’t fall, equal to value of a comparable non coverts or bond

Question 20

Exchangeable bonds

Answer 20

Bonds that ban be converted into common stoic shares of a company other than the issue

Question 21

Term bonds

Answer 21

Bonds with a single maturity date

Question 22

Serial bonds

Answer 22

Bonds issued with a regular sequence of maturity dates

Question 23

Sinking fund

Answer 23

An account used to provide for scheduled redemptions of outstanding bonds

Question 24

Protective convenanrs

Answer 24

Rested irons in a bond indenture destined to protect bond holder

Question 25

Adjustable rate bonds

Answer 25

Securities that pay coupons that change according to a prespecifided rule

Question 26

Face value

Answer 26

Value of a bill, note, or bond at its maturity when a payment of principal is paid

Question 27

Discount basis

Answer 27

Method of selling a treasury bill at a discount from face value

Question 28

Imputed interest

Answer 28

The interest paid on a treasury bill determined by the size of its discount from face value

Question 29

Strips

Answer 29

Treasury program allowing investors to buy individual coupon and principal payments from a whole treasury note or npbond.

Question 30

Zero coupon bond

Answer 30

A note or bond paying a single cash flow at maturity

Question 31

Bid ask spread

Answer 31

Difference between a dealers ask price and bid price

Question 32

Corporate bonds

Answer 32

Debt of corporation to its bond holders, reps a promise to pay to its bond holders a fixed sum of money at a future maturity date along with periodic interest payments