Chapter 2 - Corporate And Municipal Debt Flashcards
What kind of bond does not have the owners name on it?
Bearer bonds
What is principal only registration?
A bond that has been registered as principal-only does have the owner’s name on it. This person is entitled to receive the principal at maturity but must still get the coupons clipped to receive semi-annual interest payments
What is a fully registered bond?
Bonds as You typically think of them - you receive semiannual payments and principal at the end but you don’t have to clip coupons
What is par value for corporate bonds?
$1000
How are corporate bonds priced?
As a percentage of par into fractions of a percent
Is the yield to maturity for a premium bond higher or lower than a discount bond?
Lower. If the price is higher, the yield is lower
What happens if a corporation defaults on their secured bonds that they issued?
The investors will claim the assets that the corporation put up as collateral, and the trustee will attempt to sell the assets to pay Off investors
What are three examples of secured bonds that corporations may issue, and what are they backed by?
Mortgage bonds- backed by property,
Equipment trust certificates- backed by a pledge of large, equipment like airlines for example)
Collateral trust certificates - backed by a pledge of Securities that the corporation owns
Unsecured bonds are also known as…?
Debentures
What are three kinds of unsecured bonds?
Subordinated debentures - junior claim to assets and not backed by anything (like all unsecured bonds)
Income/adjustment bonds- usually issued when the company is doing very poorly financially, at a deep discount to par with a high interest rate
Zero-coupon bonds- no coupon payments
What does “phantom income” describe?
The fact that the federal government taxes the annual appreciation of zero-coupon bonds
What is the formula for determining the number of shares an investor receives when exercising the convertible feature on the convertible bond?
Number of shares = par/ conversion price
Given the number of shares for a bond conversion has already been determined, how does one calculate the parity price?
Parity price = current market price of the convertible bond / #of shares
Are interest payments made by corporations on their bonds tax deductible?
Yes
What does the trust indenture act of 1939 do?
When a corporation issues more than $ 5,000,000, it must also issue a trust indenture, which is a contract between the corporation and the trustee, who acts on behalf of all band investors makes sure the corporation isn’t up to any funny business
What is the difference between open-end and close-end indenture?
When bonds are issued with open-end indenture, the company can issue bonds that are secured by the same collateral as previous issues but have an equal claim
Bonds that are issued with closed end indenture prevent the company from issuing bonds that have equal claim on previous issues’ collateral
What is a Eurobond?
A bond that is issued in the domestic currency of the issuer but in a foreign country
What is a Eurodollar bond?
A bond that is issued in dollars but not in the issuers’ country nor in the US.
What is a Yankee bond?
A bond issued by a foreign company in US dollars to US investors
What is the process of refunding corporate debt?
When a company issues new bonds to pay off the principal of their outstanding bonds
General obligation (municipal) bonds issued by the state are backed by what two revenue streams?
Income taxes and sales taxes
General obligation bonds issued by a LOCAL government are backed by what revenue stream?
Property taxes
Industrial revenue bonds primarily benefit who?
Private companies, since the proceeds from the issuance of the bond go towards paying for equipment or a facility for the company
What makes special assessment bonds special? ( who do they benefit)
They are special because the special tax That is raised is only levied on the geographical area that is deemed to benefit from the project that the bond is paying for
What is a double-barrel bond?
A bond issued to pay for a revenue generating facility and is initially supported by the revenue generated by the facility
If that is not enough then tax revenue is used to pay off the bond
Why are New Housing authority and Public Housing authority bonds issued?
They are issued to build low-income housing
How are NHA and PHA bonds similar to double-barrel bonds? Why are they ultimately not double-barrel bonds?
They are similar because they are initially paid for by rental income generatio by the low-income housing- however it the rental income is not enough the Federal government covers it, not the municipality
How do you calculate tax-equivalent yield?
= tax-free yield (100% - Federal tax bracket)
