Chapter 2 - Corporate And Municipal Debt

Question 1

What kind of bond does not have the owners name on it?

Answer 1

Bearer bonds

Question 2

What is principal only registration?

Answer 2

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

Question 3

What is a fully registered bond?

Answer 3

Bonds as You typically think of them - you receive semiannual payments and principal at the end but you don’t have to clip coupons

Question 4

What is par value for corporate bonds?

Answer 4

$1000

Question 5

How are corporate bonds priced?

Answer 5

As a percentage of par into fractions of a percent

Question 6

Is the yield to maturity for a premium bond higher or lower than a discount bond?

Answer 6

Lower. If the price is higher, the yield is lower

Question 7

What happens if a corporation defaults on their secured bonds that they issued?

Answer 7

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

Question 8

What are three examples of secured bonds that corporations may issue, and what are they backed by?

Answer 8

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

Question 9

Unsecured bonds are also known as…?

Answer 9

Debentures

Question 10

What are three kinds of unsecured bonds?

Answer 10

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

Question 11

What does “phantom income” describe?

Answer 11

The fact that the federal government taxes the annual appreciation of zero-coupon bonds

Question 12

What is the formula for determining the number of shares an investor receives when exercising the convertible feature on the convertible bond?

Answer 12

Number of shares = par/ conversion price

Question 13

Given the number of shares for a bond conversion has already been determined, how does one calculate the parity price?

Answer 13

Parity price = current market price of the convertible bond / #of shares

Question 14

Are interest payments made by corporations on their bonds tax deductible?

Answer 14

Yes

Question 15

What does the trust indenture act of 1939 do?

Answer 15

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

Question 16

What is the difference between open-end and close-end indenture?

Answer 16

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

Question 17

What is a Eurobond?

Answer 17

A bond that is issued in the domestic currency of the issuer but in a foreign country

Question 18

What is a Eurodollar bond?

Answer 18

A bond that is issued in dollars but not in the issuers’ country nor in the US.

Question 19

What is a Yankee bond?

Answer 19

A bond issued by a foreign company in US dollars to US investors

Question 20

What is the process of refunding corporate debt?

Answer 20

When a company issues new bonds to pay off the principal of their outstanding bonds

Question 21

General obligation (municipal) bonds issued by the state are backed by what two revenue streams?

Answer 21

Income taxes and sales taxes

Question 22

General obligation bonds issued by a LOCAL government are backed by what revenue stream?

Answer 22

Property taxes

Question 23

Industrial revenue bonds primarily benefit who?

Answer 23

Private companies, since the proceeds from the issuance of the bond go towards paying for equipment or a facility for the company

Question 24

What makes special assessment bonds special? ( who do they benefit)

Answer 24

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

Question 25

What is a double-barrel bond?

Answer 25

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

Question 26

Why are New Housing authority and Public Housing authority bonds issued?

Answer 26

They are issued to build low-income housing

Question 27

How are NHA and PHA bonds similar to double-barrel bonds? Why are they ultimately not double-barrel bonds?

Answer 27

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

Question 28

How do you calculate tax-equivalent yield?

Answer 28

= tax-free yield (100% - Federal tax bracket)