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