Chapter 8

Question 1

Bankruptcy Types and brief description

Answer 1

Chapter 11 (XI)

• Reorganization
• Objective is for the organization to rebound from the bankruptcy

Chapter 7 (VII)

• Liquidation
• Absolute priority of liquidation
  1) Employee wages
  2) IRS
  3) Various creditors
  4) Preferred shareholders
  5) Common shareholders

Question 2

Bond ratings

Answer 2

Standard and Poors
(Investment Grade) (Junk Bonds)
AAA BB or below
AA
A

Moody’s
(Investment Grade) (Junk Bonds)
Aaa Ba or below
Baa

Question 3

Corporate Bonds

Answer 3

Income bond - interest payments are dependent on company profit. Usually sold as part of bankruptcy or low credit.

Convertible - Virtually all bonds are convertible to stock.

Callable - Virtually all bonds are callable by the company.

Serial bonds - usually by municipalities, lots of smaller bonds with differing maturities.

Question 4

Indenture

Answer 4

Contract written by the corporation for a bond sale.

Question 5

Debenture

Answer 5

unsecured debt. Bond holder is a general creditor in a bankruptcy filing.

Question 6

T-note duration vs T-bond duration

Answer 6

T-note = 1-10 years
T-bond = 10-30 years

Question 7

LIBOR

Answer 7

The international interest rate

Question 8

Federal Funds Rate vs Discount Rate

Answer 8

Fed Funds Rate - Banks can borrow from other bank deposits at the federal funds rate. Usually overnight loans. One bank to another.

Discount Rate - Banks can borrow directly from the FED at the discount rate. Discount loans.

Question 9

Short Term Municipal Bonds

BAN, RAN, TAN

Answer 9

BAN (bond anticipation note) - Short term bonds to fund an anticipated project that is not ready for long term funding.

RAN (revenue anticipation note) - The municipality is engaged in building something that will use revenue to pay off the bonds.

TAN (tax anticipation note)

Question 10

Euro Dollar Deposits

Answer 10

Dollar denominated negotiable CD’s at banks located outside of the U.S. usually, usually europe.
- one problem is reporation of dollars at maturity. Cannot take money out of the country issuing the CD.

Question 11

Savings Bonds

• Series EE
• Series i

Answer 11

Series EE - pure discount instrument (no interest). Buy at a lower price than you sell.

Series i - interest rate adjusted over time.