Chapter 9 Flashcards
What is the proper order of liquidation for a corporation at bankruptcy?
Unpaid workers, IRS, secured creditors (bonds), unsecured creditors, preferred stock, and then common stock.
The type of bond where bondholders have a lien on real property is called a __________________.
mortgage bond
What are some examples of rolling stock used to back a bond offering?
Airplanes, trucks, railroad cars
A bond backed by machinery or rolling stock is called a(n) ______________________.
Equipment Trust Bond
True or False: Collateral Trust Bonds are backed by the stock of the issuing corporation.
False. Must be a separate company
Are debentures considered secured or unsecured?
Unsecured. Backed by the issuer’s full faith and credit
Is an income bond appropriate for a client who desires income?
No. Income (adjustment) bonds will only pay interest if the issuer has sufficient income.
If a bond is referred to as trading flat, this means it trades ___________________________.
without accrued interest
The formula for finding conversion ratio is: ______ ÷ ____________
Par ($1,000) / Conversion Price
What is forced conversion?
An issuer calls bonds at a point where the stock is worth more than the bond’s call price.
Name some of the advantages of buying convertible bonds.
Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it’s still a bond).
A corporation that issues convertible bonds is borrowing money at a _______ rate.
lower rate
True or False: A favorable arbitrage situation occurs when a bond is trading at a discount to parity.
True
Accrued interest on corporate bonds is calculated using _____ days in the month and ______ days in the year.
30 days/month, 360 days/year
When do corporate bond trades settle?
T+3 (three business days after trade date)
True or False: Interest paid on corporate bonds is entirely tax-exempt.
False. taxed at federal, state and local levels
What are Eurodollar bonds?
Dollar-denominated bonds issued outside the U.S.
May Eurodollar bonds be issued in the U.S.?
No, and not registered with SEC
May Eurodollar bonds later trade in the U.S.?
yes, 40 days after issued
What bonds are dollar-denominated, U.S. registered, and issued by multinational companies and foreign governments?
Yankee Bonds
An ____________ indenture allows additional bonds to be issued and backed by the same collateral.
open-end
The Trust Indenture Act of 1939 regulates ________________ offerings.
corporate bond. not municipal or federal
Corporate bonds quotes may be found in the ________________.
Yellow Sheets
Money-market securities have a maturity of __________________.
one year or less
Name some of the different types of money-market instruments.
T-Bills, Bankers’ Acceptances (BAs), Commercial Paper, Negotiable CDs
Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $__________.
$100,000
What is a step-down, long-term CD?
A CD that offers an interest rate that’s higher than current rates, with subsequent interest rates paid being lower
What is a step-up, long-term CD?
A CD that offers an interest rate that is lower than current rates, with subsequent interest rates paid being higher
For bondholders, is a closed-end indenture more or less protective than an open-end indenture?
More protective, since the asset backing the bond cannot be diluted
How is interest on corporate bonds treated for tax purposes?
fully taxable
If a bond is converted to stock, what is the investor’s basis?
Same as basis of converted security
Is the conversion of a bond a taxable event?
No, taxed when stock is sold
Define parity.
The value of two investments being equal, even, or the same
A bond convertible at $25 is trading at $1,150, and the stock is trading at $30. Is the bond at parity with the stock?
No, the bond’s parity price is $1,200. The bond can be converted to 40 shares selling at $30, which equals $1,200.
A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?
$60
ABC = $50. ABC’s bond is convertible at $40 and callable at 105. Is the call or conversion and sale more profitable?
Conversion and sale equals $1,250 (25 shares x $50), while the call only provides $1,050.
Will a bond’s conversion price and conversion ratio be adjusted for stock splits or stock dividends?
Yes, due to a bond’s non-dilutive feature
What happens if a bond is convertible at $20 (ratio is 50 shares) and the company issues a 10% stock dividend?
Conversion ratio increases to 55 shares (50 x 10% = extra 5) and the new conversion price would be $18.18 ($1,000 ÷ 55).
