Chapter 9 Flashcards

You may prefer our related Brainscape-certified flashcards:
1
Q

What is the proper order of liquidation for a corporation at bankruptcy?

A

Unpaid workers, IRS, secured creditors (bonds), unsecured creditors, preferred stock, and then common stock.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

The type of bond where bondholders have a lien on real property is called a __________________.

A

mortgage bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are some examples of rolling stock used to back a bond offering?

A

Airplanes, trucks, railroad cars

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

A bond backed by machinery or rolling stock is called a(n) ______________________.

A

Equipment Trust Bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

True or False: Collateral Trust Bonds are backed by the stock of the issuing corporation.

A

False. Must be a separate company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Are debentures considered secured or unsecured?

A

Unsecured. Backed by the issuer’s full faith and credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Is an income bond appropriate for a client who desires income?

A

No. Income (adjustment) bonds will only pay interest if the issuer has sufficient income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

If a bond is referred to as trading flat, this means it trades ___________________________.

A

without accrued interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

The formula for finding conversion ratio is: ______ ÷ ____________

A

Par ($1,000) / Conversion Price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is forced conversion?

A

An issuer calls bonds at a point where the stock is worth more than the bond’s call price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Name some of the advantages of buying convertible bonds.

A

Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it’s still a bond).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

A corporation that issues convertible bonds is borrowing money at a _______ rate.

A

lower rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

True or False: A favorable arbitrage situation occurs when a bond is trading at a discount to parity.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Accrued interest on corporate bonds is calculated using _____ days in the month and ______ days in the year.

A

30 days/month, 360 days/year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

When do corporate bond trades settle?

A

T+3 (three business days after trade date)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

True or False: Interest paid on corporate bonds is entirely tax-exempt.

A

False. taxed at federal, state and local levels

17
Q

What are Eurodollar bonds?

A

Dollar-denominated bonds issued outside the U.S.

18
Q

May Eurodollar bonds be issued in the U.S.?

A

No, and not registered with SEC

19
Q

May Eurodollar bonds later trade in the U.S.?

A

yes, 40 days after issued

20
Q

What bonds are dollar-denominated, U.S. registered, and issued by multinational companies and foreign governments?

A

Yankee Bonds

21
Q

An ____________ indenture allows additional bonds to be issued and backed by the same collateral.

A

open-end

22
Q

The Trust Indenture Act of 1939 regulates ________________ offerings.

A

corporate bond. not municipal or federal

23
Q

Corporate bonds quotes may be found in the ________________.

A

Yellow Sheets

24
Q

Money-market securities have a maturity of __________________.

A

one year or less

25
Q

Name some of the different types of money-market instruments.

A

T-Bills, Bankers’ Acceptances (BAs), Commercial Paper, Negotiable CDs

26
Q

Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $__________.

A

$100,000

27
Q

What is a step-down, long-term CD?

A

A CD that offers an interest rate that’s higher than current rates, with subsequent interest rates paid being lower

28
Q

What is a step-up, long-term CD?

A

A CD that offers an interest rate that is lower than current rates, with subsequent interest rates paid being higher

29
Q

For bondholders, is a closed-end indenture more or less protective than an open-end indenture?

A

More protective, since the asset backing the bond cannot be diluted

30
Q

How is interest on corporate bonds treated for tax purposes?

A

fully taxable

31
Q

If a bond is converted to stock, what is the investor’s basis?

A

Same as basis of converted security

32
Q

Is the conversion of a bond a taxable event?

A

No, taxed when stock is sold

33
Q

Define parity.

A

The value of two investments being equal, even, or the same

34
Q

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?

A

No, the bond’s parity price is $1,200. The bond can be converted to 40 shares selling at $30, which equals $1,200.

35
Q

A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?

A

$60

36
Q

ABC = $50. ABC’s bond is convertible at $40 and callable at 105. Is the call or conversion and sale more profitable?

A

Conversion and sale equals $1,250 (25 shares x $50), while the call only provides $1,050.

37
Q

Will a bond’s conversion price and conversion ratio be adjusted for stock splits or stock dividends?

A

Yes, due to a bond’s non-dilutive feature

38
Q

What happens if a bond is convertible at $20 (ratio is 50 shares) and the company issues a 10% stock dividend?

A

Conversion ratio increases to 55 shares (50 x 10% = extra 5) and the new conversion price would be $18.18 ($1,000 ÷ 55).