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Unit 2 > Corporate bonds > Flashcards

Corporate bonds Flashcards

1
Q

Six examples of institutional investors

A
  1. mutual funds
  2. hedge funds
  3. pension funds
  4. banks and credit unions
  5. insurance companies
  6. investment advisors
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2
Q

When would a corporation issue commercial paper?

A

For short-term funds

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3
Q

What would a corporation issue for short-term funds/

A

Commercial paper

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4
Q

What type of interest paying coupon is commerical paper?

A

zero coupon

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5
Q

What is the usual par value of commerical paper?

A

100,000 or more

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6
Q

What is the mamximum maturity days for commercial paper?

A

270 days

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7
Q

When are corporate debt securities exempt from SEC registration?

A

When they are issued with 270 days or less to maturity

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8
Q

What does it mean when a corporate debt is “funded”?

A

When a corporate issuer has access to their borrowed funds for an extended period

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9
Q

What is a debenture?

A

A long term, unsecured corporate bond

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10
Q

What is the riskiness relationship between debentrues and secured bonds?

A

Debtentures are more risky

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11
Q

What makes debentures risky?

A

There is no valuable asset the bondholders can access should the corporation go bankrupt

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12
Q

What does it mean when bond is naked?

A

When it is unsecured and not backed by any pledged collateral

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13
Q

What makes something a guaranteed bond?

A

Any bond with backing from a third party to pay interest and/or prinicipal in case of default

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14
Q

What is an example of when a third party backs a guaranteed bond?

A

When a subsidiary utilizes its parent company as a “co-signer”

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15
Q

What are two typical third parties?

A
  1. parent companies
  2. insurance companies
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16
Q

Are guaranteed bonds secured or unsecured and why?

A

Unsecured because there is no collateral associated

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17
Q

What two options do corporate bondholders suing for bankruptcy have?

A
  1. force issuer to liquidate company
  2. Allow company to “restructure” their debt
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18
Q

Are income bonds risky and why?

A

Yes because they are risky because most times after bankruptcy a company does not recover

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19
Q

When would a corporation issue an income bond?

A

When the bondholders believe the issuer can restructure and become profitable again

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20
Q

When/how often do income bonds pay interest?

A

Only when the issuer meets the earnings test

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21
Q

What happens to initial bonds before the company issues new income bonds?

A

They are destroyed

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22
Q

What type (secured/unsecured) are mortage bonds?

A

Secured

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23
Q

Why would a corporation issue mortgage bonds?

A

To lower their overall cost of borrowing money.

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24
Q

Why does issuing mortgage bonds lower the overall cost of them borrowing money?

A

Because they are not as risky and therefore don’t need to give as high of yields

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25
Q

Which are more risky, second mortage bond investors or first and why?

A

Second mortgage bond holders are more risky because they are paid second after liquidation

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26
Q

What are equipment trust certificates?

A

They are a type of secured bond backed by the liquidation of its equipment

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27
Q

What type of company commonly issues utility bonds?

A

Utility companies

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28
Q

In what entry format are ETCs issued?

A

Serial format

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29
Q

What is required/how much money to fully back an offering?

A

Collateral must be worth at least the combined value of future interest payments and principal payments

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30
Q

Why are Equipment Trust Certificates issued in serial format?

A

So they can synchronize debt repayment with the equipment’s expected decline in value

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31
Q

What are collateral trust certificates?

A

Bonds secured by marketable assets owned by corporation

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32
Q

What are two types of marketable assets trust certificates can be backed by?

A
  1. Investment portfolio
  2. Subsidiary of their company
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33
Q

What two things determine the number of stock shares received if a bond is converted?

A
  1. Conversion ratio
  2. Conversion price
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34
Q

What does stock parity price describe?

A

The equivalent stock cost if a bond is bought and converted

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35
Q

What does parity pricing help determine?

A

When conversion is profitable

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36
Q

What is the Stock parity price formula?

A

bond market price / conversion ratio

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37
Q

Where do corporate bonds almost exclusively trade?

A

Almost exclusively in over the counter markets

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38
Q

What two investment strategies do corporate bond holders use?

A
  1. Buy low and sell high
  2. Simply buy and hold to maturity
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39
Q

What two things do market prices depend on for corporate bonds, but what is ultimate?

A
  1. Depend on interest rates
  2. Demand for a corporate bond is ultimate
40
Q

What should you look for when identifying a corporate bond quote?

A

A big number followed by a fraction

41
Q

What fraction are corporate bonds quoted in?

A

Eighths

42
Q

Method to turn a fractional corporate bond into a price?

A

Fraction - boot - scoot

43
Q

What are the three steps to fraction-boot-scoot

A
  1. Calculate the fraction
  2. Boot the decimal back to the big number
  3. Scoot the decimal once over to the right
44
Q

What are bond points?

A

A way to refer to percentage of par, Every bond point is worth 10 dollars

45
Q

What is the ‘s’ in corporate bond quotes?

A

The coupon interest rate

46
Q

What is the M’ in corporate bond quotes?

A

the maturity year

47
Q

What does the M represent in corporate bond quotes?

A

1000 dollar par

48
Q

What are Certificates of Deposit?

A

they are similar to bonds but only issued by banks

49
Q

What are three types of banking products?

A
  1. Certificats of deposit
  2. Jumbo negotiable CDs
  3. Banker’s acceptances
50
Q

Where are Regular CDs only bought?

A

THrough the issuing bank

51
Q

What are Jumbo CDs also called?

A

Negotiable CDs

52
Q

Where are Jumbo CDs traded?

A

Secondary market

53
Q

What is the minimum denomination for jumbo cds?

A

hundred thousand dollars

54
Q

What is the only long term corporate debt security?

A

Debenture

55
Q

Who determines the credit rating of a guaranteed bond?

A

The parent company

56
Q

Does FINRA rate bonds?

A

no

57
Q

What is a common form of collateral for a CTC?

A

Subsidiary

58
Q

A debenture is a ___-term, ___- secured corporate bond

A

Long term- unsecured

59
Q

What type of company is most likely to issue a mortgage bond?

A

Utility Companies

60
Q

Which type of corporate bond is NOT issued in term format?

A

ETCs

61
Q

What does stock parity price tell you?

A

Tells you whether the stock trading value is profitable to convert the bond or not

62
Q

What does the bond parity price tell you?

A

Tells you whether the bond price is valuable to buy and convert

63
Q

Conversion cost per share formula

A

bond price/conversion ratio

64
Q

Stock parity price formula

A

Bond market price/conversion ratio

65
Q

Bond parity price formula

A

stock price x conversion ratio

66
Q

When are mezzanine debt holders paid out in event of liquidation?

A

after senior debt holders but before stockholders

67
Q

Who usually issues mezanine debt?

A

Smaller corporations and start ups

68
Q

What size yield do mezzanine debts have?

A

High yields

69
Q

What does PIK stand for?

A

Payment in kind

70
Q

How do companies pay PIK interest instead of semi-anually in cash?

A

They add “payable interest” to the loan principle, to the par.

71
Q

What term debt is mezzanine debt?

A

Long-term corporate debt

72
Q

What three additional features may mezzanine debt offer?

A
  1. PIK interest
  2. Warrants
  3. Conversion features
73
Q

When is PIK interest reedeemable?

A

Only at redemption or maturity?

74
Q

Who has to approve convetible bond issuance?

A

Majority approval from common stockholders

75
Q

wHat’s another name for junior unsecured creditors?

A

Subordinated debenture holders

76
Q

What form are treasury bills quoted in?

A

Yield form

77
Q

What form are general obligation bonds quoted in?

A

Yield formWhat

78
Q

form are treasury bonds quoted in?

A

32nds

79
Q

Why is a banker’s acceptance a win win?

A

Because the organization selling the check can get access to their liquidity early and the organization buying the check can get

80
Q

Why are banker’s acceptances considered money markets?

A

Because they are short term in nature

81
Q

What are the SEC registration time exemptions for bankers acceptances?

A

issued with 270 days or less to maturity

82
Q

What term are jumbo CDs? When do they mature?

A

Short term 1 year or less

83
Q

Define reserve currency

A

Currency commonly utilized by the world’s central banks and largest financial institutions

84
Q

What is the central bank of the US?

A

Federal Reserve

85
Q

What is a eurobond?

A

A debt security that pays interest and principal in. adenomination other than the currency of the country it was issued in

86
Q

What are the two ways currency risk occurs?

A
  1. Converting into a strong currency
  2. Converting out of. aweak currency
87
Q

What two quotes are provided for a currency conversion?

A
  1. The spot price
  2. The forward price
88
Q

What is the spot price?

A

Current/immediate exchange rate

89
Q

What is the forward price?

A

An exchange rate agreed upon today but for a conversion in the future

90
Q

What method do investors use to protect themselves from currency risk?

A

Forward Price

91
Q

What 4 types of orgs issue eurobonds?

A
  1. US corporation
  2. US municipalities
  3. Foreign Corp
  4. Foreign gov
91
Q

WHat is a eurodollar bond?

A

Bond that pays interest and principal in US dollars but is issued outside US

92
Q

Why are eurodollar bonds enticing for american issuers?

A

Because they face no currency risk but gain access to funding from foreign investors

93
Q

What are eurodollar bonds exempt from?

A

SEC registration

94
Q

Difference between eurobond and eurodollar bond

A

Eurobond pays in a denomination other than the currency of the country it was issued in

Eurodollar bond issued outside of the US that pays interest and principal in US dollars

95
Q

What is a eurodollar deposit?

A

US Dollar held in. an account outside of the US

96
Q

Who does not participate in the

A

Unit 2 (18 decks)

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