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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
Which are more risky, second mortage bond investors or first and why?
Second mortgage bond holders are more risky because they are paid second after liquidation
26
What are equipment trust certificates?
They are a type of secured bond backed by the liquidation of its equipment
27
What type of company commonly issues utility bonds?
Utility companies
28
In what entry format are ETCs issued?
Serial format
29
What is required/how much money to fully back an offering?
Collateral must be worth at least the combined value of future interest payments and principal payments
30
Why are Equipment Trust Certificates issued in serial format?
So they can synchronize debt repayment with the equipment's expected decline in value
31
What are collateral trust certificates?
Bonds secured by marketable assets owned by corporation
32
What are two types of marketable assets trust certificates can be backed by?
1. Investment portfolio 2. Subsidiary of their company
33
What two things determine the number of stock shares received if a bond is converted?
1. Conversion ratio 2. Conversion price
34
What does stock parity price describe?
The equivalent stock cost if a bond is bought and converted
35
What does parity pricing help determine?
When conversion is profitable
36
What is the Stock parity price formula?
bond market price / conversion ratio
37
Where do corporate bonds almost exclusively trade?
Almost exclusively in over the counter markets
38
What two investment strategies do corporate bond holders use?
1. Buy low and sell high 2. Simply buy and hold to maturity
39
What two things do market prices depend on for corporate bonds, but what is ultimate?
1. Depend on interest rates 2. Demand for a corporate bond is ultimate
40
What should you look for when identifying a corporate bond quote?
A big number followed by a fraction
41
What fraction are corporate bonds quoted in?
Eighths
42
Method to turn a fractional corporate bond into a price?
Fraction - boot - scoot
43
What are the three steps to fraction-boot-scoot
1. Calculate the fraction 2. Boot the decimal back to the big number 3. Scoot the decimal once over to the right
44
What are bond points?
A way to refer to percentage of par, Every bond point is worth 10 dollars
45
What is the 's' in corporate bond quotes?
The coupon interest rate
46
What is the M' in corporate bond quotes?
the maturity year
47
What does the M represent in corporate bond quotes?
1000 dollar par
48
What are Certificates of Deposit?
they are similar to bonds but only issued by banks
49
What are three types of banking products?
1. Certificats of deposit 2. Jumbo negotiable CDs 3. Banker's acceptances
50
Where are Regular CDs only bought?
THrough the issuing bank
51
What are Jumbo CDs also called?
Negotiable CDs
52
Where are Jumbo CDs traded?
Secondary market
53
What is the minimum denomination for jumbo cds?
hundred thousand dollars
54
What is the only long term corporate debt security?
Debenture
55
Who determines the credit rating of a guaranteed bond?
The parent company
56
Does FINRA rate bonds?
no
57
What is a common form of collateral for a CTC?
Subsidiary
58
A debenture is a ___-term, ___- secured corporate bond
Long term- unsecured
59
What type of company is most likely to issue a mortgage bond?
Utility Companies
60
Which type of corporate bond is NOT issued in term format?
ETCs
61
What does stock parity price tell you?
Tells you whether the stock trading value is profitable to convert the bond or not
62
What does the bond parity price tell you?
Tells you whether the bond price is valuable to buy and convert
63
Conversion cost per share formula
bond price/conversion ratio
64
Stock parity price formula
Bond market price/conversion ratio
65
Bond parity price formula
stock price x conversion ratio
66
When are mezzanine debt holders paid out in event of liquidation?
after senior debt holders but before stockholders
67
Who usually issues mezanine debt?
Smaller corporations and start ups
68
What size yield do mezzanine debts have?
High yields
69
What does PIK stand for?
Payment in kind
70
How do companies pay PIK interest instead of semi-anually in cash?
They add "payable interest" to the loan principle, to the par.
71
What term debt is mezzanine debt?
Long-term corporate debt
72
What three additional features may mezzanine debt offer?
1. PIK interest 2. Warrants 3. Conversion features
73
When is PIK interest reedeemable?
Only at redemption or maturity?
74
Who has to approve convetible bond issuance?
Majority approval from common stockholders
75
wHat's another name for junior unsecured creditors?
Subordinated debenture holders
76
What form are treasury bills quoted in?
Yield form
77
What form are general obligation bonds quoted in?
Yield formWhat
78
form are treasury bonds quoted in?
32nds
79
Why is a banker's acceptance a win win?
Because the organization selling the check can get access to their liquidity early and the organization buying the check can get
80
Why are banker's acceptances considered money markets?
Because they are short term in nature
81
What are the SEC registration time exemptions for bankers acceptances?
issued with 270 days or less to maturity
82
What term are jumbo CDs? When do they mature?
Short term 1 year or less
83
Define reserve currency
Currency commonly utilized by the world's central banks and largest financial institutions
84
What is the central bank of the US?
Federal Reserve
85
What is a eurobond?
A debt security that pays interest and principal in. adenomination other than the currency of the country it was issued in
86
What are the two ways currency risk occurs?
1. Converting into a strong currency 2. Converting out of. aweak currency
87
What two quotes are provided for a currency conversion?
1. The spot price 2. The forward price
88
What is the spot price?
Current/immediate exchange rate
89
What is the forward price?
An exchange rate agreed upon today but for a conversion in the future
90
What method do investors use to protect themselves from currency risk?
Forward Price
91
What 4 types of orgs issue eurobonds?
1. US corporation 2. US municipalities 3. Foreign Corp 4. Foreign gov
91
WHat is a eurodollar bond?
Bond that pays interest and principal in US dollars but is issued outside US
92
Why are eurodollar bonds enticing for american issuers?
Because they face no currency risk but gain access to funding from foreign investors
93
What are eurodollar bonds exempt from?
SEC registration
94
Difference between eurobond and eurodollar bond
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
What is a eurodollar deposit?
US Dollar held in. an account outside of the US
96
Who does not participate in the

Unit 2 (18 decks)

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