Corporate Debt

Question 1

The very first bonds issued were

Answer 1

Bearer Bonds

Question 2

A principal only bond is

Answer 2

A bond registered to the principal only. Face amount of bond is now registered but bond still has bearer coupons attached.

Question 3

Both bearer bonds and principle only bonds haven’t been issued since

Answer 3

1983

Question 4

A fully registered bond is

Answer 4

A bond that is registered to principal and interest.

Question 5

Present day bonds are issued how

Answer 5

Book Entry

Question 6

Describe a Trust Indenture

Answer 6

Bond contract. Spells out the interest rate, maturity, collateral, call or put provisions and all other relevant feature of the bond.

Question 7

What does the Trust Indenture Act of 1939 say

Answer 7

Corporate issues of $50,000,000 or more must have a trust indenture.

Question 8

Long-Term corporate debt is also referred to as

Answer 8

Funded Debt

Question 9

What is SECURED corporate debt

Answer 9

A bond that has specific collateral pledged to back it.

Question 10

What are the three main types of secured corporate debt

Answer 10

Mortgage bonds, collateral trust bonds (CTB), and Equipment trust certificates (ETCs)

Question 11

Describe secured mortgage bonds

Answer 11

Bonds that are backed by real estate owned by the corporation.

Question 12

Describe secured collateral trust bonds

Answer 12

Backed by another companies (stock or bond) held in trust by the corporation.

Common for a parent company to use subsidiary stock as collateral.

Question 13

Describe secured equipment trust certificates (ETCs)

Answer 13

Backed by equipment used by the corporation.

Serial maturity is used to counteract the depreciation in collateral value over time.

Question 14

What is an unsecured bond

Answer 14

Debt backed by the issuer’s promise to pay. NO collateral backing.

Question 15

A short-term unsecured bond would be

Answer 15

Commercial Paper

Question 16

A long-term unsecured bond would be

Answer 16

Debenture (Long term Bond), subordinated debenture, guaranteed bond, and income (adjustment) bond.

Question 17

Describe unsecured commercial paper

Answer 17

Debt that matures in 270 days or less. But typically ranges between 14 to 90 days with 30 days being the most common.

$100,000 minimum denomination

Primarily sold to institutional investors.

Sold at a discount. No interest payments.

Question 18

Describe unsecured debentures

Answer 18

Long Term Bond backed solely by the full faith and credit of the issuer. Issued by “Blue Chip” corporations.

Question 19

Describe unsecured subordinated debentures

Answer 19

Lowest debt status in corporate liquidation. Usually includes a feature to induce customers to buy (Conversion or warrant).

Question 20

Describe unsecured guaranteed bonds

Answer 20

Bond that is backed by a party other than the issuer (parent company for subsidiary or insurance company)

Takes on the credit rating of the guarantor.

Question 21

Describe unsecured income (adjustment) bonds

Answer 21

Used by a corporation reorganizing after bankruptcy. Relives the obligation on any existing bonds. Issuer will attempt to get investors to accept.

Company will pay interest and principal only if it returns profits.

May adjust principal to a higher amount to entice investors.

Trade flat due to uncertainty of future payments.