Corporate debt

Question 1

What is a trust indenture?

Answer 1

Contract that spells out the interest rate, maturity, collateral, and other provisions. There is usually an independent trustee appointed to monitor compliance. All corp. issues $50,000,000 or more have to have a trust indenture under the 1939 act

Question 2

What is funded debt?

Answer 2

Long term corporate debt is referred to as funded debt since the issuer has use of funds for a long time

Question 3

What is a an additional bonds test?

Answer 3

A test which makes sure earnings before interest expense for the prior period exceed both current interst expense + projected expense on any bonds sold

Question 4

Whats an ETC (Equipment trust certificate)?

Answer 4

Backed by equipment or machinery, you pay a portion of the principal each year until the bonds are retired (pay as you use)

Question 5

Commercial paper common characteristics:

Answer 5

Usually 14-90 day maturity
270 days in longest maturity possible
Sold at a discount maturing from par

Question 6

What is a debenture bond?

Answer 6

A bond backed only (solely) by the faith and credit of borrower
High yield “junk bond”

Question 7

What is an income bond and when is it issued?

Answer 7

Issued when a corporation is about to go bankrupt, it only obligates the issuer to pay if it has sufficient earnings or the corp. returns to profitability. These trade FLAT, with no accrued interest

Question 8

Formula for the conversion ratio:

Answer 8

Conversion ratio = par value of the bond/conversion price

Question 9

Parity price formula:

Answer 9

Conversion ratio * stock markets price

Question 10

Parity price of stock formula:

Answer 10

parity price of stock = Bond market value/conversion ratio

Question 11

What is a sinking fund?

Answer 11

money is deposited into a fund and the funds are used to retire bonds at maturity or retire a portion of them each year at a specified date

Question 12

Where are corporate, agency, and government bonds reported as soon as practicable?

Answer 12

TRACE - they must be input within 15 minutes of execution

Question 13

What is a round lot of bonds on they NYSE

Answer 13

Round lot is 5 $1,000 par bonds quoted % of par in 1/8ths

Question 14

What is the settlement period for cash?

Answer 14

Same day as trade before 2:30pm

Question 15

Where do corporate bonds settle?

Answer 15

Clearing house funds (NSCC)

Question 16

Where do Govt bond trades settle?

Answer 16

Fixed income clearing corporation (FICC)

Question 17

How does interest accrue on corporate bonds?

Answer 17

on a 30/360 basis, accruing interest up to, but not including the settlement date

Question 18

What items trade flat?

Answer 18

Defaulted, income, and zero coupon bonds, along with commercial paper

Question 19

What gives a “capsule summary” of every outstanding corporate issue?

Answer 19

S&P’s Bond Guide

Question 20

When is interest income on corp. bonds taxable?

Answer 20

In the year payment is made (2 PMTS occur each year; semi-annual pmt)

Question 21

Max tax rate for interest received on bonds?

Answer 21

39.6% for individuals

Question 22

Tax rate on cash dividends from CS and PS?

Answer 22

20%

Question 23

How is the discount on original issue discount bonds treated from a tax perspective?

Answer 23

Discount on original issue is “interest income”

Question 24

Where are zero coupon bonds usually held?

Answer 24

in an IRA or Keogh to avoid current taxation