Corporate Debt Securities and Money-Market Instruments

Question 1

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

Answer 1

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

Question 2

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

Answer 2

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

Question 3

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?

Answer 3

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

Question 4

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

Answer 4

A bond backed by machinery or rolling stock is called a(n) Equipment Trust Bond.

Question 5

Are debentures considered secured or unsecured?

Answer 5

Unsecured. They are backed only by the issuer’s full faith and credit.

Question 6

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

Answer 6

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

Question 7

Name some of the different types of money-market instruments. 4

Answer 7

1. T-Bills,
2. Bankers’ Acceptances (BAs),
3. Commercial Paper,
4. Negotiable CDs

Question 8

How is interest on corporate bonds treated for tax purposes?

Answer 8

Fully taxable (taxed at the federal, state, and local level)

Question 9

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

Answer 9

Airplanes, trucks, railroad cars

Question 10

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

Answer 10

An open-end indenture allows additional bonds to be issued and backed by the same collateral.

Question 11

Name some of the advantages of buying convertible bonds. 3

Answer 11

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

Question 12

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

Answer 12

Accrued interest on corporate bonds is calculated using 30 days in the month and 360 days in the year.

Question 13

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

Answer 13

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

Question 14

What are Eurodollar bonds?

Answer 14

Dollar-denominated bonds issued outside the U.S.

Question 15

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

Answer 15

True

Question 16

Define parity.

Answer 16

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

Question 17

When do corporate bond trades settle?

Answer 17

T + 3 (three business days after the trade date)

Question 18

Money-market securities have a maturity of __________________.

Answer 18

Money-market securities have a maturity of one year or less.

Question 19

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

Answer 19

Conv. ratio = $1,000 ÷ $50 = 20 sh. The stock needs to trade at $60 to be at parity with the bond ($1,200 ÷ 20 = $60).

Question 20

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

Answer 20

A corporation that issues convertible bonds is borrowing money at a lower rate (convertibles pay lower interest rates).

Question 21

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

Answer 21

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

Question 22

What is forced conversion?

Answer 22

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

Question 23

Is the conversion of a bond a taxable event?

Answer 23

No, it is a tax-free exchange. The taxable event would occur when the stock is sold.

Question 24

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

Answer 24

Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $100,000.

Question 25

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

Answer 25

No, and they are not registered with the SEC.

Question 26

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

Answer 26

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

Question 27

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

Answer 27

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

Question 28

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

Answer 28

Unpaid workers, IRS, secured creditors, unsecured creditors, preferred, and then common.

Question 29

The formula for finding conversion ratio is: ______ ÷ ____________

Answer 29

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for a bond is $1,000)

Question 30

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

Answer 30

False. Corporate bond interest is taxed at the federal, state, and local level.

Question 31

Corporate bonds quotes may be found in the ________________.

Answer 31

Corporate bonds quotes may be found in the Yellow Sheets.

Question 32

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

Answer 32

Yes

Question 33

The Trust Indenture Act of 1939 regulates ________________ offerings.

Answer 33

The Trust Indenture Act of 1939 regulates corporate bond offerings (NOT municipal or government offerings).

Question 34

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

Answer 34

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

Question 35

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

Answer 35

False. The stock pledged must be that of a separate company.

Question 36

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

Answer 36

If a bond is referred to as trading flat, this means it trades without accrued interest.

Question 37

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

Answer 37

The same as the basis of the converted security.

Question 38

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

Answer 38

Yankee Bonds