Corporate Debt Securities and Money-Market Instruments Flashcards
What is a step-up, long-term CD?
A CD that offers an interest rate that is lower than current rates, with subsequent interest rates paid being higher
Is an income bond appropriate for a client who desires income?
No. Income (adjustment) bonds will only pay interest if the issuer has sufficient income.
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?
No, the bond’s parity price is $1,200. The bond can be converted to 40 shares selling at $30, which equals $1,200.
A bond backed by machinery or rolling stock is called a(n) ______________________.
A bond backed by machinery or rolling stock is called a(n) Equipment Trust Bond.
Are debentures considered secured or unsecured?
Unsecured. They are backed only by the issuer’s full faith and credit.
The type of bond where bondholders have a lien on real property is called a __________________.
The type of bond where bondholders have a lien on real property is called a mortgage bond.
Name some of the different types of money-market instruments. 4
- T-Bills,
- Bankers’ Acceptances (BAs),
- Commercial Paper,
- Negotiable CDs
How is interest on corporate bonds treated for tax purposes?
Fully taxable (taxed at the federal, state, and local level)
What are some examples of rolling stock used to back a bond offering?
Airplanes, trucks, railroad cars
An ____________ indenture allows additional bonds to be issued and backed by the same collateral.
An open-end indenture allows additional bonds to be issued and backed by the same collateral.
Name some of the advantages of buying convertible bonds. 3
- Consistent interest payments,
- appreciation if stock rises,
- downside protection if stock falls (since it’s still a bond).
Accrued interest on corporate bonds is calculated using _____ days in the month and ______ days in the year.
Accrued interest on corporate bonds is calculated using 30 days in the month and 360 days in the year.
What happens if a bond is convertible at $20 (ratio is 50 shares) and the company issues a 10% stock dividend?
Conversion ratio increases to 55 shares (50 x 10% = extra 5) and the new conversion price would be $18.18 ($1,000 ÷ 55).
What are Eurodollar bonds?
Dollar-denominated bonds issued outside the U.S.
True or False: A favorable arbitrage situation occurs when a bond is trading at a discount to parity.
True
Define parity.
The value of two investments being equal, even, or the same
When do corporate bond trades settle?
T + 3 (three business days after the trade date)
Money-market securities have a maturity of __________________.
Money-market securities have a maturity of one year or less.
A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?
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).
A corporation that issues convertible bonds is borrowing money at a _______ rate.
A corporation that issues convertible bonds is borrowing money at a lower rate (convertibles pay lower interest rates).
For bondholders, is a closed-end indenture more or less protective than an open-end indenture?
More protective, since the asset backing the bond cannot be diluted
What is forced conversion?
An issuer calls bonds at a point where the stock is worth more than the bond’s call price.
Is the conversion of a bond a taxable event?
No, it is a tax-free exchange. The taxable event would occur when the stock is sold.
Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $__________.
Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $100,000.
May Eurodollar bonds be issued in the U.S.?
No, and they are not registered with the SEC.
ABC = $50. ABC’s bond is convertible at $40 and callable at 105. Is the call or conversion and sale more profitable?
Conversion and sale equals $1,250 (25 shares x $50), while the call only provides $1,050.
Will a bond’s conversion price and conversion ratio be adjusted for stock splits or stock dividends?
Yes, due to a bond’s non-dilutive feature.
What is the proper order of liquidation for a corporation at bankruptcy?
Unpaid workers, IRS, secured creditors, unsecured creditors, preferred, and then common.
The formula for finding conversion ratio is: ______ ÷ ____________
The formula for finding conversion ratio is: Par ÷ Conversion Price (par for a bond is $1,000)
True or False: Interest paid on corporate bonds is entirely tax-exempt.
False. Corporate bond interest is taxed at the federal, state, and local level.
Corporate bonds quotes may be found in the ________________.
Corporate bonds quotes may be found in the Yellow Sheets.
May Eurodollar bonds later trade in the U.S.?
Yes
The Trust Indenture Act of 1939 regulates ________________ offerings.
The Trust Indenture Act of 1939 regulates corporate bond offerings (NOT municipal or government offerings).
What is a step-down, long-term CD?
A CD that offers an interest rate that’s higher than current rates, with subsequent interest rates paid being lower
True or False: Collateral Trust Bonds are backed by the stock of the issuing corporation.
False. The stock pledged must be that of a separate company.
If a bond is referred to as trading flat, this means it trades ___________________________.
If a bond is referred to as trading flat, this means it trades without accrued interest.
If a bond is converted to stock, what is the investor’s basis?
The same as the basis of the converted security.
What bonds are dollar-denominated, U.S. registered, and issued by multinational companies and foreign governments?
Yankee Bonds
