Debt: Corporate Debt Flashcards
Debt- Corporate Debt
CHARACTERISTICS OF CORPORATE DEBT
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1) why do companies issue corporate debt?2)The debt can take the form of what [what do they sell to investors]
- Bearer Bond
3) first bonds issued were these? 4)registered in an owner’s name? 5) company have a record of the owner? 6) what happens if the bond is lost or destroyed 7) does the bond have coupons you rip off and send in for payment? 8) do they issue them any more 9)issued outside the us 10) still trade until last is gone in the US?
1) raise capital 2)long-term bonds, intermediate-term notes or short-term notes known as commercial paper
3) yes 4) no, whoever has the coupon at the due date and sends it to the paying agent for cash payment. 5) no 6) it cannot be replaced, worthless 7) yes 8) no 9) Yes 10) yes
Debt- Corporate Debt
CHARACTERISTICS OF CORPORATE DEBT
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-Registered To Principal Only Bond
1)similar to bearer bonds? 2)bond certificate is payable to the name of the registered owner at maturity only? 3) who can collect coupon
- Fully Registered Bond
4) T/F bondholder registered with the transfer agent as the owner of the record and a physical certificate is issued to the bondholder? 5) use a paper coupon, sent in for payment
1) Yes 2) correct 3) anyone
4) True 5) no, the paying agent sends the semi-annual interest payments directly to the registered owner and, at maturity, sends the final $1,000 principal repayment to the registered owner.
Debt- Corporate Debt
CHARACTERISTICS OF CORPORATE DEBT
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-Book-Entry Bond
1) All new issues of bonds coming out in the United States book entry? 2)cheaper to produce and why 3) transfer agent work with this
- Transfer Agent / Paying Agent
4) the transfer agent has the purchasers name and address, but does issue physical certificates? 5) sends the semi-annual interest payments and the final principal repayment 6) what happens when debt is traded
1) Yes 2) yes, no printed bond certificate 3) yes
4) yes 5) yes 6) they make corrections of the owner of the debt and makes sure they get interested and redemption
Debt- Corporate Debt
CHARACTERISTICS OF CORPORATE DEBT
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-Trust Indenture
1) Idea 2) what does it spell out 3) the indenture may also call for the corporation to do what 4) The trustee is usually who 5) the trustee reports directly to who regarding company non 6) What is the Trust Indenture Act Of 1939
- Funded Debt
7) Companies long or short debt? 8) why referred to as “funded” debt 9)term applicable to commercial paper.
1) bonds are issued under a bond contract called indenture 2) interest rate, maturity, collateral, call or put provisions, and all other relevant features of the bond 3)maintain specific protections for the bondholders such as insurance coverage 4) independent commercial bank 5) bondholder 6) All corporate issues of $50,000,000 or more must have a Trust Indenture as specified by the Trust Indenture Act of 1939.
7) long-term corporate debt 8) issuer has use of the funds for a long time period before repayment is due 9)n o
Debt- Corporate Debt
SECURED CORPORATE DEBT
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-Secured Corporate Debt
1) Corporate bonds can be secured or unsecured. 2) When a bond is secured, specific collateral needs to be pledged to back the bond issue? 2.1) why is this good 2.2) drawback to secured 3) Secured bonds are typically issued with short or long-term maturities
- Mortgage Bonds
4) secured or unsecured 5) The bond is secured by what 6) Mortgage bond financing is typically used by who 7) do they get a high rating because of the collateral, and why?
1) both 2) If the corporation defaults, the bondholders have a claim to the collateral 2.2) secured bonds can be sold at lower interest rates than unsecured bonds 3) Long
4) secured 5) mortgage on the real property of the issuer 6) utilities 7)yes, usually the real estate pledged is worth more than the bonds issued=cushion
Debt- Corporate Debt
SECURED CORPORATE DEBT
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–Mortgage Bonds: Open End / Additional Bonds Test
1) Benefit 2) what is the additional bonds test requirement
- Mortgage bonds: Closed-End
3) can be issued only if? 4) have a lower status in a liquidation? - -Mortgage bonds: Senior/Junior Lien
5) Idea
1) corporation can sell additional bonds having equal status against the real estate 2) before new bonds can be sold, must make sure earnings before interest expense for the preceding period exceeds both current interest expense plus projected expense on any additional bonds sold.
3) new bonds: issued as junior to existing bonds 4) Yes 5) senior issue a first mortgage bond; junior issues are second and third mortgage bonds.
Debt- Corporate Debt
SECURED CORPORATE DEBT
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–Mortgage bonds: Mortgage Bonds Issued By Utilities
1) most common form of corporate debt 2) principal financing source for public utilities 3) generally get high credit ratings, why? 4) sold at higher/lower interest rates than unsecured debt 5) utility companies obtain up to over 80% of its financing by selling mortgage bonds 5.1) why
- Equipment Trust Certificate
6) Commonly Issued By who 7) backed by what [collateral] 8) issued in serial or term issues 8.1) as a result, 9) rated highly why 10) why good options for investors
1) yes 2) yes 3) quality of the collateral backing the issue 4)lower 5) yes 5.1) utilities have stable revenue streams, the remaining 20% need will come from the sale of equity
6) Transportation Companies 7) equipment or machinery 8) obligate the issuer to repay a portion of principal each year until the bonds are retired [usually will have it paid off when the equipment’s life is done] 9) equipment can easily be sold to repay the bondholders. 10)generally non-callable
Debt- Corporate Debt
SECURED CORPORATE DEBT
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-Collateral Trust Certificate
1) backed by what 2) highly rated because 3) generally used by who
1) portfolio of marketable securities 2)trust indenture requires that additional collateral be given if the securities drop in value, protecting investors 3) when parent company pledges the securities of a subsidiary as collateral
Debt- Corporate Debt
UN SECURED CORPORATE DEBT
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1) Backed by what 2) issued in short-term, intermediate-term and long-term maturities?
- Commercial Paper
3) long or short corporate financing 4) typically Maturities range 5) maturity will never exceed? 5.1) what happens they want more time - -Commercial Paper: Discount Instrument
6) because of the short term, and not able to pay semi-annually interest, how do investors get paid 7) sold in $1,000 units? - –Commercial Paper: Book Entry Form / Limited Trading
8) generally purchased by who 8.1) why
1) nothing, issuer’s promise to pay 2) all
3) short 4) 14 days to 90 days, with 30 days being the most common maturity 5) 270 days 5.1) registered with the SEC, an expensive and time-consuming process 6) sold at a discount and matures at face value 7) no, $100,000 is the minimum denomination and it is often sold in multiples of $1,000,000.
8) large institutions with excess cash 8.1) due to large minimum denominations [100k]
Debt- Corporate Debt
UN SECURED CORPORATE DEBT
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-Debenture
1)collateral backing the issue 2) what term are they 3) issued by what type of corporations
- -Debenture: Subordinated Debenture
4) holders agree to a higher/lower status in a corporate liquidation 4.1) paid after who 5) In order to induce customers to buy what do companies do - –Debenture: Guaranteed Bond
6) T/F bonds are typically issued by a subsidiary company; 7) corporate parent company guaranteeing what 8) who is the credit rating based on
1) no, backed by full faith and credit of the issuer 2) Intermediate and long-term corporate debt 3) Blue chip with high credit ratings who do not have to back the issue with asset and lower credit-rated companies in form of junk bonds
4) lower 4.1) all other creditors are paid 5) payout a higher interest rate or given conversion into a fixed number of common shares
6) true 7)payment of interest and principal as due 8) corporate company who is guaranteeing
Debt- Corporate Debt
UN SECURED CORPORATE DEBT
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-Income Bonds / Termed “Adjustment Bonds”
1) issued when 2) only obligates the issuer to pay interest if? 2.1) if the corporation becomes profitable? 3) To induce the bondholders to accept the new issue 4) why do bondholder take this adjustment bond 5) if intrest payment are not currently being paid, how is the investment trading in the market
1) when a corporation is about to go bankrupt to replace existing bonds which have defaulted 2) it has sufficient earning or if the corporation return to profitability 2.1) all missed interest payments will be made up 3) principal is adjusted higher 4) they are likely to not receive anything anyway 5)trading flat, without accrued interest
Debt- Corporate Debt
CONVERTIBLE CORPORATE DEBT
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-Convertible Debentures
1) Idea 2) a conversion price is set based on par per share when 3) when does the conversion feature have value 4) due to this feature investor take a hit on interest rate compared to non-convertible?
1) can be converted, at the option of the owner, into the common stock of the issuer 2)At the time of issuance 3) The stock’s price must rise in the market above the conversion price [set higher then what you bought it for] 4) yes
5) the price at which the convertible bond and the common stock both have an equivalent value 6) no 6.1) yes
7) conversion ratio
Debt- Corporate Debt
CONVERTIBLE CORPORATE DEBT
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–Convertible Debentures: Parity
5) idea 6) when a convertible security trades above parity does the conversion feature have value? 6.1) how about if trades below
Example: In order to handle convertible bond problems, two formulas are needed [conversion ratio and parity price]. Let’s use the example of the $1,000 par bond convertible at $50. The current market price of the stock is $40. The bond is currently selling for $900
7) what is the conversion ratio
8) parity price of bond
9) order for the bond to be of equal value to
the stock, it must trade for
10) Parity price of stock
10.1) is it at parity
10.2) conversion feature has value
5) the price at which the convertible bond and the common stock both have an equivalent value 6) no 6.1) yes
7) par value of bond/ conversion price. 1,000/50= 20:1
8) conversion ratio X stocks market price. 20 X 40=800 9) $800 10)bond market value/ conversion ratio. 900/20=45 10.1) no, stock must be $45 (it is currently $40) 10.2) Yes, becuase it’s trading below parity
Debt- Corporate Debt
CONVERTIBLE CORPORATE DEBT
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–Convertible Debentures: Arbitrage
1) Idea 2) only works if convertible security trades above or below parity? 3) T/F above par security acts like a stock [interest rates are not causing bonds price changes] 4)T/F Below par security acts like bond ]price changes are primarily caused by interest rate movements]
1) trader will buy the lower-priced security (the bond at $1,100) and sell the equivalent number of shares of the higher-priced security (the stock - 20 shares at $60 = $1,200) 2) below 3)True 4) True
Debt- Corporate Debt TRADE SETTLEMENT ------------------------------------------------------------ -Regular Way 1) trade settles after how many days
- Cash settlement
2) The benefit over the regular way 3) The downside for the seller
1) T + 2 business days
2) don’t need to wait for T+2, Cash settlement occurs the same day as trade date before 2:30 PM. 3)to induce someone to pay today, the bonds would have to be sold at a lower price than in a regular way trade
