Pg 38

Question 1

What are different types of bonds?

Answer 1

• open and closed mortgage bonds

– debentures

Question 2

What is an open and closed mortgage bond?

Answer 2

Closed bond means no more bonds can be issued under the mortgage or deed of trust

Question 3

What is a debenture?

Answer 3

Serial obligations or notes that represent indebtedness but are not secured by any specific mortgage, lien, or security pledge. The bad thing about this is they don’t have collateral. This is an unsecured corporate obligation.

Question 4

What is the ideal financing structure for a corporation?

Answer 4

One class of common shares

Question 5

When corporations issue more than one class of common stock, what usually happens?

Answer 5

One class is full voting and the other is non-voting or they just have a fractional voting share

Question 6

What is common stock?

Answer 6

The most basic type of stock. The holders can vote for the election of directors, amend articles of incorporation, vote to get net assets of the corporation on dissolution, inspect books and records, and right to financial information. This is the residual ownership in a corporation that benefits as a business prospers

Question 7

What are upstream conversion rights?

Answer 7

The ability to convert common shares to preferred shares or preferred shares to debt securities. This is not allowed

Question 8

Does common stock get dividends and distribution?

Answer 8

Yes, but there’s no guarantee that this will happen because the board determines if they will declare or distribute a dividend to common stock

Question 9

What is the rule for when common stock takes its dividends and distribution?

Answer 9

Common stock takes last, after all outside creditors have been paid, as well as all inside creditors/bond holders, and after preferred stock

Question 10

If the corporation liquidates and there isn’t enough money to pay creditors, what does common stock get?

Answer 10

Nothing

Question 11

If the corporation liquidates and has a surplus, what does the common stock get?

Answer 11

The surplus is divided proportionately among the common stock

Question 12

What is preferred stock?

Answer 12

This is a hybrid of debt and equity. Payment on dividends is not a mandatory fixed charge but they usually have the right to get dividends before common stock, and preferred shares are usually non-voting. Although they can gain voting power if the corporation misses dividend payments

Question 13

Nothing is paid to common stock until what stock gets its share?

Answer 13

Preferred stock

Question 14

What are the rights of preferred stock?

Answer 14

Cumulative dividends, non-voting, liquidation preference over common stock on dissolution, redemption rights where the corporation has a power to buy back the shares at any price and the shareholder must accept, conversion rights, protective provisions that require the corporation to set aside money each year to redeem portions of the preferred stock, etc.

Question 15

Is it possible for a corporation to have different classes of preferred stock?

Answer 15

Yes, they can have class A and class B, they can have different dividend rights, rights for dissolution, different priorities, etc. Both are senior securities because the preferential rights of common stock, but they may be junior to another class of preferred stock

Question 16

If a preferred share is expressly or implied cumulative and dividends don’t get paid for a year, what happens?

Answer 16

The arrears must be made up in later years, whether they are earned or not, before any dividends can be declared or paid to common shares.

Question 17

What does it mean if a share is designated as “cumulative if earned“?

Answer 17

In the absence of sufficient profits the dividends are non-cumulative and they don’t have to be made up out of the profits for subsequent years. Usually dividends for preferred shares are implied by cumulative