Unit 5 - Corporate Bonds

Question 1

• this bond occurs when a corporation borrows money backed by real estate of the corporation
• if the corporation develops financial problems and is unable to pay the interest on the bonds, those real assets pledged as collateral are generally sold to pay off the bondholders

Answer 1

Mortgage Bond

Question 2

• this type of bond is issued when corporations finance the acquisition of their rolling stock, locomotives, or airplanes
• when the company has finished paying off the loan, it receives clear title to its equipment from the trustee
• if the company does not make the payments, the lender repossesses the collateral and sells it for her benefit

Answer 2

Equipment Trust Certificate

Question 3

• this bond is issued when a corporation wants to borrow money and has neither real estate nor equipment to use as collateral
• the corporation instead deposits securities it owns into a trust to serve as collateral for the lenders
• the securities can be securities in that corporation or any other securities as long as they are marketable

Answer 3

Collateral Trust Bond

Question 4

• this term is a debt obligation of the corporation backed only by its word and general creditworthiness

Answer 4

Debenture

Question 5

• this type of bond is guaranteed as to payment of interest, or both principal and interest, by a corporate entity other than the issuer

Answer 5

Guaranteed Bond

Question 6

• this type of bond is also known as an adjustment bond
• it is used when a company is reorganizing and coming out of bankruptcy
• this type of bond only pays interest only if the corporation has enough income to meet the interest payment and if the board of directors declares a payment

Answer 6

Income Bond

Question 7

• these bonds are debt obligations that do not make any interest payments
• they trade at deep discount and mature at par value
• investors receive accretion instead of interest.

Answer 7

Zero Coupon Bond