Debt Section 1: Corporate Debt

capital market

"Funded debt" is a term that applies to long term corporate obligations. This debt is "funded," indicating that the monies are a source of long term funding and do not have to be repaid shortly. Such long term debts are part of the __ - the market for long term bonds and equity financings.

book entry

A __ bond is a fully registered bond where no paper certificate is issued. Instead, the owner simply receives that confirmation that he or she bought the bond. On such bonds, the paying agent mails the semi-annual interest payments to the registered owner.

guranteed corporate

A __ bond is one guaranteed by another corporation.

960.00

A convertible bond is convertible into common stock at a 32:1 ratio. The common stock is currently trading at $30. The bond is currently trading at $980. What is the bond's parity price? $__ bond parity price= stock market price x conversion ratio

31.25

A convertible bond is convertible into common stock at a 32:1 ratio. The common stock is currently trading at $30. The bond is currently trading at $980. What is the conversion price? $__ conversion price = par value of bond/ conversion ratio

25:1, 44

A convertible debenture is convertible into common at $40 per share. If the market price of the bond rises to a 10 point premium over par, which statements are TRUE? The conversion ratio is established when the bond is issued, and is: par value divided by the conversion price. In this case, the conversion price is set at $40 per share, so the conversion ratio is $1,000 par / $40 conversion price = __. If the bond moves to a 10 point premium over par, its new price will be 110, or $1,100 per bond. For the common stock to be valued at parity to the bond, the price per share must be $1,100 / 25 shares per bond = $__ per share parity price.

106

A corporation has issued 10% convertible debentures, convertible into 40 shares of common stock. The current market price of the common stock is $25.25. If the bonds are trading at 5 points above parity, they are priced at: The bonds are convertible into 40 shares of stock. The current market value of the stock is $25.25, so the parity price of the bonds is 40 x $25.25 = $1,010. Since the bonds are trading at 5 points ($50) above parity, they are priced at $1,010 + $50 = $1,060 per bond =__.

5,600

A corporation has issued 10%, $1,000 par convertible debentures, convertible at $31.25. The common stock is currently trading at $35. If the bond and the common are trading at parity, a customer purchasing 5M of the bonds will pay: The bonds are convertible at $31.25, based on $1,000 par value. Therefore each bond converts into 32 shares ($1,000 par / $31.25 conversion price). If the common is trading at $35, the bond must be trading at 32 times this to be at parity. $35 x 32 = $1,120 parity price of one bond. The parity price of "5M" ($5,000 face amount, "M" is Latin for $1,000) is $1,120 x 5 = $__

32:1

A customer bought a $1,000 par convertible subordinated debenture at par, convertible into common at $31.25 per share. If the bond's market price increases by 20%, the conversion ratio will be: The conversion price (and hence the conversion ratio) is fixed when the convertible security is issued and does not change. In this case, the bond is issued with a conversion price of $31.25, based upon converting each bond at par. $1,000 par / $31.25 conversion price = __ conversion ratio.

40:1

A customer owns a convertible subordinated debenture, convertible into common at $25 per share. The bond is currently trading at par. If the bond's market price increases by 20%, the conversion ratio will be: The conversion price (and hence the conversion ratio) is fixed when the convertible security is issued and does not change. In this case, the bond is issued with a conversion price of $25, based upon converting each bond at par. $1,000 par / $25 conversion price = __ conversion ratio.

promises

A debenture and subordinated debenture are __ to pay without any liens on corporate assets.

principal only

A registered to__ bond has a physical certificate with the bond's face amount registered in the owner's name, but interest coupons are attached which are payable to the "bearer." Bearer coupons can be redeemed by anyone. The bonds are negotiable.

lien

A secured bondholder has a __ on a specific asset of the company - such as securities given as collateral in the form of a collateral trust certificate.

interest only

Adjustment (also known as "income") bonds obligate the issuer to pay __ if the company meets a specified earnings test. If the earnings are not sufficient, no interest payment is legally required.

corporate, serial

All of the following statements are true regarding equipment trust certificates ("ETCs"): Equipment trust certificates are secured by specified __ assets. Equipment trust certificates are commonly issued by transportation companies. Equipment trust certificates are issued in __ maturities.

2

Regular way trades of corporate bonds and stocks settle _ business days after trade date.

trust indenture

The __ of a bond spells out all of the protective and restrictive covenants made to the bondholders. The trustee ensures that the corporation adheres to the covenants.

48.00

The conversion price of a convertible debenture is set at issuance at $40 per share. The common stock is now trading at 42 while the bond is trading at par. If the bond rises 20% from its current market value, the new parity price of the common stock will be: If the bond rises 20% from its current price of $1,000 (par), the new price will be 120% x $1,000 = $1,200 per bond. Since each bond is convertible based upon a conversion price of $40 per share, the conversion ratio is $1,000 par / $40 conversion price = 25:1. The new parity price is $1,200 / 25 = $__ per share.

convertible bond

The following statements are TRUE regarding __ issues? At the time of issuance, the conversion price is set at a premium to the stock's current market price When the stock price is at a premium to the conversion price, the conversion feature has intrinsic value. For the conversion feature to have value, the stock's price must move up in the market after issuance Usually have lower yields than bonds without the conversion feature

secured creditors, common stockholders

The priority of claim to corporate assets in a liquidation is: __, unpaid wages and taxes, trade creditors, unsecured bondholders, preferred stockholders, __.

lower

When convertible bonds are issued, it is normal for the conversion price to be at a premium to the current market price. Thus, for the conversion feature to be worth something, the stock's price must move up in the market. Due to the value of the conversion feature (or rather, the potential value if the stock price goes up), convertible bonds are saleable at __ yields than bonds without the conversion feature.

intrinsic

When the stock price is at a discount to the conversion price, the conversion feature is worthless. The bond is valued based on interest rate movements. On the other hand, when the stock price is at a premium to the conversion price, the conversion feature now has __ value. For every dollar that the stock now moves, the bond will move as well, since the securities are "equivalent."

unfunded

Commercial paper has a maximum life of 270 days, and thus is an __ debt. Debentures, mortgage bonds and equipment trust certificates are all long term ("funded") corporate debts.

promise to pay

Commercial paper is a short term IOU and is only backed by the issuer's __.

lower, appreciation

Convertible bonds are issued at __ interest rates than non-convertible issues; which bondholders accept in return for price __ potential based upon the market value of the common stock (since the bond is convertible into a fixed number of shares of common).

faith and credit

Corporate debentures are backed solely by the full __ of the issuer. Debentures are usually issued by "Blue Chip" organizations with high credit ratings or lower credit rated companies in the form of high yield or "junk" bonds.

unfunded

Money market instrument, which is a debt with a maturity of 1 year or less. This is an __ debt that must be repaid shortly.

mortgage

Mortgage bonds are corporate obligations that pay interest semi-annually and are backed by a __ on real property - so these bonds are secured.

calling

An issuer can retire bonds prior to maturity by __ the issue under the terms established in the bond contract; requesting the bondholders to tender the bonds at a price established by the issuer; or by buying the bonds in the open market. If a bond has a put option, the bondholder has the right to put the bonds back to the issuer at par. This decision is made by the bondholder, not by the issuer.

bondholders

Both bonds and preferred stock are "Senior" securities over common. Payments to __ are a legal obligation of the issuer. They are not a discretionary decision on the part of the Board of Directors, as is the decision to pay a dividend to preferred and common shareholders.

taxation

Both bonds and preferred stock can be convertible and both have a fixed payout rate. Think of preferred stock as a "bond" designed for corporate investment, so that a corporate investor can take advantage of the dividend exclusion from __ (this tax benefit is not available to individual investors).

institutional

Dealer commercial paper is sold for corporations by dealer firms such as Goldman Sachs. The minimum purchase amount is generally $100,000. The dealer commercial paper market is primarily an __ market, with purchasers including insurance companies, trust companies and money market mutual funds.

investing

Dealer paper, many corporations sell their commercial paper directly to the __ public.

directly

Direct paper is sold __ to the investing public, usually via the web. It also sells in $100,000 and $500,000 minimum amounts, so the individual investor is pretty much cut out.

100.00

Ford Motor Company has issued 8% convertible debentures, convertible at a 10:1 ratio. Currently the debenture is trading at 94. The stock is trading at $80. What is the conversion price of the stock? $__ conversion price = par value of bond/ conversion ratio

20.00

Ford Motor Company has issued 8% convertible debentures, convertible at a 50:1 ratio. Currently the debenture is trading at 110. The stock is trading at 21. What is the conversion price of the stock? $__ conversion price = par value of bond/ conversion ratio

long term

Funded debt is a somewhat archaic term that refers to corporate debt that is long term. This is considered to be part of an issuer's __ (permanent) funding.

permanent financing

Funded debt is a term used to describe corporate bonds that are part of the issuer's __. Generally, any corporate debt with a long term maturity is considered to be "funded."

corporate guarantor

Guaranteed corporate bonds are guaranteed by another corporation (typically a parent company guaranteeing the debt of a wholly owned subsidiary). The guarantor will have the higher credit rating, so the bonds will be able to be issued at a lower interest cost. Such bonds take on the credit rating of the __, who is liable for payment if the issuer defaults.

buy back

In a tender offer, the issuer of the securities is offering to __ either a portion or all of the issue at a stated price. The price of the tender offer is set by the issuer, typically using the advice of a securities firm acting as "financial advisor" in the offer.