Chapter I: Debt

commercial paper is sold in _________ units and up to multiples of _________

$1,000 $1,000,000

The conversion price of a convertible debenture is set at issuance at $25 per share. The common stock is now trading at $27.50 while the bond is trading at 110. In order for the common stock to be trading at parity to the current market price of the bond, the stock price would be: A. $27.50 B. $30.00 C. $32.00 D. $35.50

(1,000 par)/(25 conversion price) = 40 110 * 1000 = 1,100 1,100/40 = 27.50 $27.50

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: A. $3,500 B. $4,800 C. $5,000 D. $5,600

(1,000 par)/(31.25 conversion price) = 32 32 * 35 = 1,120 M = 1,000 1,120 * 5 = 5,600 $5,600

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 110. In order for the common stock to be trading at parity to the current market price of the bond, the stock price would be:

(1,000 par)/(40 conversion price) = 25 110 * 1,000 = 1,100 1,100/25 = 44 $44

how is current yield on a bond calculated

(annual interest)/(market value)

how is nominal yield calculated?

(annual interest)/(par)

1 basis point equals

0.01

10 basis points equals

0.1

100 basis points equals

1

commercial paper maturities range from _____ to ____ days, with ____ days being the most common maturity

14 90 30

A bond which is guaranteed by another corporation is known as a: A. guaranteed corporate bond B. general obligation bond C. adjustment bond D. subordinated bond

A

A company that has issued first mortgage bonds is declared in default by the trustee. Which statement is TRUE? A. The bondholders have a "first mortgage lien" to the property backing the bond B. The bondholders do not have legal claim to the property backing the bond C. The bondholders have first claim on all of the assets of the failed company to satisfy the debt D. The bondholders may not sell the pledged property to satisfy the unpaid obligation unless the lending bank approves

A

A customer wishes to invest in corporate bonds that offer minimum market risk. Which recommendation is appropriate? A. Bonds with short term maturities B. High yield bonds C. Guaranteed bonds with medium term maturities D. Bonds with long term maturities and high call premiums

A

A customer wishes to maximize liquidity and minimize interest rate risk. The best recommendation is (are): A. short term maturities B. long term maturities C. callable bonds D. non callable bonds

A

All new corporate bonds are issued in: A. book entry form B. fully registered form C. registered to principal only form D. bearer form

A

For bonds trading at a discount, rank the yield measures from lowest to highest? A. Nominal, Current, Basis B. Current,Basis,Nominal C. Basis, Current, Nominal D. Basis, Nominal, Current,

A

In a period of steep decreases in interest rates, which issuer is most likely to be positively affected? A. Public utility B. Railroad C. Consumer goods D. Mining

A

Promises made by corporate issuers to bondholders, as well as any restrictions placed on the issuer are found in the: A. indenture B. legal opinion C. prospectus D. underwriting agreement

A

The yield to maturity of a bond: A. increases as bond market prices decline B. increases as bond market prices increase C. is unaffected by changes in market interest rates D. will vary with the earnings of the issuer

A

Which statement is TRUE about bond price changes that result from interest rate movements? A. Short term bond prices move more slowly than long term bond prices B. Long term bond prices move more slowly than short term bond prices C. Both short term and long term prices move at equivalent rates D. No relationship exists between short term and long term bond price movements

A

Standard & Poor's investment grades are

AAA AA A BBB

what is included in corporate debt?

ALL long term corporate debt

Moody's investment grades are

Aaa Aa A Baa

A bond call premium is the amount: A. below par at which the issuer has the right to call bonds B. above par at which the issuer has the right to call bonds C. above par at which a bond is currently trading D. at which the issuer would make money by calling in outstanding bonds

B

A bond is purchased at par. After the purchase is made, market interest rates start to decline. Which statement is TRUE? A. The bond's nominal yield and current yield are the same B. The bond's nominal yield will be higher than the current yield C. The bond's nominal yield will be lower than the current yield D. The relationship between the bond's nominal yield and current yield cannot be determined

B

A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 12%. Which statement is TRUE about the outstanding 10% issue? A. The bond will trade at a discount and the current yield will be lower than the nominal yield B. The bond will trade at a discount and the current yield will be higher than the nominal yield C. The bond will trade at a premium and the current yield will be lower than the nominal yield D. The bond will trade at a premium and the current yield will be higher than the nominal yield

B

A customer buys 10 Allied Corporation 8% debentures, M '25, at 90 on Wednesday, April 19th in a regular way trade. The interest payment dates are March 1st and September 1st. The trade settles on: A. Thursday, April 20th B. Friday, April 21st C. Saturday, April 22nd D. Monday, April 24th

B

All of the following are true statements regarding convertible bond issues EXCEPT: A. at the time of issuance, the conversion price is set at a premium to the stock's current market price B. the yield on convertible issues is higher than the yield for similar non-convertible issues C. when the stock price is at a premium to the conversion price, bond price movements are usually caused by those of the stock D. when the stock price is at a discount to the conversion price, bond price movements are usually caused by interest rate changes

B

An investor seeking a moderate level of income and a low level of risk would buy: A. common stock B. mortgage bonds C. income bonds D. convertible bonds

B

As interest rates rise, which following statement is TRUE? A. Bonds trading at small discounts fall faster in price than bonds trading at large discounts. B. Bonds trading at large discounts fall faster in price than bonds trading at small discounts. C. Premium bonds fall faster in price than discount bonds. D. Bonds trading at large premiums fall faster in price than bonds trading at small premiums.

B

If a callable bond is purchased at a premium, and is then called at par which of the following is TRUE? A. The yield to call is higher than the nominal yield B. The yield to call is lower than the nominal yield C. The yield to call is the same as the nominal yield D. The yield to call moves inversely to the nominal yield

B

If a corporation reports a loss for a year, it is obligated to make interest payments on all of the following bonds EXCEPT: A. Reset bonds B. Adjustment bonds C. Convertible bonds D. Callable bonds

B

The nominal yield of a bond will: A. increase as bond prices fall B. remain unchanged as bond prices fluctuate C. increase as bond prices rise D. decrease as bond prices rise

B

Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is puttable at par in 5 years, while the other is puttable at par in 10 years. If interest rates rise by 200 basis points shortly after issuance, which statement is TRUE? A. The bond puttable in 5 years will depreciate more than the bond puttable in 10 years B. The bond puttable in 10 years will depreciate more than the bond puttable in 5 years C. Both bonds will depreciate by equal amounts D. The rate of depreciation depends on the credit rating of the bonds

B

Which of the following would be a quote for a U.S. Government bond? A. 105.625 B. 105-20 C. 105 5/8 D. 105 10/16

B

Which of the following would be a quote for a U.S. Government bond? A. 99.50 B. 99-16 C. 99 1/2 D. 99 8/16

B

Which statement is TRUE regarding bond price volatility? A. High coupon, long maturity bonds have the lowest price volatility B. High coupon, short maturity bonds have the lowest price volatility C. Low coupon, long maturity bonds have the lowest price volatility D. Low coupon, short maturity bonds have the lowest price volatility

B

Standard & Poor's speculative grades are

BB B CCC CC C

Moody's speculative grades are

Ba B Caa Ca C

All of the following are likely to purchase dealer commercial paper EXCEPT: A. Institutions B. Trust Companies C. Individuals D. Open-end Investment Companies

C

All of the following statements are true about both bonds and preferred stock EXCEPT: A. Both bonds and preferred stock are "Senior" securities over common stock in a dissolution B. Both bonds and preferred stock can be convertible C. Payments to both bondholders and preferred stockholders are subject to approval of the Board of Directors D. Both bonds and preferred stock have a stated fixed payment rate

C

An investor believes that interest rates are peaking and wishes to buy long term fixed income securities that will assure the investor of receiving periodic payments at today's rates. The best recommendation is high grade: A. zero coupon bonds B. premium bonds with low call premiums C. non-callable bonds D. puttable bonds

C

An outstanding bond issue which is currently trading at 103 1/4 is callable starting next year at 102 1/2. The call premium on the bond issue is: A. 3/4 points B. 1 3/4 points C. 2 1/2 points D. 3 1/4 points

C

Equipment trust certificates would most likely be issued by a(n): A. manufacturer B. utility C. airline D. bank

C

Exchange rate risk is a factor to consider when investing in foreign debt issues and the: A. U.S. dollar depreciates in value B. U.S. dollar value remains constant C. foreign currency depreciates in value D. foreign currency appreciates in value

C

In a corporate bankruptcy, of the choices offered, the LAST to be paid would be: A. Junior debentures B. Secured bonds C. Preferred stockholders D. Second mortgage bonds

C

The term "Funded Debt" refers to which of the following issues? A. Commercial paper with under 270 days to maturity B. Revenue bond with at least 5 years to maturity C. Corporate debt with at least 5 years to maturity D. Treasury bond with at least 5 years to maturity

C

What will not affect the marketability of a corporate bond? A. Bond rating B. Maturity C. Bond denominations D. Block size

C

When interest rates have fallen, an issuer will: A. call the outstanding low interest rate bonds and issue new bonds with lower interest rates B. call the outstanding low interest rate bonds and issue new bonds with higher interest rates C. call the outstanding high interest rate bonds and issue new bonds with lower interest rates D. call the outstanding high interest rate bonds and issue new bonds with higher interest rates

C

Which of the following would be a quote for an airline bond? A. 105.625 B. 105-20 C. 105 5/8 D. 105 10/16

C

Which statement is TRUE regarding interest rate movements and their effect on bond prices? A. As interest rates move, the price of short term maturities with low coupons will change the fastest B. As interest rates move, the price of short term maturities with high coupons will change the fastest C. As interest rates move, the price of long term maturities with low coupons will change the fastest D. As interest rates move, the price of long term maturities with high coupons will change the fastest

C

A call premium on a bond is the amount: A. the issuer pays the investor each year until maturity B. by which the bond's redemption price maturity exceeds the purchase price C. the bondholder will pay the issuer to call in bonds prior to maturity D. above par issuer will pay the bondholder to call in bonds prior to maturity

D

Corporate debentures are backed by: A. real estate B. equipment C. portfolio of marketable securities D. full faith and credit

D

For bonds trading at a discount which yield measure would be the highest? A. Nominal B. Current C. Basis D. Yield to Call

D

In a corporate liquidation, the priority of claim to corporate assets is: A. Unpaid wages and taxes, debenture holders, mortgage bond holders, preferred stockholders B. Unpaid wages and taxes, preferred stockholders, debenture holders, mortgage bondholders C. Mortgage bond holders, debenture holders, unpaid wages and taxes, preferred stockholders D. Mortgage bond holders, unpaid wages and taxes, debenture holders, preferred stockholders

D

Purchasing power risk is the risk that: A. the issuer will default B. the security will be difficult to sell C. the security will be called prior to maturity D. inflation will reduce the value of future interest payments

D

Regarding bonds with put options, which statement is TRUE? A. Exercise of the put is at the option of the issuer B. Exercise of the put guarantees the investor gets back his or her purchase price. C. Yields on bonds with put options are higher than similar bonds without this feature D. Put features are most likely to be used when rates rise.

D

Reinvestment risk is the risk that: A. interest rates will rise subsequent to bond issuance and interest payments will be reinvested at higher rates B. interest rates will rise subsequent to bond issuance and interest payments will be reinvested at lower rates C. interest rates will drop subsequent to bond issuance and interest payments will be reinvested at higher rates D. interest rates will drop subsequent to bond issuance and interest payments will be reinvested at lower rates

D

What will benefit the most from a decline in market interest rates? A. Money Market Fund B. Short Term Bond Fund C. Intermediate Term Bond Fund D. Long Term Bond Fund

D

When a bond trades at a premium, which bond yield will be the lowest? A. Nominal B. Stated C. Current D. Basis

D

When the price of a bond increases, which statement regarding yields is TRUE? A. Current yield increases and yield to maturity increases B. Current yield increases and yield to maturity decreases C. Current yield decreases and yield to maturity increases D. Current yield decreases and yield to maturity decreases

D

Which of the following will increase the marketability risk of a bond? A. Active trading in that security B. The presence of numerous bids C. Round lot size transaction amount D. Large block size transaction amount

D

In a corporate bankruptcy, who gets paid when?

I. secured bond holders II. unpaid wages and taxes III. debentures IV. preferred stockholders

Moody's ratings for short term municipal notes are

MIG 1 MIG 2 MIG 3 SG

Moody's ratings for short term commercial paper is

P1 P2 P3 NP

as interest rates on bonds fall and prices on bonds rise, what happens to nominal and current yield? What happens to yield to maturity and call?

all of them fall

as interest rates on bonds rise and prices on bonds fall, what happens to nominal and current yield? What happens to yield to maturity and call?

all of them rise

When a bond increases in value due to market demand, this is termed:

appreciation

Arrange the yields for bonds trading at a premium from lowest to highest

basis (yield to maturity) current nominal

Put options are exercisable at the option of the

bond holder

when interest rates rise

bond prices fall

when interest rates fall

bond prices rise

commercial paper is issued in ______ form and is only appealing to ______ investors

book entry large institutional investors

If interest rates drop steeply, a utility can _____ its outstanding bonds and ______ at _______ current market rates.

call refund lower

The issuer must pay call premiums to the bondholders to

call in debt

what is the formula for conversion price of a bond?

conversion price = (par value of bond)/(conversion ratio)

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? A. $20 B. $21 C. $22 D. $50

conversion price = (par value of bond)/(conversion ratio) (1,000)/(50) = 20 $20

A corporation has issued $10,000,000 of 8%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 25:1. The bond is currently trading at 120, while the company's common stock is at 46. The conversion price per share is:

conversion price = (par value)/(conversion ratio)

A convertible debenture is convertible into common at $50 per share. If the market price of the bond rises to a 25 point premium over par, which statement is TRUE? A. The conversion ratio is 20:1 and the parity price of the stock is $50.00 B. The conversion ratio is 20:1 and the parity price of the stock is $62.50 C. The conversion ratio is 25:1 and the parity price of the stock is $50.00 D. The conversion ratio is 25:1 and the parity price of the stock is $62.50

conversion ratio (1,000 par)/(50 conversion price) = 20 20:1 ( 20 shares per bond) price per share 100 + 25 = 125 125 * 1000 = 1,250 1,250/20 62.50 20:1 conversion ratio $62.50 parity price

with convertible bond issues, it is normal for the conversion price to be at a premium to the __________

current market price

In 2021, a customer buys 5 GE 10% debentures, M '41 at 150. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2031 at 103. The current yield on the bonds is:

current yield = (annual income)/(market price) (100)/(1500) 6.67%

A 12%, $1,000 par corporate bond is trading at $1,100. What is the current yield?

current yield = (annual income)/(market price) = (120)/(1,100) = 10.9%

commercial paper is sold at _______ and matures at _______

discount face value

term bonds are also known as

dollar bonds

If market interest rates start to decline, the bond's current yield will

fall

As market interest rates rise, long term bond prices

fall faster than short term bond prices

true or false put option guarantees that the investor will get back his/her purchase price

false

true or false mortgage bonds ARE NOT the most common form of corporate debt

false ARE

true or false whether or not to pay both bondholders and preferred stock holders are subject to approval of the board of directors (discretionary decision)

false NOT subject

true or false: like with nominal yield, current and yield to maturity will change as bond prices rise/fall

false ONLY current and yield to maturity are affected by the fluctuations of bond prices NOT nominal yield

true or false treasury bonds are particularly affected by marketability risk

false municipal bonds are this is due to their fragmented and illiquid nature

true or false Reset bonds are obligated to pay interest, however the rate is reset semi-annually

false rate is reset annually

the lower the price of the bond, the _______ that bond's price will move as market interest rates change.

faster

Debentures are backed solely by the ________ __________ of the issuer. Debentures are usually issued by "_______" organizations with ______ credit ratings or lower credit rated companies in the form of high yield or "______" bonds.

full faith and credit blue chip high junk

mortgage bonds generally get _____ credit ratings and can be sold at ______ interest rates than _______ debt

high lower unsecured

What kind of a quality rating do mortgage bonds usually get? why?

high credit rating quality of the collateral backing the issue

"Purchasing power" risk is the risk

inflation reduces the value of future interest payments and the principal repayment yet to be received in the future.

Callable bonds are of no value unless

interest rates fall increasing bond value

An issuer will call its debt when

interest rates have fallen sufficiently

Puttable bonds are of no value unless

interest rates rise devalues bond

with convertible bond issues when the stock price is at a premium to the conversion price, the conversion feature now has _________

intrinsic value

what're factors that affect marketability risk?

issue's size number of traders in the market

which are most susceptible to market risk?

long term maturities low coupon rate bonds deep discount bonds

Deep (large) discount bonds have a ______ price than small discount bonds, hence their prices move _______

lower faster

Deep discount bonds have a ________ price than small discount bonds, so their change in price as a percentage of current market value is _______.

lower higher

Convertible bonds pay a _______ rate of interest, but they are only backed by the ___________ of the issuing company - they are __________

moderate faith and credit NOT secured

public utilities are financed using ______ bonds

mortgage bonds

Revenue bonds are issued by

municipalities

When interest rates rise, yields on bonds already trading

must also rise

In order for the call to make economic sense, the issuer must be able to issue

new bonds at a lower interest rate to cover the cost of the call premiums and the costs associated with calling the old debt and issuing new debt.

For Bonds Trading at a Discount, Rank Yield Measures Lowest to Highest

nominal current yield to maturity yield to call

A corporation has issued 10%, $1,000 par convertible debentures, convertible at $40. The common stock is currently trading at $45. If the bond and the common are trading at parity, a customer purchasing 5M of the bonds will pay:

number of shares per bond (1,000 par)/(40 conversion price) = 25 the bond is trading 45 times to be at parity 25 * 45 = 1,125 1,125 * 5 = 5,625 $5,625

The put feature can permit the owner to put the bond back to the issuer at ______, or at a fixed price that is ______ _______

par lower than par

US government bonds are quoted as a

percentage of par value with minimum changes of 1/32nd point

Adjustment bonds, also known as income bonds, pay interest only if the corporation hits a _________ level of earnings. If the income level is __________, there is ____ obligation to make the interest payment.

predetermined not sufficient no

why are put options valued by bond holders?

put option removes some or all of the market risk from the bond if interest rates rise

As market interest rates fall, long term bond prices

rise faster than short term bond prices

If market interest rates start to decline, the bond's price will

rise in the market

Market risk for a bondholder is

rising interest rates forcing the price of a bond to drop

Commercial paper is a ________ financing and is an _________ debt.

short term unfunded

Premium bonds will fall more ________ than discount bonds in a rising rate environment.

slowly

common stock dividend decision is discretionary on the part of

the board of directors

Income bonds only pay when

the company has sufficient earnings

with convertible bond issues when the stock price is at a discount to the conversion price, __________

the conversion feature is worthless

A call premium is

the excess over par value that the issuer will pay the bondholder to call in the bonds prior to maturity

t bonds are issued by

the government

A 30-year bond is issued with a 6% stated rate of interest, and is callable starting in 10 years at 102. It is now 11 years later and market interest rates for similar bonds are now at 9%. Which statement is TRUE?

the market price of the bond will fall substantially below par

When a bond is purchased at par, the nominal (stated) yield and the current yield (annual income/market price) are

the same

The nominal yield is

the stated rate of interest as a percentage of par value

with convertible bond issues, for the conversion feature to be worth something

the stock's price must move up in the market

true or false if the bond is purchased at a premium, both yield to call and yield to maturity must be lower than the nominal yield.

true

true or false Large premium bonds have a higher price than small premium bonds, so their change in price as a percentage of current market value is smaller.

true

true or false The longer the maturity, the greater the change in price for a given change in interest rates

true

true or false The lower the coupon, the greater the change in price for a given change in interest rates.

true

true or false annual interest and capital gain for a bond are fixed

true

true or false bonds with high coupon rates, do not have high price volatility

true

true or false both bonds and preferred stock have a fixed payout rate

true

true or false both conversion and call features have no effect on the obligation to pay

true

true or false commercial papers' maturity CANNOT exceed 270 days

true

true or false corporate and government bonds are term bonds

true

true or false funded debt ONLY applies to corporate debt that is part of the company's permanent long term funding

true

true or false long term bond prices are more volatile than short term bond prices as interest rates move

true

true or false with commercial debt, semi annual interest payments CANNOT be made like with longer term debt

true

true or false: Both bonds and preferred stock are "Senior" securities over common

true

true or false: both bonds and preferred stock can be convertible

true

true or false: nominal yield DOES NOT change as bond prices move

true

______ corporate financing needs are met by issuing commercial paper.

very short term

The yield to call will be lower than the yield to maturity if the bond

was purchased at a premium

How are corporate bonds quoted?

whole and fractional in 1/8th increments