Corporate Debt

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: (question #14)

$48

The conversion price of a convertible debenture is set at issuance at $50 per share. The common stock is now trading at $46 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: (question #16)

$55.00

What is true about both bonds and preferred stock?

-both bonds and preferred stock are "senior" securities over common stock in a dissolution; -both bonds and preferred stock can be convertible; -both bonds and preferred stock have a stated fixed payment rate

What is the parity price?

-for convertible bonds and convertible preferred stock, when the total market value of the common shares into which a security can be converted equals the market value of the convertible security; -for options, when the premium of the option is exactly equal to the option's intrinsic value

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 parity, they are priced at: (question #17)

101

A customer bought a $1,000 par convertible subordinated debenture at par, convertible into common at $25 per share. If the bond's market price increases by 20%, the parity price of the stock will be: (question #15)

30

Ford Motor Company has issued 8% convertible debentures, convertible at a 25:1 ratio. Currently the debenture is trading at 110. The stock is trading at 38. What is the conversion price of the stock? (question #13)

40

What is a Yankee Bond?

A foreign bond traded in the U.S. Market

A company that has issued first mortgage bonds is declared in default by the trustee. Which statement is TRUE? A. The bondholders have legal claim to the property backing the bond; and may sell that property to satisfy the unpaid obligation B. The bondholders have legal claim to all property of the failed company; and may attach and sell any, or all, of that property C. The bondholders have first claim to all assets of the failed company that have not been pledged D. The bondholders are general creditors of the failed company

A. The bondholders have legal claim to the property backing the bond; and may sell that property to satisfy the unpaid obligation.

All of the following statements are true regarding equipment trust certificates ("ETCs") EXCEPT: A. Equipment trust certificates are secured by specified corporate assets B. Default of ETCs is common during recessionary periods C. Equipment trust certificates are commonly issued by transportation companies D. Equipment trust certificates are issued in serial maturities

B. Default of ETCs is common during recessionary periods

All new corporate bonds are issued in:

Book entry form

A corporate bond which is backed solely by the full faith and credit of the issuer is a:

Debenture

Common carriers such as airline, railroad, or trucking companies would most likely issue:

Equipment trust certificates

What debt securities may be issued by corporations?

Equipment trust certificates; mortgage bonds; adjustment bonds

When comparing convertible to non-convertible corporate bonds, convertible bonds have: I. Lower yields II. Higher yields III. Price appreciation potential based on the market price of the common stock IV. No price appreciation potential based upon the market price of the common stock

I and III

Which of the following statements are TRUE when comparing bonds and preferred stock? I. Both bonds and preferred stock have a fixed payout rate II. Bonds have a fixed payout rate; preferred stock does not III. Both bonds and preferred stock can be convertible into shares of common stock IV. Bonds can be convertible; preferred stock cannot

I and III

The certificates issued by Southwest Railroad are: I. secured II. unsecured III. backed by a lien on real property owned by the issuer IV. backed by a lien on equipment owned by the issuer

I and IV

A convertible debenture is convertible into common at $40 per share. If the market price of the bond rises to a 5 point premium over par, which statements are true? I. The conversion ratio is 20:1 II. The conversion ratio is 25:1 III. The parity price of the stock is $40 IV. The parity price of the stock is $42

II and IV

Who would purchase commercial paper?

Insurance companies, trust companies, open-end investment companies

What is the formula for the conversion price?

Par Value of Bond/Conversion Ratio=Conversion price

A discount corporate bond that is callable would be quoted on a yield basis based upon:

Yield to maturity

What are equipment trust certificates?

a long-term debt security issued by corporations that are common carriers such as airlines and railroads. proceeds from the issue are used to purchase equipment such as aircraft or railroad cars, to which a trustee holds the title for the certificate holders until the bond is retired; if default or bankruptcy, the certificate holders have first claim on the equipment pledged as collateral for the loan

Facts about zero coupon bonds:

pay interest at maturity; are bought at a discount and mature at par