Corporate Debt

A customer buys 5 Coleco bonds (11s22f) at the closing price, with settlement taking place on February 1st. The interest payment dates on the bonds are Jan 1st and July 1st. How much accrued interest will the buyer pay to the seller? A. $0 B. $9.17 C. $45.83 D. $275.00

A. $0 (The Coleco bonds are "11s22f"; 11% bonds maturing in 2022 which are trading flat. A bond trades flat (without accrued interest) when the issuer has defaulted on the interest payments.)

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. Book entry form

The Standard and Poor's Bond Guide includes information on: A. Corporate Bonds B. U.S. Government Bonds C. Municipal Bonds D. Agency Bonds

A. Corporate Bonds (Standard and Poor's Bond Guide is published on the web, and gives capsule summaries of every outstanding corporate issue, including recent price, rating, and yield.)

Interest earned on corporate bonds is: I Subject to Federal tax II Subject to State and Local tax III Exempt from Federal tax IV Exempt from State and Local tax A. I and II B. III and IV C. I and IV D. II and III

A. I and II

Which of the following statements are TRUE regarding corporate obligations? I Corporate bonds are traded on the NYSE II Corporate bonds are not traded on the NYSE III Corporate bonds are traded over-the-counter IV Corporate bonds are not traded over-the-counter A. I and III B. I and IV C. II and III D. II and IV

A. I and III (Though a very small amount of corporate bonds are traded on the NYSE (in a separate trade matching computer), most of the trading volume takes place over-the-counter between corporate bond dealers such as Goldman Sachs and other firms.)

Reports of corporate bond trades are made through: A. TRACE B. RTRS C. Network A Tape D. Network C Tape

A. TRACE (TRACE is FINRA's Trade Reporting and Compliance Engine. It reports trades of corporate, government and agency bonds. Any OTC dealers trading these bonds must report each trade to TRACE "as soon as practicable," but no later than 15 minutes after execution. TRACE disseminates the trade report immediately. RTRS stands for Real Time Reporting System. It reports trades of municipal bonds. The Network A Tape reports trades of NYSE listed equity issues. The Network B Tape reports trades of AMEX (now renamed the NYSE American) and regional listed equity issues. The Network C Tape reports trades of NASDAQ listed equity issues. These are covered in the Trading Markets chapter.)

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 (First mortgage bondholders have been granted a "first mortgage lien" on any "real" properties (real estate - land and buildings) that are pledged by the issuer as backing for the bond issue. If a default occurs, the bondholders have the legal right to sell the pledged property, and to use the proceeds to satisfy the outstanding debt.)

The "interest" received from a zero-coupon corporate bond is: A. accreted and taxed annually B. accreted and tax deferred until maturity C. not accreted and not taxed annually D. not accreted and taxed as capital gain at maturity

A. accreted and taxed annually

A short term corporate debt which is backed solely by the full faith and credit of the issuer is: A. commercial paper B. an income bond C. a mortgage bond D. a general obligation bond

A. commercial paper

This is where an undervalued publicly held company is "bought out" and taken private. The funds to do this are raised by selling bonds, so this is the "leverage" used to complete the buy out. A. leveraged buy out B. tender offer C. reverse merger D. reorganization

A. leveraged buy out

If the bonds are trading at 130 5/8 and the common stock is trading at $14.75, the parity price of the common stock is (also convertible at $10.50) A. $13.25 B. $13.75 C. $14.75 D. $15.00

B. $13.75 Par is convertible at $10.50, so 1000 par / 10.50 = roughly 95 shares Trading at 130 5/8, so 1306.25 / 95 = $13.75

A corporation has issued $10,000,000 of 7 1/4%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 40:1. The bond is currently trading at 101, while the company's common stock is at 24. The parity price per share is: A. $24.75 B. $25.25 C. $30.50 D. $40.75

B. $25.25 The bond is currently priced at $1,010. For the common stock to be trading at "parity," 40 shares (the conversion amount per bond) must be worth the same $1,010. $1,010 divided by 40 shares per bond equals $25.25 per share parity price. The parity price formula is: parity price = bond's price / conversion ratio PP = 1010 / 40 = 25.25

A customer buys 10 Allied Corporation 8% debentures, M '45, at 90 on Wednesday, April 19th. The interest payment dates are Mar. 15th and Sept. 15th. The trade settled on Friday, April 21st. How many days of accrued interest must the buyer pay to the seller? A. 15 B. 36 C. 38 D. 39

B. 36 (Interest accrues on a 30 day month / 360 day year for corporate bonds, with interest accruing up to, but not including settlement. The bonds were purchased on Wednesday, April 19th. Settlement takes place 2 business days after purchase on Friday, April 21st, thus interest accrues through the 20th of April. Since the last interest payment was made on March 15th, 16 days are due for March (the 15th through the 30th is 16 days!); and 20 days are due for April; for a total of 36 days of accrued interest due.)

A new issue corporate bond has a dated date of September 1st. The bond is assigned by the issuer to the underwriter on August 31st. Accrued interest on the bond will be calculated based on how many days in a year? A. 359 B. 360 C. 364 D. 365

B. 360 (Accrued interest on a corporate bond is calculated on a 30-day month / 360-day year basis.)

Current dealer offerings of corporate bonds can be found in: A. Bond Buyer B. Bloomberg C. Moody's D. Fitch's

B. Bloomberg (Quote providers such as Bloomberg and Reuters give dealer to dealer prices (the "wholesale" market) for corporate bonds daily. The Bond Buyer is the municipal new issue newspaper. Moody's and Fitch's rate bonds - they are not quote providers.)

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

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 $52. Which statements are TRUE? I An arbitrage opportunity exists between the convertible bond and the common stock II An arbitrage opportunity does not exist between the convertible bond and the common stock III The common stock is trading at a discount to the parity price IV The common stock is trading at a premium to the parity price A. I and III B. I and IV C. II and III D. II and IV

B. I and IV (Since the common stock is trading at $52 per share, while the parity price is $48 per share ($1,200 current bond price / 25 conversion ratio = $48), the stock is trading at a premium to the parity price. An arbitrage opportunity is present as the common stock is trading above parity.)

Corporate bonds are issued with an "anti-dilutive" covenant. If the corporation declares a 5% stock dividend, which statements are TRUE? I The conversion ratio is increased II The conversion price is increased III The conversion ratio is decreased IV The conversion price is decreased A. I and II B. I and IV C. II and III D. III and IV

B. I and IV (When a senior convertible security is issued with an "anti-dilutive" covenant, should the company issue additional common shares, the terms of conversion are adjusted. When additional common shares are issued, there are more common shares outstanding, with each share being worth proportionately less. To adjust the terms of conversion, the conversion price is reduced, and the number of common shares into which the security is convertible is increased.)

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 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 $50.00 IV The parity price of the stock is $62.50 A. I and III B. I and IV C. II and III D. II and IV

B. I and IV 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 $50 per share, so the conversion ratio is $1,000 par / $50 conversion price = 20:1 (20 shares per bond). If the bond moves to a 25 point premium over par, its new price will be 125, or $1,250 per bond. For the common stock to be valued at parity to the bond, the price per share must be $1,250 / 20 shares per bond = $62.50 per share parity price.

What does a bond trading "flat" mean? A. No commission is added to the price of the trade B. The bond is trading without accrued interest C. The dealer's bid and ask quote for the bond are the same D. The bond does have SIPC insurance

B. The bond is trading without accrued interest (A bond trades flat (without accrued interest) when the issuer has defaulted on the interest payments, or if the issue is an income bond or a zero coupon bond.)

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. Which statement is TRUE? A. There is an arbitrage opportunity between the convertible bond and the common stock B. The common stock is trading at a discount to the parity price C. The common stock is trading at parity D. The common stock is trading at a premium to the parity price

B. The common stock is trading at a discount to the parity price (Since the common stock is trading at $46 per share, while the parity price is $48 per share, the stock is trading below the parity price. (To find the parity price, divide the $1,200 bond price by the conversion ratio of 25 = $48 per share). An arbitrage opportunity is not present unless the common stock is trading above parity. Then the bond can be bought and converted into common stock at a "cheaper" price than the current market price of the stock.)

A customer buys 10 PDQ Corporation 10% debentures, M '35, at 93 on Friday, June 12th in a regular way trade. The interest payment dates are March 1st and September 1st. The trade settles on: A. Monday, June 15th B. Tuesday, June 16th C. Wednesday, June 17th D. Friday, June 19th

B. Tuesday, June 16th (Regular way trades of corporate bonds and stocks settle 2 business days after trade date.)

In a period of steep increases in interest rates, which issuer is most likely to be negatively affected? A. Trucking company B. Utility company C. Mining company D. Technology company

B. Utility company (If interest rates rise steeply, as its bonds mature, the utility must replace them with new bonds at steeply higher interest rates. This increases its interest cost (which is one of its largest expenses), so earnings will deteriorate, and the price of the stock will fall in the market. Because the other industries listed cannot issue such a large amount of bonds, the negative impact of higher current market rates is not as great.)

The credit rating of a guaranteed corporate bond is based on the credit quality of the: A. corporate issuer B. corporate guarantor C. FDIC D. SIPC

B. corporate guarantor

A corporation has issued $1,000 par, 8% convertible bonds, callable at par. The bonds are convertible into 14 shares of common stock. Currently, the bond is trading at 102 while the common stock is trading at $75.50. The corporation calls the bonds at par plus accrued interest of $20 per bond. The corporation is making a(n): A. tender offer B. forced conversion C. advance refunding D. simultaneous transaction

B. forced conversion (The best choice for the bondholder is to convert. In effect, the corporation is forcing the convertible bondholders to convert to common. Corporations will do this when interest rates have fallen. It allows the issuer to retire older, high interest rate debt. After the conversion occurs, the issuer will sell new debt at lower current market interest rates.)

When a corporation is making a limited time offer to buy its own securities or the securities of another company at a price that is above the current market price, this is known as a: A. leveraged buy out B. tender offer C. reverse merger D. reorganization

B. tender offer

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: A. $4,950 B. $5,000 C. $5,625 D. $6,550

C. $5,625 The bonds are convertible at $40, based on $1,000 par value. Therefore each bond converts into 25 shares ($1,000 par / $40 conversion price). If the common is trading at $45, the bond must be trading at 25 times this to be at parity. $45 x 25 = $1,125 parity price of one bond. The parity price of "5M" ($5,000 face amount, "M" is Latin for $1,000) is $1,125 x 5 = $5,625.

A new issue corporate bond with dated date of March 1st is bought from the underwriter with settlement occurring on Wednesday, March 28th. How many days of accrued interest is owed the underwriter? A. 0 B. 26 C. 27 D. 28

C. 27 (Accrued interest on a new issue is calculated from the dated date up until, but not including settlement date.)

The term "Funded Debt" refers to: I Short term debt II Long term debt III Corporate debt IV U.S. Government debt A. I and III B. I and IV C. II and III D. II and IV

C. II and III

Zero coupon bonds: I pay interest semi-annually II pay interest at maturity III are bought at a discount and mature at par IV are bought at a par and mature at a premium A. I and III B. I and IV C. II and III D. II and IV

C. II and III

Which of the following corporate obligations are NOT secured? I Collateral trust certificate II Subordinated debenture III Commercial paper IV Debenture A. I only B. II and IV only C. II, III, IV D. I, II, III, IV

C. II, III, IV

Which of the following statements are TRUE when comparing bonds and preferred stock? I Payments to bondholders are subject to approval of the Board of Directors II Payments to preferred stockholders are subject to approval of the Board of Directors III Bonds are considered senior securities over common stock in a corporate dissolution IV Preferred stock is considered to be a senior security over common stock in a corporate dissolution A. I and III only B. II and IV only C. II, III, IV D. I, II, III, IV

C. II, III, IV

All of the following statements are true regarding corporate zero coupon bonds EXCEPT: A. zero coupon bonds do not offer investors a current return B. zero coupon bonds are usually suitable investments for Individual retirement Accounts and Self Employed Retirement Plans. C. the interest income on such obligations is not taxable until maturity D. the rate of return for zero coupon bonds is not subject to reinvestment risk associated with interest paying issues

C. the interest income on such obligations is not taxable until maturity (This "earning" of the discount is taxed annually as interest income to the bondholder even though no physical payment is made.)

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? A. $10 B. $80 C. $94 D. $100

D. $100 conversion price = par value / conversion ratio CP = 1000 / 10 = 100

A customer buys 10 Allied Corporation 8% debentures, M '25, at 90 on Tuesday, Oct 9th. The interest payment dates are Feb. 1 and Aug. 1. The trade settled on Thursday, October 11th. The annual interest payments amount to: A. $74.50 B. $80 C. $754 D. $800

D. $800 10 x 1000 = 10,000 10,000 x 8% = 800

The trust indenture of a bond would include which of the following information? I Interest rate II Maturity III Collateral backing the issue IV Call provisions A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

D. I, II, III, IV

Which of the following statements are TRUE regarding convertible bond issues? I At the time of issuance, the conversion price is set at a premium to the stock's current market price II When the stock price is at a premium to the conversion price, the conversion feature has intrinsic value. III For the conversion feature to have value, the stock's price must move up in the market after issuance IV Convertible bonds usually have lower yields than bonds without the conversion feature A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

D. I, II, III, IV

Which statements are TRUE about adjustment (income) bonds? I Semi-annual payment of interest is assured II Semi-annual payment of interest is not assured III Repayment of principal at maturity is assured IV Repayment of principal at maturity is not assured A. I and III B. I and IV C. II and III D. II and IV

D. II and IV (Income bonds only pay interest if the corporation earns enough "income" to make that interest payment. So payment of interest is not assured. In addition, if the issuer defaults (which could happen), then the principal will not be repaid either.)

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. Mortgage bond holders, unpaid wages and taxes, debenture holders, preferred stockholders

A corporation can redeem its debt securities prior to their maturity date by all of the following methods EXCEPT: A. purchasing outstanding debt securities in the open market B. tendering for outstanding debt securities at a price determined by the issuer C. calling outstanding securities at pre-established dates and prices D. issuing new bonds and using the proceeds to prepay the bondholders

D. issuing new bonds and using the proceeds to prepay the bondholders (A corporation cannot retire its debt prior to maturity by prepaying the bondholders - there is no such thing for corporate debt securities. There are only four ways in which a corporation can redeem its debt prior to maturity. It can purchase outstanding debt securities in the open market, which it would do if the market price of the bonds was below the call price. It can make a formal tender offer to all bondholders to buy outstanding debt securities at a price determined by the issuer. It can call outstanding securities at pre-established dates and prices. Finally, it can force conversion of convertible bonds that have appreciated in the market by calling them.)