Corporate Debt Securities and Money-Market Instruments Flashcards Preview

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Flashcards in Corporate Debt Securities and Money-Market Instruments Deck (38)
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1
Q

What is a step-up, long-term CD?

A

A CD that offers an interest rate that is lower than current rates, with subsequent interest rates paid being higher

2
Q

Is an income bond appropriate for a client who desires income?

A

No. Income (adjustment) bonds will only pay interest if the issuer has sufficient income.

3
Q

A bond convertible at $25 is trading at $1,150, and the stock is trading at $30. Is the bond at parity with the stock?

A

No, the bond’s parity price is $1,200. The bond can be converted to 40 shares selling at $30, which equals $1,200.

4
Q

A bond backed by machinery or rolling stock is called a(n) ______________________.

A

A bond backed by machinery or rolling stock is called a(n) Equipment Trust Bond.

5
Q

Are debentures considered secured or unsecured?

A

Unsecured. They are backed only by the issuer’s full faith and credit.

6
Q

The type of bond where bondholders have a lien on real property is called a __________________.

A

The type of bond where bondholders have a lien on real property is called a mortgage bond.

7
Q

Name some of the different types of money-market instruments. 4

A
  1. T-Bills,
  2. Bankers’ Acceptances (BAs),
  3. Commercial Paper,
  4. Negotiable CDs
8
Q

How is interest on corporate bonds treated for tax purposes?

A

Fully taxable (taxed at the federal, state, and local level)

9
Q

What are some examples of rolling stock used to back a bond offering?

A

Airplanes, trucks, railroad cars

10
Q

An ____________ indenture allows additional bonds to be issued and backed by the same collateral.

A

An open-end indenture allows additional bonds to be issued and backed by the same collateral.

11
Q

Name some of the advantages of buying convertible bonds. 3

A
  1. Consistent interest payments,
  2. appreciation if stock rises,
  3. downside protection if stock falls (since it’s still a bond).
12
Q

Accrued interest on corporate bonds is calculated using _____ days in the month and ______ days in the year.

A

Accrued interest on corporate bonds is calculated using 30 days in the month and 360 days in the year.

13
Q

What happens if a bond is convertible at $20 (ratio is 50 shares) and the company issues a 10% stock dividend?

A

Conversion ratio increases to 55 shares (50 x 10% = extra 5) and the new conversion price would be $18.18 ($1,000 ÷ 55).

14
Q

What are Eurodollar bonds?

A

Dollar-denominated bonds issued outside the U.S.

15
Q

True or False: A favorable arbitrage situation occurs when a bond is trading at a discount to parity.

A

True

16
Q

Define parity.

A

The value of two investments being equal, even, or the same

17
Q

When do corporate bond trades settle?

A

T + 3 (three business days after the trade date)

18
Q

Money-market securities have a maturity of __________________.

A

Money-market securities have a maturity of one year or less.

19
Q

A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?

A

Conv. ratio = $1,000 ÷ $50 = 20 sh. The stock needs to trade at $60 to be at parity with the bond ($1,200 ÷ 20 = $60).

20
Q

A corporation that issues convertible bonds is borrowing money at a _______ rate.

A

A corporation that issues convertible bonds is borrowing money at a lower rate (convertibles pay lower interest rates).

21
Q

For bondholders, is a closed-end indenture more or less protective than an open-end indenture?

A

More protective, since the asset backing the bond cannot be diluted

22
Q

What is forced conversion?

A

An issuer calls bonds at a point where the stock is worth more than the bond’s call price.

23
Q

Is the conversion of a bond a taxable event?

A

No, it is a tax-free exchange. The taxable event would occur when the stock is sold.

24
Q

Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $__________.

A

Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $100,000.

25
Q

May Eurodollar bonds be issued in the U.S.?

A

No, and they are not registered with the SEC.

26
Q

ABC = $50. ABC’s bond is convertible at $40 and callable at 105. Is the call or conversion and sale more profitable?

A

Conversion and sale equals $1,250 (25 shares x $50), while the call only provides $1,050.

27
Q

Will a bond’s conversion price and conversion ratio be adjusted for stock splits or stock dividends?

A

Yes, due to a bond’s non-dilutive feature.

28
Q

What is the proper order of liquidation for a corporation at bankruptcy?

A

Unpaid workers, IRS, secured creditors, unsecured creditors, preferred, and then common.

29
Q

The formula for finding conversion ratio is: ______ ÷ ____________

A

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for a bond is $1,000)

30
Q

True or False: Interest paid on corporate bonds is entirely tax-exempt.

A

False. Corporate bond interest is taxed at the federal, state, and local level.

31
Q

Corporate bonds quotes may be found in the ________________.

A

Corporate bonds quotes may be found in the Yellow Sheets.

32
Q

May Eurodollar bonds later trade in the U.S.?

A

Yes

33
Q

The Trust Indenture Act of 1939 regulates ________________ offerings.

A

The Trust Indenture Act of 1939 regulates corporate bond offerings (NOT municipal or government offerings).

34
Q

What is a step-down, long-term CD?

A

A CD that offers an interest rate that’s higher than current rates, with subsequent interest rates paid being lower

35
Q

True or False: Collateral Trust Bonds are backed by the stock of the issuing corporation.

A

False. The stock pledged must be that of a separate company.

36
Q

If a bond is referred to as trading flat, this means it trades ___________________________.

A

If a bond is referred to as trading flat, this means it trades without accrued interest.

37
Q

If a bond is converted to stock, what is the investor’s basis?

A

The same as the basis of the converted security.

38
Q

What bonds are dollar-denominated, U.S. registered, and issued by multinational companies and foreign governments?

A

Yankee Bonds