3 - Bonds Payable & Other Concepts

Question 1

Long-term debt instruments similar to notes & loans but are usually offered to the public and sold to many investors

Answer 1

Bonds

Question 2

Any contract that represents right to receive cash from issuer to the holder.

Answer 2

Debt instrument

Question 3

A debt instrument represents what kind of relationship between entities?

Answer 3

Debtor-creditor relationship

Question 4

Contractual arrangement between issuer and bondholders that contains restrictive covenants to prevent issue from taking actions contrary to interests of bondholders.

Answer 4

Bond indenture

Question 5

Appointed to ensure the compliance of restrictive covenants in the bond indenture

Answer 5

Trustee (often a bank)

Question 6

Bond Indenture specifications:

Answer 6

a. Rights & duties of bondholders and issuer
b. Restrictions and requirements on the issuer
c. Interest rate, payment dates, and maturity dates

Question 7

Rights & duties of bondholders and issuer have the following:

Answer 7

1. Call provision
2. Redemption rights

Question 8

Issuer’s right to call the bonds before maturity

Answer 8

Call provision

Question 9

Holder’s right to redeem the bonds

Answer 9

Redemption rights

Question 10

Restrictions and requirements on the issuer has the following:

Answer 10

1. Sinking funds
2. Financial rations
3. Restriction on dividends available to the shareholders
4. Restriction on incurrence of additional obligations
5. Appointment of independent trustee
6. Authorized amount

Question 11

Issued to bondholder representing amount of bonds that has been purchased

Answer 11

Bond certificate

Question 12

Bonds are usually issued in small denominations, why?

Answer 12

To increase affordability of bonds

Question 13

Bonds can be issued in several ways:

Answer 13

1. Underwriting
2. Auction
3. Direct placement

Question 14

Agrees on the price, pays issuer, and resells at higher price

Answer 14

Underwriter

Question 15

Mature on a single date

Answer 15

Term bonds

Question 16

Principal matures in installments

Answer 16

Serial bonds

Question 17

Have more than one maturity and permits investors to choose maturity dates that meet their needs

Answer 17

Extendible and Retractable bonds

Question 18

Give holders right to extend

Answer 18

Extendible bonds

Question 19

Give holders right to shorten

Answer 19

Retractable bonds

Question 20

Issued in name of holder and interests are paid directly to them. When bond is sold, new certificate is issued.

Answer 20

Registered bonds

Question 21

Freely transferred and have a detachable coupon

Answer 21

Coupon or Bearer bonds

Question 22

Do not pay periodic interests, both principal & compounded interests are due @ maturity date

Answer 22

Zero-coupon bonds/
Strip bonds/
Deep discount bonds

Question 23

Pay interest only if issuer earns profit

Answer 23

Income bonds

Question 24

Participate in excess earnings of issuer

Answer 24

Participating bonds

Question 25

Pay interest indexed to measure of general purchasing power

Answer 25

Indexed bonds

Question 26

Principal and interest are adjusted in response to inflation providing protection to bondholder from inflation

Answer 26

Inflation-linked bonds

Question 27

Secured by real property

Answer 27

Mortgage bonds

Question 28

Secured by issuer securities held by a trustee

Answer 28

Collateral trust bonds

Question 29

Collateralized by a pool of assets

Answer 29

Asset-backed bonds

Question 30

Have higher yield but lower priority during liquidation

Answer 30

Subordinate bonds

Question 31

Not secured by any collateral

Answer 31

Debenture bonds

Question 32

High risk, high-yield bonds

Answer 32

Junk bonds

Question 33

Bonds issuer can redeem prior to maturity date

Answer 33

Callable bonds

Question 34

Holder can exchange for issuer's shares of stocks

Answer 34

Convertible bonds

Question 35

Issued by a corporation

Answer 35

Corporate bonds

Question 36

Issued by companies with high credit rating

Answer 36

Investment grade

Question 37

Issued by companies with low credit rating

Answer 37

Non-investment grade

Question 38

Issued by a government and have low financial risk since they are free from default

Answer 38

Government bonds or Treasury bonds

Question 39

Issued by a foreign entity in a domestic market

Answer 39

International bonds

Question 40

Denominated in a currency other than currency of the market where they are offered

Answer 40

Eurobonds

Question 41

Denominated in the currency of domestic market in which they are offered

Answer 41

Foreign bonds

Question 42

Yen-denominated in Japan

Answer 42

Samurai bond

Question 43

Australian denominated issued in Australia

Answer 43

Kangaroo/Matilda bonds

Question 44

Canadian - Canada

Answer 44

Maple bonds

Question 45

Euro - Spain

Answer 45

Matador bonds

Question 46

British - British market

Answer 46

Bulldog bonds

Question 47

US - US market

Answer 47

Yankee bonds

Question 48

Bonds issued in several countries at the same time

Answer 48

Global bonds

Question 49

Bonds are accounted for the same way as notes and loans payable but bonds are:

Answer 49

1. long-term 2. bears interest 3. issued @ premium/discount 4. transaction cost