Ch. 2, Corp and Municipal Debt Securities | Day 1 Flashcards
(15 cards)
What does a bond represent in finance?
A bond represents a loan to the issuer in exchange for a promise to repay the principal amount at maturity, along with periodic interest payments.
Who are corporate bondholders in relation to the company?
Corporate bondholders are creditors of the company, not owners. They do not have voting rights.
What is leverage financing in the context of corporate bonds?
Leverage financing is when a company raises capital by issuing debt and pays interest only until maturity.
In what order are investors paid in the event of a company’s liquidation?
Bondholders are paid before preferred and common stockholders in liquidation.
What are bearer bonds, and what is a key risk associated with them?
Bearer bonds do not record the owner’s identity and can be redeemed by whoever holds them, posing a higher risk of loss or theft.
What distinguishes a registered bond from a bearer bond?
A registered bond records the owner’s name with the issuer; interest and principal payments are made directly to the registered owner.
What is a principal-only registered bond?
It records the owner’s name for principal repayment, but the holder must still clip coupons for interest payments.
How are fully registered bonds different from principal-only registered bonds?
Fully registered bonds record the owner’s name for both principal and interest payments, which are sent directly by the issuer.
What is a book-entry bond, and what serves as ownership evidence?
Book-entry bonds have no physical certificate; the trade confirmation from the brokerage serves as proof of ownership.
List at least five items found on a bond certificate.
Name of issuer, principal amount, interest rate, maturity date, and reference to the trust indenture.
What is a trust indenture?
It’s a formal agreement between the issuer and trustee outlining terms and protections for bondholders.
What does par value represent on a bond?
Par value is the bond’s face value—typically $1,000—which is repaid at maturity.
What does it mean to buy a bond at a discount?
Buying a bond for less than its par value, often due to market interest rate conditions.
What causes a bond to sell at a premium?
When existing bond prices rise above par due to market conditions, often when interest rates fall.
Name at least four factors that influence bond pricing in the secondary market.
Rating, interest rates, term, coupon rate, supply and demand, issuer, and bond features (e.g., callable, convertible).
