Chapter 3 - Types of Bonds

Question 1

Convertible Bonds

Answer 1

A corporate bond that can be converted at the investor’s choice into a fixed number of common shares of the company

Question 2

Parity price

Answer 2

Market value at which an investor is indifferent toward owning a convertible bond or converting into the underlying common stock

Question 3

MBS

Answer 3

Mortgage backed security

Question 4

Mortgage backed security

Answer 4

Pools of mortgages that are turned into bonds, helping to create more liquidity in the mortgage market

Question 5

Collateralized mortgage obligations

Answer 5

Mortgage backed securities that are structured by broker-dealers and divided into tranches, each varying by expected maturity, credit quality, and exposure to investment risks

Question 6

General obligation (GO Bonds)

Answer 6

Municipal bonds issued to finance a non-revenue producing facility (public park, public school, or public library) and backed by the taxing power of the issuing municipality

Question 7

Revenue bonds

Answer 7

Municipal bonds issued for and backed by a revenue-producing facility (toll road, an airport, or water treatment facility)

Question 8

Money market securities

Answer 8

Very safe and liquid debt securities with maturities of one year or less

Question 9

What are some examples of money market securities?

Answer 9

Treasury bills, negotiable certificates of deposit, and commercial paper

Question 10

The term corporate bonds usually applies too _________ debt instruments with maturities of at least ______ years

Answer 10

Longer-term, 10

Question 11

Notes

Answer 11

Medium term maturity instruments

Question 12

Commercial paper

Answer 12

Used for corporate instruments with a maturity of no more than 270 days

Question 13

Vast majority of trading volume in corporate bonds takes place in the ______________ market place

Answer 13

Over the counter

Question 14

Interest paid on corporate bonds is fully taxable as ordinary income at the ________ levels

Answer 14

Federal, state, and local levels

Question 15

Trust Indenture Act of 1939

Answer 15

Requires that corporate debt issues of more than 50 million include a written agreement (trust indenture)

Question 16

Trust indenture

Answer 16

Written agreement between the issuer and an independent trustee acting on behalf of the bondholders

Question 17

The indenture includes a number of __________ or promises by the issuer, that are designed to protect the interests of the bondholders

Answer 17

Covenants

Question 18

Who is usually the trustee?

Answer 18

Large bank

Question 19

What is the trustee legally empowered to do?

Answer 19

Act in the best interest of the bondholders to ensure the issuer meets its obligations

Question 20

In the event that a bond issuer defaults, the appointed trustee may be able to seize the __________ and ________

Answer 20

Issuer’s assets, and sell them to recoup the bondholders investment

Question 21

Secured corporate debt

Answer 21

Backed by the corporate collateral

Question 22

Investors have rights to the collateral if ________

Answer 22

If the issuer defaults on principal and interest payments

Question 23

Mortgage bonds

Answer 23

Corporate bonds that are secured by real estate holdings or other real property (can take your house)

Question 24

Collateral trust bonds

Answer 24

Secured by a financial asset owned by the corporation, such as stocks, bonds, or other securities (can take your stocks)

Question 25

Equipment trust bligations

Answer 25

Debt instruments that are secured by equipment or physical assets such as airplanes, trucks, and trains

Question 26

What is another way to say unsecured corporate debt?

Answer 26

Debenture bonds

Question 27

Unsecured corporate debt vs Secured debt

Answer 27

Pay more interest than secured debt because it is not backed by a specific asset

Question 28

Some unsecured debt may be contractually identified as senior to other unsecured debt which ______

Answer 28

Gives it higher priority in a corporate liquidation

Question 29

More junior debt is called _____

Answer 29

Subordinate debt

Question 30

The holders of subordinate debt have a _________ in case of a bankruptcy filing and because of this subordinated debt pays more interest to investors

Answer 30

Lower priority

Question 31

What is the liquidation priority of a bank? From first to last

Answer 31

Secured bondholders, unsecured bondholders and general creditors, subordinated debt and convertible bonds, preferred stockholders, common stockholders

Question 32

Why are secured bondholders paid first if a corporation declares bankruptcy?

Answer 32

Bc the bond is backed by or secured by tangible property

Question 33

As the investment goes from least risky to riskiest, the return goes from ____ to _____

Answer 33

Lowest expected to highest expected

Question 34

Convertible bonds yield less interest than __________ bonds from the same issuer because of the flexibility that comes along with them

Answer 34

Non-convertible bonds

Question 35

Convertible securities tend to be offered by issuers as a means to achieve _________ for borrowing

Answer 35

Lower fixed costs

Question 36

Through the issuance of convertible debt rather than equity, issuers avoid ____________ if their common sares

Answer 36

Immediate dilution

Question 37

From an investor's prospective, though convertible bonds are a safer investment than common stock, they can _____________

Answer 37

Provide stock like returns

Question 38

Convertible bonds are ________ than stocks and their value can only fall to a price where the yield would be equal to that of a non-convertible bond with the same terms

Answer 38

Less volatile

Question 39

In a period of stable interest rates, the price of the convertible bond will be ______ than that of other types of debt. This is because the convertible bond will fluctuate in price with the underlying stock.

Answer 39

More volatile

Question 40

Conversion price

Answer 40

Stated price at which the bondholder is able to convert to shares of common stock

Question 41

Conversion ratio

Answer 41

Number of common shares that the bondholder will receive upon conversion

Question 42

Equation for conversion ratio

Answer 42

Par value/conversion price

Question 43

Conversion parity is also known as _____

Answer 43

Parity price

Question 44

Eurodollar bonds

Answer 44

Bonds issued outside the united states but denominated in US dollars

Question 45

Eurodollar bonds are __________ outside the US and are not registered with the SEC

Answer 45

Issued and trade