Corporate Debt Missed Questions Flashcards
(7 cards)
New Issue
$16,275,000
Southwest Railway Company
Equipment Trust No. 1 of 2016
8 3/4 % Equipment Trust Certificates - Non-Callable
To mature in 15 equal annual installments of $1,085,000 commencing October 15, 2017
MATURITIES AND YIELDS 2017 8.25% 2025 9.10% 2018 8.55% 2026 9.15% 2019 8.70% 2027 9.15% 2020 8.75% 2028 9.20% 2021 8.75% 2029 9.20% 2022 8.90% 2030 9.25% 2023 8.95% 2031 9.25% 2024 9.10% The certificates are offered, subject to prior sale, when, as, and if issued and received by us.
Preston, Tucker, Inc.
Which of the following statements are TRUE about a certificate maturing in 2030?
I The bond is offered at a discount
II The bond is offered at a premium
III The effective yield is lower than the coupon
IV The effective yield is higher than the coupon
A. I and III B. I and IV C. II and III D. II and IV
The best answer is B.
The bonds of 2030 have a stated interest rate of 8 3/4%. These bonds are initially offered at a discount to raise the effective yield to 9.25%
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
The best answer is A.
Commercial paper is simply backed by the issuer’s full faith and credit (the promise to pay). The maturities are short, most typically 30 days or less, though legally the maturity can extend to 270 days maximum (9 months). All of the other debts listed are long term (over 1 year) obligations. Income bonds are long term corporate obligations that require the issuer to pay interest only if it has sufficient income. Mortgage bonds are backed by real property owned by the issuing corporation. General obligation bonds are issued by municipalities; they are not issued by corporations.
A corporate security with at least 5 years to maturity is a: A. Money market instrument B. Non-callable funded debt C. Treasury bill D. Treasury note
The best answer is B.
The term “funded” debt refers to corporate debt that is considered part of a company’s permanent long term financing. Included is all corporate debt with 5 years or more to maturity.
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. A customer holds 100 bonds, purchased at par. The customer wishes to liquidate the position at the greatest profit. The BEST recommendation is to (ignoring commissions):
A. tender the bonds at the call price
B. sell the bonds at the current market price
C. sell short the common stock and convert the bonds for delivery to cover the short
D. continue to hold the bonds
The best answer is C.
If the bonds are tendered at the call price, the owner receives $1,000 per bond. If the bonds are sold at the current market price, the owner receives $1,020 per bond. Since each bond is convertible into 14 common shares, the short sale of 14 common shares will yield 14 x $75.50 = $1,057. The bonds can then be converted to common to cover the short position. Thus, selling short the common is the best choice. Continuing to hold the bonds does not make sense since interest payments will cease.
The trust indenture is a contract between the: A. issuer and trustee B. trustee and bondholder C. issuer and bondholder D. issuer and transfer agent
The best answer is A.
The trust indenture is a contract between the issuer and trustee (since the trustee is paid by the issuer) where the trustee acts for the benefit of the bondholders.
Which of the following statements are TRUE when comparing bonds and preferred stock?
I Both bonds and preferred stock have a fixed payout rate
II Bonds have a fixed payout rate; preferred stock does not
III Both bonds and preferred stock can be convertible into shares of common stock
IV Bonds can be convertible; preferred stock cannot
A. I and III B. I and IV C. II and III D. II and IV
The best answer is A.
Both bonds and preferred stock can be convertible and both have a fixed payout rate. Think of preferred stock as a “bond” designed for corporate investment, so that a corporate investor can take advantage of the dividend exclusion from taxation (this tax benefit is not available to individual investors).
Which of the following statements are TRUE when comparing bonds and preferred stock?
I Both bonds and preferred stock have a fixed payout rate
II Bonds have a fixed payout rate; preferred stock does not
III Both bonds and preferred stock can be convertible into shares of common stock
IV Bonds can be convertible; preferred stock cannot
A. I and III B. I and IV C. II and III D. II and IV
The best answer is A.
Both bonds and preferred stock can be convertible and both have a fixed payout rate. Think of preferred stock as a “bond” designed for corporate investment, so that a corporate investor can take advantage of the dividend exclusion from taxation (this tax benefit is not available to individual investors).
