Deck 18: Corporate Bonds

Question 1

What is the document called that is distributed to potential bondholders and provides detailed information on the financial position and operations of the bond issuer?

A) indenture summary
B) prospectus
C) trust statement
D) 10K
E) 10Q

Answer 1

B

Question 2

Which one of the following defines an in-the-money bond?

A) secured bond with collateral value that exceeds the bond's price
B) callable bond with a call price that exceeds the current market price
C) put bond with a put price that exceeds the current market price
D) convertible bond with a call price that exceeds its conversion value
E) convertible bond with a conversion value that exceeds its call price

Answer 2

E

Question 3

Which one of the following is the clause which prevents a bond issuer from issuing new debt that has seniority over current debt?

A) first-in-line
B) sinking fund
C) call provision
D) affirmation
E) negative pledge

Answer 3

E

Question 4

Which one of the following is an unsecured bond issued by a corporation?

A) indenture
B) general obligation bond
C) plain vanilla bond
D) debenture
E) trust bond

Question 5

Which one of the following provisions grants the bondholder the option of selling the bond back to the issuer at a prespecified price on prespecified dates?

A) convertible
B) call
C) put
D) exchange
E) sinking fund

Question 6

Which one of the following accurately describes bond refunding?

A) replacing maturing bonds with a new bond issue
B) calling existing bonds and refinancing those bonds with new debt
C) paying off bonds early with excess cash generated by the firm
D) replacing maturing bonds with an equity issue
E) paying bonds off early to satisfy disgruntled bondholders

Question 7

Bonds issued with a regular sequence of maturity dates are called which one of the following?

A) callable bonds
B) sequential bonds
C) serial bonds
D) sinking bonds
E) put bonds

Question 8

Term bonds are defined as all bonds in a bond issue having which one of the following characteristics?

A) sequential maturity dates
B) serial maturity dates
C) multiple maturity dates
D) an identical maturity date
E) renewable maturity dates

Question 9

What is a bond called if it can be converted into shares of stock of a firm other than the bond issuer?

A) swap bond
B) alternate bond
C) exchangeable bond
D) convertible bond
E) callable bond

Question 10

Which one of the following is an unsecured bond that has a higher claim on a firm's assets than other unsecured bonds?

A) plain vanilla bond
B) subordinated debenture
C) refunded bond
D) senior debenture
E) collateral trust bond

Question 11

Which one of the following is an account used to provide for scheduled redemptions of outstanding bonds?

A) redemption fund
B) sinking fund
C) liquidation account
D) serial account
E) callable account

Question 12

Which one of the following is the portion of a prospectus that outlines the contractual terms of a new bond issue?

A) indenture summary
B) financial disclosure
C) covenant agreement
D) security agreement
E) trust agreement

Question 13

Which one of the following terms is defined as debt issued without specific collateral pledged as security?

A) unsecured debt
B) indenture
C) vanilla bond
D) naked bond
E) risk-free bond

Question 14

During a bankruptcy proceeding, Bond A will be paid only if funds remain after the bonds that have a higher claim on the issuer's assets have been paid. What type of bond is Bond A?

A) plain vanilla bond
B) senior trust bond
C) junior trust bond
D) subordinated debenture
E) senior debenture

Question 15

Which one of the following provisions grants the bondholder the option of exchanging a bond for a prespecified number of shares of stock of the same issuer?

A) put
B) call
C) equity
D) conversion
E) sinking

Question 16

Which one of the following terms is given to the value of a convertible bond that would equate to the value of a comparable nonconvertible bond?

A) out-of-the money value
B) in-the-money value
C) discounted value
D) external value
E) intrinsic value

Question 17

Which one of the following best defines a plain vanilla bond?

A) bond secured by agricultural or food inventory
B) bond with relatively standard features
C) unsecured debt
D) bond secured with financial collateral
E) bond that has no coupon payments

Question 18

Debt issued by a trustee to purchase airplanes that will be leased to an airline would be classified as which of the following?

A) collateral trust bond
B) equipment trust certificate
C) transportation bond
D) mortgage bond
E) rolling stock certificate

Question 19

Debt that is secured by a property lien is referred to as which one of the following?

A) realty bond
B) land trust bond
C) mortgage bond
D) debenture
E) collateral trust bond

Question 20

A collateral trust bond is debt secured by which one of the following?

A) property lien
B) financial assets
C) fixed assets
D) inventory
E) real estate

Question 21

Which one of the following identifies a new bond issue as being a private placement?

A) The proceeds of the issue are used for a single project.
B) The issue is marketed through a sole brokerage house.
C) The issue is sold only to individuals rather than to institutional investors.
D) The issue is not made available to the public.
E) The issue names a private individual as the bond trustee.

Question 22

Which one of the following statements related to callable bonds is correct?

A) Callable bonds are issued at the call price.
B) Callable bonds can be called at any time.
C) Callable bonds are generally called at the market price at the time of the call.
D) Callable bonds are more apt to be called if market interest rates decline.
E) Callable bonds are generally priced higher than comparable noncallable bonds.

Question 23

Which one of the following parties is the largest holder of U.S. corporate bonds?

A) pension funds
B) life insurance companies
C) banks
D) foreign investors
E) individual investors

Question 24

Which one of the following is an assessment of the credit quality of a bond based on the financial condition of the bond issuer?

A) protective covenant
B) risk analysis
C) credit rating
D) serial report
E) in-the-money status

Question 25

The entire formal contract between a bond issuer and the bondholders is found in which one of the following documents?

A) prospectus
B) prospectus summary
C) indenture agreement
D) indenture summary
E) trust certificate

Question 26

A pension fund purchases bonds so that the payments from the bonds provide sufficient cash inflow in a timely manner to offset the cash outflows from the pension fund. What is this investment strategy called?

A) cash flow matching
B) cash diversification
C) cash stabilization
D) in-out investing
E) plain vanilla matching

Question 27

Which one of the following provisions prevents a bond issuer from calling a bond simply because market interest rates have declined and the firm can now borrow at lower rates?

A) negative pledge provision
B) call provision
C) convertible provision
D) refunding provision
E) refinancing provision

Question 28

Event risk is the possibility that a bond will experience which one of the following?

A) sudden increase in market value
B) unexpected call by the issuer
C) decrease in conversion value due to a sudden decline in the price of the issuer's stock
D) decrease in credit quality due to a financial or structural change in the bond issuer
E) decrease in intrinsic value due to an unexpected increase in market interest rates

Question 29

The holder of a debenture has a claim on which one of the following assets of the issuer in the case of a default?

A) current assets only
B) only the remaining fixed assets after the secured creditors are paid
C) any and all net working capital
D) only income earned prior to the default
E) any and all corporate assets remaining after higher legal claims have been satisfied

Question 30

Which of the following are common characteristics associated with corporate bonds?
I) specified cash flows
II) equity ownership
III) call feature
IV) set maturity date

A) I and II only
B) I and IV only
C) II and III only
D) I, II, and IV only
E) I, III, and IV only

Question 31

The holder of which one of following will have the lowest priority claim in a bankruptcy proceeding?

A) mortgage bond
B) securitized bond
C) subordinated debenture
D) senior debenture
E) collateral trust bond

Question 32

What are the various provisions within a bond indenture that are designed to protect bondholders by restricting the actions of the issuer called?

A) restrictive actions
B) prohibitions
C) negative conditions
D) protective covenants
E) restrictive amendments

Question 33

What are the restrictions on investment portfolios that require that all securities held within the portfolio meet a specified level of safety called?

A) protective covenants
B) negative restrictions
C) prudent investment guidelines
D) safety monitors
E) risk ranges

Question 34

Adjustable-rate bonds are identified by which one of the following characteristics?

A) The coupon rate will increase should the credit rating of the bond decline.
B) Different bonds within the same issue have different coupon rates.
C) Bondholders can defer coupon payments at their discretion.
D) The amount of each coupon payment will depend on the free cash flow of the issuer.
E) The coupon rate changes in response to changes in current market rates.

Question 35

Which one of the following features of corporate bonds has the greatest appeal to pension fund investors?

A) call provision
B) convertible provision
C) zero repayment risk
D) prospectus availability
E) predictable cash flows

Question 36

Which one of the following has a claim to dividends and also a superior claim over common stock?

A) preferred stock
B) callable bond
C) convertible bond
D) put bond
E) equipment trust certificate

Question 37

Which of the following features would you expect a plain vanilla bond to have?
I) semi-annual coupon payments
II) $1,000 face value
III) stated maturity date
IV) multiple bonds within one issue

A) I and II only
B) II and III only
C) II, III, and IV only
D) I, II, and III only
E) I, II, III, and IV

Question 38

How much will you be paid if you own a bond that is called under a make-whole call provision?

A) the face value
B) an amount equal to the par value plus the total amount of the remaining interest payments
C) the present value of all future bond payments that will not be paid because of the call
D) the current market value plus a prespecified call premium
E) an amount equal to the normal maturity value of the bond

Question 39

Bonds with relatively high coupons due to their speculative credit ratings are called which one of the following?

A) investment-grade bonds
B) high-yield bonds
C) prudent risk bonds
D) floating-rate bonds
E) covenant bonds

Question 40

Which one of the following statements is correct regarding equipment trust certificates (ETCs)?

A) The trust fund issuing the ETCs leases equipment from manufacturers and then re-leases the equipment to transportation firms.
B) ETCs are used principally to finance the daily operations of large equipment manufacturers.
C) ETC holders receive dividend payments derived from lease payments received by the trust fund.
D) ETCs are all issued as senior notes.
E) ETCs generally have an unlimited life.

Question 41

The majority of corporate bond trading occurs on which one of the following?

A) NYSE
B) American Stock Exchange
C) OTC market
D) regional exchanges
E) TRACE

Question 42

A bond is currently priced at $1,076.88 and has a par value of $1,000. If the conversion ratio is 25, what is the conversion price?

A) $35.71
B) $36.92
C) $38.46
D) $40.00
E) $41.67

Question 43

Which one of the following statements correctly applies to serial bonds?

A) Serial bonds are generally callable.
B) Serial bonds within one issue will have the same maturity date.
C) Serial bonds are redeemed only if and when they are called.
D) Serial bonds are subissues that have sequential maturities.
E) Serial bonds are automatically convertible.

Question 44

A convertible bond has a par value of $1,000, a market value of $875, and a conversion ratio of 16. What is the conversion price?

A) $55.56
B) $58.82
C) $62.50
D) $66.67
E) $71.43

Question 45

Which one of the following statements related to convertible bonds is correct?

A) Bondholders forego higher coupon rates in exchange for the conversion option.
B) Convertible bonds are generally issued such that the conversion value is equal to the par value.
C) The conversion price is equal to the bond's market value divided by the conversion ratio.
D) The conversion value is equal to the bond's market price multiplied by the conversion ratio.
E) Bonds should be converted as soon as the conversion value exceeds the face value.

Question 46

Which one of the following statements related to convertible bonds is correct?

A) Convertible bonds have a maximum value equal to the bond's intrinsic value.
B) Convertible bonds have limited downside risk with unlimited upside potential.
C) A convertible bond is in-the-money when its call price is greater than its conversion value.
D) Convertible bonds must be converted prior to or on the maturity date.
E) Convertible bonds must be converted once they are called.

Question 47

Which one of the following correctly applies to adjustable-rate bonds?

A) callable but not putable
B) coupon rate equal to the U.S. Treasury bill rate
C) greater interest rate risk than a fixed rate bond
D) greater fluctuation in its market price than a fixed-rate bond
E) frequently putable at par value

Question 48

Which one of the following is a positive protective covenant that might be found in a bond indenture?

A) The firm must not issue bonds that are senior to those currently outstanding.
B) The firm must avoid purchasing bonds issued by other corporations.
C) The firm must maintain the good condition of all pledged assets.
D) The firm must avoid issuing new bonds with a lower coupon to refund outstanding bonds.
E) The firm must not pay dividends in excess of that allowed by the specified formula.

Question 49

A bond has a conversion price of $47.62, a par value of $1,000, and a market price of $833.40. What is the conversion ratio?

A) 20
B) 21
C) 22
D) 23
E) 24

Question 50

A bond has a par value of $1,000 and a market value of $833.40. The conversion price is $71.43. What is the conversion ratio?

A) 14
B) 15
C) 16
D) 17
E) 18

Question 51

A convertible bond has a par value of $1,000 and a market price of $1,116.76. If the conversion ratio is 18, what is the conversion price?

A) $43.48
B) $45.45
C) $47.62
D) $52.63
E) $55.56

Question 52

Which one of the following statements related to a put bond is correct?

A) Put bonds are generally redeemed at a premium over par value.
B) Put bonds can be redeemed at any time once the put protection period has elapsed.
C) The put feature effectively sets the ceiling price for the bond.
D) The put feature helps protect bondholders from the risk associated with rising interest rates.
E) A putable bond is generally priced lower than a comparable nonputable bond.

Question 53

After the call protection period, which one of the following basically serves as the upper price limit on a callable bond?

A) present value of all future bond payments discounted at the current market rate of interest
B) face value of the bond
C) call price of the bond
D) current market price of the bond
E) current market price of a comparable noncallable bond

Question 54

Which one of the following statements regarding preferred stock is true?

A) Preferred stock pays tax-free income.
B) Preferred stock generally provides voting rights to its holders.
C) Preferred stock generally pays a lower rate to investors than do corporate bonds.
D) Preferred stock provides totally tax-free income to corporate shareholders.
E) Preferred stock can frequently be converted into bonds.

Question 55

Which one of these statements regarding corporate bond credit ratings is correct?

A) Bonds rated Ba₃ or above by Moody's are considered investment-grade bonds.
B) All bonds issued by the same issuer will have the same credit rating.
C) A bond's credit spread may be a better indicator of a bond's risk than its rating.
D) Bond ratings are based solely on the seniority of the bond issue and the protective covenants by which it is covered.
E) Credit ratings are assigned to the bond issuer, not the bond issue.

Question 56

Which one of the following is another name for a junk bond?

A) high-yield
B) convertible
C) private placement
D) subordinated
E) called

Question 57

A bond has a conversion ratio of 20 and a market price of $1,080. If the par value is $1,000, what is the conversion price?

A) $50.00
B) $51.80
C) $52.60
D) $53.20
E) $53.80

Question 58

What is the conversion ratio of a $1,000 par value bond that is selling for $888.96 and has a conversion price of $58.82?

A) 15
B) 16
C) 17
D) 18
E) 19

Question 59

A bond that is currently selling for $933.38 has a conversion price of $62.50. If the par value is $1,000, what is the conversion ratio?

A) 13
B) 14
C) 15
D) 16
E) 17

Question 60

Which one of the following is a common feature of preferred stock?

A) steady stream of interest payments
B) specified maturity date
C) automatic bankruptcy filing when normal payments to shareholders are suspended
D) preferential treatment over bonds and common stock in the event of a bankruptcy
E) call provision

Question 61

You own a bond that has a face value of $1,000 and a conversion ratio of 25. You have just received notification that the bond is being called at a premium of $40. The stock price is $41.20 a share. You should _____ your bond because the conversion value is _____.

A) convert; less than the call price by $40.00
B) convert; greater than the call price by $40.00
C) convert; greater than the call price by $4.75
D) not convert; less than the call price by $10.00
E) not convert; greater than the call price by $40.00

Question 62

A cumulative preferred stock pays a quarterly dividend of $1.25. The issuing firm is experiencing some cash shortfalls and has not paid the dividend for the last two quarters. The current situation is expected to be corrected within the month. Next month, the firm wants to pay dividends to both its preferred and common shareholders. How much will it have to pay to the preferred shareholders per share to do this?

A) $0.00
B) $1.33
C) $3.75
D) $3.99
E) $4.40

Question 63

A bond has a conversion ratio of 22, a $1,000 par value, and a market price of $1,038. The stock is selling for $46.14. What is the conversion value?

A) $1,009.16
B) $1,015.08
C) $1,038.60
D) $1,049.35
E) $1,053.50

Question 64

The Bronze Star has 8 percent, semi-annual coupon bonds outstanding that have a face value of $1,000 and a conversion ratio of 24. The bonds mature in 14 years. Comparable, non-convertible bonds are yielding 7.8 percent. The firm also has shares of common stock outstanding at a price of $51 a share. The intrinsic value of the bonds is _____ and the conversion value is _____.

A) $1,005.23; $1,000.08
B) $1,016.86; $1,224.00
C) $1,033.76; $1,000.08
D) $1,034.11; $1,000.08
E) $1,034.11; $1,224.00

Question 65

A bond has a face value of $1,000 and a call price of $1,030. The bond is callable in 3.5 years and pays a 5 percent, semi-annual coupon. What is the current price if the yield to call is 6 percent?

A) $912.36
B) $927.19
C) $966.25
D) $993.24
E) $1,009.01

Question 66

A bond is callable in 2 years and currently has a yield to call of 4.8 percent. The bond has a coupon rate of 5 percent and pays interest semi-annually. The call premium is $50 and the face value is $1,000. What is the current price?

A) $904.16
B) $989.14
C) $998.12
D) $1,003.77
E) $1,049.25

Question 67

A noncumulative preferred stock pays a quarterly dividend of $1.30. The firm did not pay this dividend last quarter. How much will the company have to pay to the preferred shareholders per share this quarter if it wishes to also pay a common stock dividend?

A) $0.00
B) $1.30
C) $2.60
D) $2.88
E) $4.80

Question 68

A semi-annual coupon bond has a 6.5 percent coupon rate, a $1,000 face value, a current value of $1,054.54, and 4 years until the first call date. What is the call price if the yield to call is 6.7 percent?

A) $1,000
B) $1,020
C) $1,040
D) $1,060
E) $1,080

Question 69

A bond has 5 years until it can be called, a 7 percent coupon, and a $1,000 face value. The bond has a market value of $1,030.40 and a yield to call of 7.28 percent. What is the call premium?

A) $40
B) $50
C) $60
D) $70
E) $80

Question 70

A convertible bond has a 7 percent, semi-annual coupon and a conversion ratio of 20. The bond has a face value of $1,000 and matures in 13.5 years. The current yield to maturity is 7.1 percent. Assume that you buy this bond today and sell it one year from now when the yield to maturity is 7.25 percent and the stock price is $52. What will your holding period return be?

A) -5.19 percent
B) -4.67 percent
C) -2.39 percent
D) 0.30 percent
E) 4.90 percent

Question 71

A bond has a par value of $1,000 and a market price of $1,087.20. The conversion price is $40 and the stock price is $41.75. What is the conversion value?

A) $1,043.75
B) $1,250.00
C) $1,481.10
D) $1,500.00
E) $1,652.00

Question 72

A $1,000 par value bond has a market price of $986 and a conversion ratio of 16. The stock is selling for $60.74. What is the conversion value?

A) $963.17
B) $971.84
C) $985.60
D) $990.57
E) $1,006.49

Question 73

A convertible bond has a 5 percent, semi-annual coupon and a conversion ratio of 25. The bond has a face value of $1,000 and matures in 12.5 years. The current yield to maturity is 5.8 percent. Assume that you buy this bond today and sell it one year from now when the yield to maturity is 5.6 percent and the stock price is $43.90. What will your holding period return be?

A) 1.29 percent
B) 7.04 percent
C) 10.30 percent
D) 16.56 percent
E) 18.07 percent

Question 74

A firm had a major fire which hampered operations for the past year. As a result, the firm discontinued all dividends for one year. Next month, the firm will resume paying dividends. The normal quarterly payments are $1.50 for the cumulative preferred shares and $0.95 for the common shares. How much will the firm need to pay the preferred shareholders per share if the firm also pays a common dividend?

A) $0.00
B) $4.75
C) $6.00
D) $7.50
E) $8.00

Question 75

Slater Mines just called its outstanding bonds at a call price of $1,025. The bonds have a conversion price of $33.33 and a par value of $1,000. The stock price is currently $33.10. In response to this call, the bondholders should _____ because _____.

A) accept the call; the call price exceeds the conversion value
B) accept the call; they have no other choice
C) convert their bonds; the conversion price exceeds the par value by $37.90
D) convert their bonds; the conversion price exceeds the call price by $12.90
E) elect to continue holding their bonds; they want to continue receiving the interest payments

Question 76

A convertible bond has a $1,000 par value, a 6 percent, semi-annual coupon, and a time to maturity of 12 years. The bond has a conversion ratio of 20. Comparable, non-convertible bonds have a yield to maturity of 6.8 percent. What is the intrinsic value of this bond?

A) $935.09
B) $939.63
C) $968.65
D) $989.38
E) $998.36

Question 77

A convertible bond has a 5 percent, semi-annual coupon and a conversion ratio of 35. The bond has a face value of $1,000 and matures in 18 years. The current yield to maturity is 4.9 percent. Assume that you buy this bond today and sell it one year from now when the yield to maturity is 5.05 percent and the stock price is $28.10. What will your holding period return be?

A) -1.73 percent
B) -0.65 percent
C) 0.20 percent
D) 2.34 percent
E) 7.75 percent

Question 78

A 6 percent, semi-annual coupon bond has a face value of $1,000 and a time to maturity of 4 years. The bonds are convertible into shares of common stock at a conversion price of $40. The stock price currently is $40.70. Similar, non-convertible bonds have a yield to maturity of 5.6 percent. The intrinsic value of this bond is _____ and the conversion value is _____.

A) $832.62; $982.80
B) $832.62; $1,017.50
C) $1,014.16; $1,017.50
D) $1,014.16; $982.80
E) $1,006.96; $1,017.50

Question 79

A convertible bond has an 8 percent, semi-annual coupon and a conversion ratio of 15. The bond has a face value of $1,000 and matures in 9.5 years. The current yield to maturity is 8.1 percent. Assume that you buy this bond today and sell it one year from now when the yield to maturity is 7.6 percent and the stock price is $66.30. What will your holding period return be?

A) -2.92 percent
B) .0147 percent
C) 1.79 percent
D) 3.22 percent
E) 3.15 percent

Question 80

A firm has outstanding common stock valued at $67 a share. The firm also has convertible bonds which have a $1,000 par value, a 7.5 percent, semi-annual coupon, and a time to maturity of 11 years. The bonds have a conversion ratio of 15. Comparable, non-convertible bonds have a yield to maturity of 8.2 percent. What is the intrinsic value of this bond?

A) $949.90
B) $957.37
C) $975.83
D) $1,005.00
E) $1,360.76