Deck 18: Corporate Bonds

Question 1

The call price of a bond that is equal to the present value of the bond's remaining cash flows is called the _________ call price.

A) Undervalued
B) Make-whole
C) Realistic
D) Tender-offer
E) Present value

Answer 1

B

Question 2

The unsecured bonds that do not have the first claim in a bankruptcy proceeding are called _________. They will only be paid if funds remain after payment on other bond issue has been satisfied during a liquidation.

A) senior indentures
B) senior debentures
C) subordinated indentures
D) subordinated debentures
E) plain vanilla bonds

Answer 2

D

Question 3

Bonds issued with a relatively standard set of features are _________ bonds.

A) put
B) callable
C) plain vanilla
D) convertible
E) exchangeable

Answer 3

C

Question 4

A bond that is secured by real estate is called a _________.

A) land trust certificates.
B) plain vanilla bonds.
C) mortgage bonds.
D) debenture bonds.
E) sinking fund bonds.

Question 5

The description of the contractual terms for a new bond issue in a prospectus is the _________.

A) debenture
B) summary sheet
C) Indenture
D) trust report
E) Prospectus

Question 6

A bond indenture clause that prohibits a company from issuing new debt that has seniority over current debt is the _________ clause.

A) sinking fund
B) first-in-line
C) debt prohibition
D) negative pledge
E) affirmation

Question 7

A bond which would be worth more if it were converted than it is presently in its bond form is called a(n) _________ bond.

A) in-the-money
B) Premium
C) Discount
D) out-of-the-money
E) Intrinsic

Question 8

_________ bonds are secured by financial assets of the issuing company.

A) Collateral trust
B) Plain vanilla
C) Debentures
D) Trust
E) Indentures

Question 9

Unsecured bonds issued by a corporation are called _________.

A) general obligation bonds
B) debentures
C) indentures
D) trust bonds
E) plain vanilla bonds

Question 10

The _________ details financial information about the company issuing a bond and this document is required by various provincial Security Commissions for distribution to potential investors.

A) Debenture
B) summary sheet
C) Indenture
D) trust report
E) Prospectus

Question 11

In case of bankruptcy, an unsecured bond that has a higher claim on a company's assets than another bond is called _________.

A) senior indentures
B) senior debentures
C) subordinated indentures
D) subordinated debentures
E) plain vanilla bonds

Question 12

Which of the following are bond provisions commonly used to restrict an issuer's call privilege?
I Deferred Call Provision
II Retractable Provision
III Call Premium Provision
IV Refunding Provision

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

Question 13

_________ is the process of calling an outstanding bond issue and financing with a new bond issue at a lower interest rate.

A) Redemption
B) Putting
C) Rebating
D) Conversion
E) Refunding

Question 14

Which of the following is NOT a common fixed-price call provision?

A) deferred call provision
B) call premium provision
C) refunding provision
D) convertible provision
E) All of the these are fixed-price call provisions

Question 15

A bond issued by ABC Inc. that can be converted into stock of XYZ inc. is called a(n) _________ bond.

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

Question 16

A(n) _________ bond can be sold back to the issuer by bondholders at a preset price and on specified dates before maturity.

A) put
B) callable
C) plain vanilla
D) convertible
E) exchangeable

Question 17

A convertible bond whose conversion value is less than its call price is a(n) _________ bond.

A) in-the-money
B) Premium
C) Discount
D) out-of-the-money
E) Intrinsic

Question 18

Corporate bonds for which no specific assets are pledged as collateral are referred to as _________ bonds.

A) unsecured
B) collateralized
C) indentures
D) naked
E) risk-free

Question 19

A bond that can be exchanged for a pre-specified number of shares of stock of the issuing company is a(n) _________ bond.

A) put
B) callable
C) plain vanilla
D) convertible
E) exchangeable

Question 20

Bonds issued by a railroad company and secured by lease payments for rail cars are called

A) Debentures
B) Indentures
C) Collateral trust bonds
D) Mortgage bonds
E) Equipment trust certificates

Question 21

Which of the following is not specified in the indenture contract when a bond is issued?

A) Any call provision.
B) Issue amount.
C) Par value.
D) Coupon payment dates.
E) All of the above are specified.

Question 22

The possibility of a structural or financial change in a corporation that causes a lowered credit rating is known as _________ risk.

A) systematic
B) interest rate
C) market
D) placement
E) event

Question 23

The value that would be given to a convertible bond if it were converted into a comparable straight bond is called the bond's _________ value. This value is also known as floor value.

A) conversion
B) absolute
C) intrinsic
D) market
E) terminal

Question 24

Which of the following is false concerning corporate bonds?

A) Coupon and principal payments are stated in advance when the bond is first issued.
B) Bonds represent a creditor's claim on the corporation.
C) Most corporate bonds are callable.
D) The yield to maturity is constant throughout a bond's life.
E) Canadian corporate bonds generally have a $1,000 face value.

Question 25

Bonds are frequently used to pay retirement benefits because

A) They provide cash flows that can easily be matched for the retirement benefit payments.
B) They are risk-free.
C) Their yield-to-maturity is constant throughout the life span.
D) They pay a higher return than stocks.
E) All of the above.

Question 26

Junk bonds with speculative credit ratings are called _________ bonds.

A) investment grade
B) Angel
C) high-yield
D) retrograde
E) prudent

Question 27

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

A) indentures
B) protective covenants
C) placement clauses
D) debentures
E) pledge certificates

Question 28

Which group owns the largest percentage of corporate bonds in the capital market?

A) Individual investors.
B) Pension funds.
C) Foreign investors.
D) Life insurance companies.
E) Banks.

Question 29

Equivalent trust certificates

A) Are mortgage bonds
B) Are a form of debt issued by a trustee
C) Generally have an infinite life
D) Represent partial ownership of a trust fund
E) Are a lease agreement on heavy industrial equipment

Question 30

A security that receives dividend payments prior to common shares, but it is subordinate to bonds is called a _________ stock.

A) common
B) bond
C) preferred
D) convertible
E) senior

Question 31

_______ guidelines are restrictions established by financial institutions for investment portfolio selection.

A) Best choice
B) Optimum selection
C) Restricted investment
D) Prudent investment
E) Debt selection

Question 32

A bond issue that is sold directly to a financial institution is called a

A) privileged placement
B) put offering
C) senior offering
D) private placement
E) non-market offering

Question 33

Bonds with a high yield and low-grade credit ratings are often referred to as ________.

A) investment grade bonds
B) junk bonds
C) yield premium bonds
D) speculative angel bonds
E) institutional bonds

Question 34

When a portion of the bonds in a bond issue matures each year, the bonds are called

A) term
B) exchangeable
C) sinking
D) serial
E) indenture

Question 35

When all the bonds in a bond issue mature on the same date, the bonds are called _________ bonds.

A) term
B) exchangeable
C) sinking
D) serial
E) singular

Question 36

Bonds have floating-rate coupons are called _________ bonds.

A) indexed
B) Market
C) adjustable rate
D) junk
E) speculative

Question 37

The _________ is the difference between the promised yields of risky bond issues at a given time relative to yields on Treasury issues of equal maturity.

A) yield margin
B) bid-ask spread
C) yield spread
D) yield-to-worst
E) current yield

Question 38

An assessment of the financial status of the company for repayment of the bond principal plus any interest is indicated by the ________.

A) credit rating
B) protective covenants
C) call provisions
D) conversion price
E) Indenture

Question 39

A _________ is an account where payment are kept and used for the scheduled redemption of outstanding bonds.

A) refunding account
B) redemption account
C) sinking fund
D) terminal account
E) collateral trust

Question 40

In the case of a default, the holder of a debenture has a claim on _________ of the issuer.

A) Nothing
B) Only the current assets
C) Only the net fixed assets
D) Only the working capital
E) All the assets

Question 41

Callable bonds I) normally have a call protection period
II) frequently pay one year's coupon amount as the call premium
III) tend to be called only if market interest rates rise
IV) are preferred by investors over non-callable bonds

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

Question 42

Which of the following are negative protective covenants that can be found in a bond indenture?
I) Bond proceeds must be used to finance fixed assets
II) Bonds with senior status cannot be issued while this bond issue is outstanding
III) The issuer is prohibited from guaranteeing debt of another firm
IV) The issuer must furnish audited financial statements on an annual basis

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

Question 43

The primary purpose of protective covenants is to

A) Allows the company to repurchase the bond at a specific price.
B) Outline the responsibilities of both the bond issuer and the bond holders.
C) Protect bondholders from company actions that may endanger a bond's credit quality.
D) Reduce the volatility of its price.
E) All of the above.

Question 44

Which of the following is true about the make-whole call provision?

A) It ensures bondholders not suffering any loss in the event of a call
B) It allows the issuers to payoff the debt early
C) It drives the call price changing over time
D) All of the above
E) None of the above

Question 45

Collateral trust bonds are commonly issued by

A) Trustees
B) Investors
C) Bondholders
D) Governments
E) Holding companies

Question 46

A convertible bond

A) Has a maximum value equal to its intrinsic value
B) Has limited downside risk with unlimited upside potential
C) Is in-the-money when its call price is greater than its conversion value
D) Must be converted by the maturity date
E) Must be converted if it is called.

Question 47

A disadvantage to the bondholder of a traditional fixed-price call provision is:

A) Callable bonds have a lower price than non-callable bonds.
B) Bondholders might be forced to invest at a rate lower than the current coupon rate.
C) An increase in interest rates will cause the price of non-callable bonds to increase relative to callable bonds.
D) Callable bonds demonstrate a negative price-yield convexity.
E) Callable bonds' refunding provision makes them less valuable than non-callable bonds.

Question 48

Bonds are traded in the

A) primary markets
B) secondary markets
C) over-the counter markets
D) all of the above
E) none of the above

Question 49

The put feature of a bond is valuable because it

A) Effectively sets a price floor for the bond
B) Increases the probability that the bond will be called when interest rate decline
C) Allows the bondholders to resell the bond to the issuer at any time
D) Extends the maturity date of the bond at the bondholder's discretion
E) Effectively sets a price ceiling for the bond

Question 50

If you own a bond that is called under a make-whole call provision, you will be paid a call price which is

A) Equal to the face value
B) Equal to the par value plus the total amount of the remaining interest payments
C) Approximately equal to the current value of the bond
D) Based on the market value plus a call premium of a specified dollar amount
E) Approximately equal to the future value of the bond at normal maturity

Question 51

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 52

Investing heavily in a firm's bonds, you are concerned about the future bond issues being granted seniority over your issue. Your fear will be gone if you find that your bonds are

A) Subordinated debentures
B) Senior debentures
C) Protected by a clause prohibiting bond refunding
D) Protected by a negative pledge clause
E) Entitled to a residual claim on the firm's assets if default occurs

Question 53

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

A) Allows the company to repurchase the bond at a specific price.
B) Outline the responsibilities of both the bond issuer and the bond holders.
C) Protect bondholders from company actions that may endanger a bond's credit quality.
D) Reduce the volatility of its price.
E) All of the above.

Question 54

The yield-to-maturity of a bond is equal to the bond's

A) Internal rate of return
B) Net present value
C) Current yield
D) Yield-to-call
E) Realized return

Question 55

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

Question 56

Callable bonds usually are sold at _________ prices than comparable non-callable bonds.

A) higher
B) lower
C) the same
D) higher or lower
E) Insufficient information.

Question 57

In general, a bondholder should convert a convertible bond:

A) As soon as possible.
B) When the conversion price is above the intrinsic bond value.
C) The latest it possibly can.
D) Immediately after the next coupon payment is made when the conversion price is greater than the straight bond value.
E) None of the above.

Question 58

Which of the following is not a common feature associated with a bond's call provision?

A) The bond is usually call deferred.
B) The call can be refused at the discretion of the bondholder.
C) If the bond is called, a premium above par is usually paid.
D) The company may be prohibited from calling the bond to issue new debt with a lower coupon.
E) None of the above.

Question 59

A call provision associated with a preferred stock issue

A) Is generally advantageous to investors because it provides increased marketability for the security.
B) Will never influence the market price of the security.
C) Will tend to prevent the market price of the preferred stock from falling below its preset call price.
D) Is likely to be used by the company at a time when investors will have to reinvest at lower interest rates.
E) Is unimportant since preferred stocks never have call features.

Question 60

Par value is important in preferred stock because

A) It shows the amount of the deficiency assessment in most current issues.
B) This is a good measure of the intrinsic.
C) The dividend is often stated as a percentage of par value.
D) Preferred par value has the same use as common stock par value.
E) The market value fluctuates around the par value.

Question 61

A sinking fund is designed to offer protection for the:

A) Issuer.
B) Bondholders.
C) Ontario Securities Commission.
D) Bank of Canada.
E) Trustees.

Question 62

A bond that is originally issued with an investment grade credit rating that subsequently changes to speculative grade is called a(n):

A) fallen angel.
B) conversion bond.
C) original-issue junk.
D) retrograde bond.
E) crossover bond.

Question 63

You want to purchase bonds such that a fraction of them mature each year, which would provide you with vacation money. Your need may be best served by investing in the _________ bonds offered by a reputable corporation.

A) Sinking fund
B) Callable
C) Unsecured
D) Serial
E) Mortgage-backed

Question 64

When the graphical representation of the bond-price yield is bowed away from the origin, the bond is said to have _________ convexity.

A) Positive
B) Linear
C) Inverse
D) Negative
E) Normal

Question 65

The conversion value of a convertible bond is equal to:

A) Stock price / Conversion ratio.
B) Par value / Conversion ratio.
C) Conversion ratio $\times$ Par value.
D) Conversion ratio / Par value.
E) Stock price $\times$ Conversion ratio.

Question 66

Which of the following is not a common feature of preferred stock?

A) Preferred stock has no voting rights.
B) Preferred stock has no maturity.
C) Management can suspend dividend payments even if dividends are being paid to common stockholders.
D) Dividends paid to preferred stockholders are fixed when the stock is issued.
E) Preferred stock can be convertible to common stock.

Question 67

A serial bond

A) Is assigned a serial number that is used to randomly determine which bonds will be redeemed in any given year
B) Has a specified maturity date which will vary from the date assigned to other bonds in the same bond issue
C) Generally has a sinking fund provision
D) Will generally be callable within three to five years of issue
E) Has no fixed maturity date, but is redeemed when called

Question 68

Which of the following is an 'investment grade' credit rating from Moody's?

A) Baa1
B) 2
C) AA+
D) 1
E) Aa2

Question 69

A put bond is generally putable at:

A) a premium.
B) a discount.
C) par value.
D) the current market price.
E) the yield to maturity.

Question 70

Preferred stock

A) Generally pay a variable coupon payment
B) Usually has a predetermined maturity date
C) Will lead a firm into bankruptcy if dividends are not paid on a timely basis
D) Is usually callable
E) Is more valuable when it is non-cumulative

Question 71

Bonds with _________ default risk and _________ marketability have lower yield spread.

A) higher; less
B) lower; more
C) slightly higher; more
D) higher; slightly less
E) slightly lower; less

Question 72

All else the same, which of the following bonds will have the highest yield-to-maturity?

A) Callable, A rating
B) Putable, A rating
C) Callable, AA rating
D) Putable, AA rating
E) Insufficient information.

Question 73

Which of the following is NOT a corporate bond ratings agency?

A) Standard & Poor's
B) Dow Jones Bond Service
C) Crisanti and Maffei
D) McCarthy
E) Dominion Bond Ratings Service

Question 74

The lowest investment grade for corporate bonds with Standard & Poor's credit ratings is

A) BBB
B) BB
C) A-
D) BBB-
E) BB+

Question 75

The conversion price of a convertible bond is equal to:

A) Stock price / Conversion ratio.
B) Par value / Conversion ratio.
C) Conversion ratio $\times$ Par value.
D) Conversion ratio / Par value.
E) Stock price $\times$ Conversion ratio.

Question 76

Which of the following bonds is least likely to have an indenture?

A) Private placement bonds.
B) Callable bonds.
C) Equipment trust certificates.
D) Collateral trust bonds.
E) Mortgage bonds.

Question 77

Which of the following is an 'investment grade' credit rating from the Dominion Bond Rating's Service?

A) Baa1
B) 2
C) AA+
D) AA-
E) Aa2

Question 78

The floor value of a convertible bond is the _________ value.

A) intrinsic value
B) conversion value
C) in-the-money value
D) greater of the intrinsic or conversion
E) lesser of the intrinsic or conversion

Question 79

Which of the following bond types permits bondholders to participate in a stock price increase?

A) Callable bonds.
B) Convertible bonds.
C) Put bonds.
D) Plain vanilla bonds.
E) Floating rate bonds.

Question 80

A bond that is issued with a speculative investment grade credit rating is often referred to as a(n):

A) fallen angel bond.
B) short-issue bond.
C) original-issue junk bond.
D) premium-yield bond.
E) crossover bond.