Reading 61: Features of Debt Securities-LOS d 习题精选 2011, statements, following, regarding, border

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Session 15: Fixed Income: Basic Concepts
Reading 61: Features of Debt Securities

LOS d: Explain the provisions for redemption and retirement of bonds.

 

 

Which of the following statements regarding nonrefundable bonds is most accurate? Nonrefundable bonds:

A) may only be called if the source of funds for the redemption is other than a new bond issue with a lower coupon rate.

B) must be refunded from funds generated from operations, not from outside sources of capital such as new debt or equity issues.

C) and noncallable bonds are essentially the same.

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Nonrefundable bonds may be called as long as the firm does not use less expensive debt to do so. They may be refunded with outside capital, just not cheaper debt.

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The refunding provision found in nonrefundable bonds allows bonds to be retired unless:

A) the funds come from a lower cost bond issue.

B) the funds come from the sale of new common stock.

C) market interest rates have increased substantially.

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Refunding from a new debt issue at a higher interest rate is not prohibited, however their purchase cannot be funded by the simultaneous issuance of lower coupon bonds.

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Which of the following statements regarding a sinking fund provision is most accurate?

A) It requires that the issuer retire a portion of the principal through a series of principal payments over the life of the bond.

B) It requires that the issuer set aside money based on a predefined schedule to accumulate the cash to retire the bonds at maturity.

C) It permits the issuer to retire more than the stipulated sinking fund amount if they choose.

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A sinking fund actually retires the bonds based on a schedule. This can be accomplished through either payment of cash or through the delivery of securities. An accelerated sinking fund provision allows the company to retire more than is stipulated in the indenture.

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On November 15, 2006, Grinell Construction Company decided to issue bonds to help finance the acquisition of new construction equipment. They issued bonds totaling $10,000,000 with a 6% coupon rate due June 15, 2026. Grinell has agreed to pay the entire amount borrowed in one lump sum payment at the maturity date. Grinell is not required to make any principal payments prior to maturity. What type of bond structure has Grinell issued?

A) Serial bonds.

B) Bullet maturity.

C) Income bonds.

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These bonds have a bullet maturity structure because the issuer has agreed to pay the entire amount borrowed in one lump-sum payment at maturity.

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Which of the following is the appropriate redemption price when redemption funds are obtained as a result of a forced sale of assets for deregulatory purposes?

A) Regular redemption price.

B) Special redemption price.

C) General redemption price.

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When redemption funds are obtained as a result of a forced sale of assets for deregulatory purposes, the funds can be used to redeem bonds at the special redemption price, which are typically par value.

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Which of the following is the appropriate redemption price when bonds are called according to the sinking fund provision?

A) Specific redemption price.

B) Regular redemption price.

C) Special redemption price.

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Regular redemption price refers to bonds being called according to the provisions specified in the bond indenture. When bonds are redeemed to comply with a sinking fund provision or because of a property sale mandated by government authority, the redemption prices (typically par value) are referred to as "special redemption prices." There is no such thing as a specific redemption price.

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Which of the following statements regarding a bond being called is CORRECT? Call prices are known as regular redemption prices when bonds are called at:

A) under the call provisions specified in the bond indenture.

B) at the par value.

C) at a premium.

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When bonds are redeemed under the call provisions specified in the bond indenture, these are known as regular redemptions and the call prices are referred to as regular redemption prices which can be either at a premium or at par.

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Which of the following is least likely an amortizing security?

A) Bonds with sinking fund provisions.

B) Coupon Treasury bonds.

C) Mortgage-backed securities (MBS).

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Coupon Treasury bonds and most corporate bonds are non-amortizing securities because they pay only interest until maturity. At maturity these bonds repay the entire par value or face value. A MBS is backed by pools of loans that generally have a schedule of partial principal payments, making these securities amortizing securities. A sinking fund provision is another example of an amortizing feature of a bond. This feature is designed to pay a part or the entire total of the issue by the maturity date.

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The annual Fixed Income Analysts' Forum had just ended and two attendees, James Purcell and Frederick Hanes, were discussing some of the comments made by the panelists. Purcell and Hanes were specifically concerned with the following two statements that were made:

Panelist 1: Mortgage-backed securities and asset-backed securities are both fixed income securities that are backed by pools of loans and are said to be amortizing securities. For many of the loans, no principal payments are required to be made prior to the maturity date. These securities are said to have a bullet maturity structure.

Panelist 2: If coupon Treasury bonds or corporate bonds are issued with the terms specifying that the principal be repaid over time at the option of the issuer, then these bonds are putable bonds; if the principal is to be repaid over time at the option of the bondholder, then the bonds are termed callable bonds.

With regard to the statements made by Panelist 1 and Panelist 2:

A) both are correct

B) both are incorrect.

C) only one is correct.

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Panelist 1 is incorrect. These securities do not have a bullet maturity structure. The payments are structured so that the loan is paid off when the last loan payment is made.

Panelist 2 is incorrect. If coupon Treasury bonds or corporate bonds are issued with the terms specifying that the principal be repaid over time at the option of the issuer, then these bonds are callable bonds – the call provision grants the issuer an option to retire part of the issue or the entire issue prior to the maturity date. On the other hand, if the principal is to be repaid over time at the option of the bondholder, then these bonds are putable bonds – the put provision entitles the bondholder to put (sell) the issue back to the issuer at the put price (if interest rates increase and the bond’s price declines below the put price).

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Most often the initial call price of a bond is its:

A) par value plus one year's interest.

B) par value.

C) principal plus a premium.

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Customarily, when a bond is called on the first permissible call date, the call price represents a premium above the par value. If the bonds are not called entirely or not called at all, the call price declines over time according to a schedule. For example, a call schedule may specify that a 20-year bond issue can be called after 5 years at a price of 110. Thereafter, the call price declines by a dollar a year until it reaches 100 in the fifteenth year, after which the bonds can be called at par