Fixed Income【Reading 53】Sample following, describes, 2012, offering

mouse123

Which of the following contains the overall rights of the bondholders?

A) Covenant.

B) Rights offering.

C) Indenture.

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Covenants are part of the indenture. A rights offering describes an equity offering—not fixed income.

clearlycanadian

Which of the following statements regarding financing bond purchases is CORRECT?

A) The rate the investor pays on the loan in a margin transaction is known as the call money rate.

B) Purchasing securities on margin allows investors to leverage assets and make larger purchases.

C) In margin transactions, the broker borrows from the bank at the call money rate plus a spread.

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Example: An investor has $5,000 cash, but wants to buy ten $1,000 face value bonds at par (for a total of $10,000). With cash only, he can only purchase five of the bonds. With a 50% margin account, he can buy all ten bonds ($5,000 cash equity contribution and $5,000 from the margin account). With the margin account, he will realize the gain or loss on all ten bonds rather than the five he could have purchased with cash only.
The statements about the rates paid by the parties to a margin transaction are reversed. The statement, “In margin transactions, the broker borrows from the bank at the call money rate plus a spread,” should read, “…borrows…at the call money rate.” The statement, “The rate the investor pays on the loan in a margin transaction is known as the call money rate.” should read, “…known as the call money rate plus a spread.” Remember that the broker needs to make profit, so the investor will pay a rate higher than the broker pays to the bank.

clearlycanadian

Which of the following statements regarding financing bond purchases with margin accounts is NOT correct?

A) The required margin percentage changes daily.

B) In the U.S., margin accounts are regulated by the Federal Reserve.

C) Individuals are more likely than institutions to use margin accounts to finance bond purchases.

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The margin percentage is fixed by contract. The required margin dollars may vary from day to day due to fluctuations in the underlying collateral.

clearlycanadian

Which of the following embedded options most likely benefits the bondholder?

A) Prepayment option on an amortizing security.

B) Interest rate cap on a floating-rate bond.

C) Put provision at par on a bond that is trading at a premium.

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A put provision is an option that is exercisable by, and therefore potentially of benefit to, the bondholder. Even though the put is out of the money, it still has value to the bondholder. Interest rate caps and prepayment options both potentially benefit the issuer of the bond.

clearlycanadian

Which of the following embedded options benefits the bond investor?

A) Call provision.

B) Prepayment option.

C) Put provision.

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A put provision allows the investor to put the bond back to the issuer.

clearlycanadian

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

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

B) market interest rates have increased substantially.

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

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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.

clearlycanadian

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

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

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

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.

clearlycanadian

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) Bullet maturity.

B) Serial bonds.

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.

clearlycanadian

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) General redemption price.

C) Special 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.

clearlycanadian

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.