Reading 60: Features of Debt Securities LOSd习题精选 2010, statements, following, regarding

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

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

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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Which of the following statements about the early retirement of debt is least accurate?

A) Noncallable bonds generally cannot be retired for any reason prior to maturity.

B) Non-refundable bonds prohibit a company from calling an issue financed by the proceeds of a lower cost refunding bond issue.

C) When bonds are redeemed under sinking fund provisions, the call price is known as the "regular redemption price."

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When bonds are redeemed to comply with sinking fund provisions, the call price is known as the “special redemption price.” When bonds are redeemed according to the call provisions specified in the bond indenture, the call price is known as “regular redemption price.”

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Which of the following statements about refunding and redemption is most accurate?

A) An investor concerned about premature redemption is indifferent between a noncallable bond and a nonrefundable bond.

B) A sinking fund is an example of refunding.

C) Bonds redeemed at the special redemption price are typically redeemed at par.

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This statement is accurate. 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." When bonds are redeemed under the call provisions specified in the bond indenture, these are known as a regular redemptions and the call prices are referred to as "regular redemption prices." 

The other statements are false. A sinking fund is a type of redemption, which refers to the retirement of bonds. An investor concerned about premature redemption would prefer a noncallable bond because a noncallable bond cannot be called for any reason. A bond that is callable but nonrefundable can be called for any reason other than refunding. The term refunding specifically means redeeming a bond with funds raised from a new bond issued at a lower coupon rate. A nonrefundable bond can be redeemed with funds from operations or a new equity issue.

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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.

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Which of the following is most accurate about a bond with a deferred call provision?

A) It could be called at any time during the initial call period, but not later.

B) Principal repayment can be deferred until it reaches maturity.

C) It could not be called right after the date of issue.

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A deferred call provision means the issue is initially (say, for the first 5 to 7 years) non-callable, after which time it becomes freely callable. In other words, there is a deferment period during which time the bond cannot be called, but after that, it becomes freely callable.

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Which of the following is TRUE about the call feature of a bond? It:

A) stipulates whether and under what circumstances the bondholders can request an earlier repayment of the principal amount prior to maturity.

B) stipulates whether and under what circumstances the issuer can redeem the bond prior to maturity.

C) describes the maturity date of the bond.

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Call provisions give the issuer the right (but not the obligation) to retire all or a part of an issue prior to maturity. If the bonds are “called,” the bondholder has no choice but to turn in his bonds. Call features give the issuer the opportunity to get rid of expensive (high coupon) bonds and replace them with lower coupon issues in the event that market interest rates decline during the life of the issue.

Call provisions do not pertain to maturity. A put provision gives the bondholders certain rights regarding early payment of principal.

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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 TRUE? 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) Mortgage-backed securities (MBS).

C) Coupon Treasury bonds.

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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 regards to the statements made by Panelist 1 and Panelist 2:

A) both are correct

B) only one is correct.

C) both are incorrect.

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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).