Deck 20: Markets for Corporate Senior Instruments: II

Question 1

Bonds that have been downgraded can fall into a group described as ________.

A) issues that have been downgraded because the issuer voluntarily and significantly decreased their debt as a result of a leveraged buyout or a recapitalization.
B) issues that have been upgraded because the issuer voluntarily and significantly increased their debt as a result of a leveraged buyout or a recapitalization.
C) issues that have been downgraded because the issuer voluntarily and significantly increased their debt as a result of a leveraged buyout or a recapitalization.
D) None of these

Answer 1

C

Question 2

In regards to adjustable-rate preferred stock, which of the below statements are FALSE?

A) The dividend rate on an adjustable-rate preferred stock is fixed quarterly.
B) The predetermined spread on an adjustable-rate preferred stock is called the dividend reset spread.
C) The popularity of adjustable-rate preferred stock declined when instruments began to trade below their par value- because the dividend reset rate is determined at the time of issuance, not by market forces.
D) In the case of adjustable-rate preferred stock, the dividend rate is determined periodically by a remarketing agent who resets the dividend rate so that any preferred stock can be tendered at par and be resold (remarketed) at the original offering price.

Answer 2

D

Question 3

Preferred stock, particularly cumulative preferred stock, has some important similarities with debt including: ________.

A) the issuer promises flexible cash payments to preferred stockholders.
B) preferred stockholders have priority over debtholders with respect to cash payments.
C) the issuer promises fixed cash payments to preferred stockholders.
D) preferred stockholders have priority over common stockholders in everything except the distribution of assets in the case of bankruptcy.

Answer 3

C

Question 4

Historically, there have been issues entitling the preferred stockholder to participate in earnings distribution beyond the specified amount (based on some formula). Preferred stock with this feature is referred to as ________.

A) redeemable preferred stock.
B) convertible preferred stock.
C) cumulative preferred stock.
D) participating preferred stock.

Question 5

Most corporate bonds are ________; that is, they run for a term of years, and then ________.

A) sinkable bonds; become due and convertible.
B) balloon bonds; become due and payable.
C) term bonds; become due and payable.
D) term bonds; become due but not payable.

Question 6

The preferred stock ________.

A) is a large part of the financial system in terms of a source of new financing.
B) has historically been issued largely by utilities, accounting for more than half of each year's issuance.
C) has been primarily issued by young growth companies.
D) All of these

Question 7

The four general classifications used by bond information services are: ________.

A) utilities, commerce, industrial, and bank holding companies.
B) electricals, transportations, utilities, and finance companies.
C) utilities, transportations, industrial, and banks and finance companies.
D) electricals, transportations, industrial, and financials.

Question 8

Which of the below statements is FALSE?

A) A guaranteed bond is an obligation guaranteed by another entity.
B) Refunding is much more comprehensive than call protection because it prohibits the early redemption of the bonds for any reason
C) Most corporate issues have a call provision allowing the issuer an option to buy back all or part of the issue prior to maturity.
D) A callable corporate bonds is generally callable at a premium above par with the amount of the premium declining as the bond approaches maturity.

Question 9

Which of the below statements is FALSE?

A) The promises of corporate bond issuers and the rights of investors who buy them are set forth in great detail in contracts called bond indentures
B) A bond's indenture clearly outlines three important aspects: its maturity, its security, and its provisions for retirement.
C) The indenture is made out to the corporate trustee as a representative of the interests of bondholders; that is, the trustee acts in a fiduciary capacity for investors who own the bond issue.
D) A corporate trustee is a trust company with officers who are amateurs in performing the functions of a trustee.

Question 10

Which of the below statements is TRUE?

A) Fixed-rate securities are attractive to some institutional investors because they allow them to buy an asset with an income stream that closely matches the floating nature of the income of some of their liabilities.
B) The lowest-grade bonds are designated by Moody's by the symbol Aaa and by the other three rating systems by the symbol AAA.
C) Frequently, the ability of an issuer to make interest and principal payments is seriously and unexpectedly changed by a natural or industrial accident or some regulatory change.
D) Each rating agency periodically publishes a table showing the upgrade and downgrade history of the issues that it rated.

Question 11

High-yield bonds ________.

A) are issues with a credit rating above triple B.
B) are issues with a credit rating below triple B.
C) have been rated investment grade at the time of issuance and cannot be downgraded subsequently to noninvestment grade.
D) cannot be rated noninvestment grade at the time of issuance (e.g., rated as original-issue, high- yield bonds).

Question 12

Which of the below statements is FALSE?

A) Warrants may be attached as part of a bond issue with each warrant granting the holder the right to purchase a designated security at a specified price from the issuer of the bond.
B) The conversion provision in a corporate bond issue grants the bondholder the right to convert the bond to a predetermined number of shares of common stock of the issuer.
C) A callable bond grants the bondholder the right to sell the issue back to the issuer at par value on designated dates.
D) Zero-coupon bonds are bonds without coupon payments or a stated interest rate.

Question 13

The ________ does not attempt to precisely predict a given level of recovery, but rather offer ratings that are in the form of an ordinal scale.

A) recovery ordinal system
B) ordinal scale system
C) recovery rating system
D) revival rating system

Question 14

________ companies can be divided into airlines, railroads, and trucking companies.

A) Utilities
B) Transportations
C) Industrial
D) Banks and finance

Question 15

Features of a corporate bond include ________.

A) promises by the corporate issuer to pay a specified percentage of the bond's market value on designated dates.
B) failure to pay either principal or interest when due constitutes legal default, and court proceedings can be instituted to enforce the contract.
C) prior legal claim by preferred stockholders over common and bondholders as to both income and assets of the corporation for the principal and interest due them.
D) promises by the corporate issuer to repay par or principal value of the bond after the maturity date.

Question 16

Which of the below statements is TRUE?

A) A collateral trust bond grants the bondholders a mortgage against the pledged assets.
B) A lien is a legal right to buy mortgaged property to satisfy unpaid obligations to stockholders.
C) Airway rolling stock has for a long time been regarded by investors as excellent security for debt.
D) A debenture bond is not secured by a specific pledge of property, but that does not mean that this type of bond has no claim on property of issuers or on their earnings.

Question 17

________ is a class of stock, not a debt instrument, but it shares characteristics of both common stock and debt.

A) Preferred stock
B) Preferential stock
C) Hybrid stock
D) Desirable stock

Question 18

A provision in the tax code exempts ________ from federal income taxation, if the recipient is a qualified corporation.

A) 50% of qualified dividends
B) 70% of qualified dividends
C) 50% of nonqualified dividends
D) 70% of nonqualified dividends

Question 19

One of the four general classifications used by bond information includes the class called "utilities," which can be further broken down into ________.

A) electric power companies, gas distribution companies, water companies, and communication companies.
B) airlines, railroads, and trucking companies.
C) manufacturing, merchandising, and service companies.
D) depository institutions, non-life insurance companies, and mutual funds.

Question 20

Which of the below is NOT one of the three types of preferred stock?

A) fixed-rate preferred stock
B) adjustable-rate preferred stock
C) exchangeable and cumulative preferred stock
D) auction and remarketed preferred stock

Question 21

In liquidations, the ________ generally holds, but in reorganizations under Chapter 11, it is often violated.

A) supreme priority rule
B) absolute precedence regulation
C) absolute priority rule
D) resolute priority law

Question 22

Business risk is the risk associated with operating cash flows.

Question 23

Occasionally, the ability of an issuer to make interest and principal payments is seriously and unexpectedly changed by (1) a natural or industrial accident or some regulatory change, or (2) a takeover or corporate restructuring.

Question 24

In assessing the credit risk of a corporate issuer, the rating agencies never look at the ability of an issuer to make the contractual payments to debt holders.

Question 25

________ of the bankruptcy act deals with the liquidation of a company; ________ covers reorganization.

A) Chapter 1; Chapter 2
B) Chapter 7; Chapter 12
C) Chapter 7; Chapter 11
D) Chapter 11; Chapter 17

Question 26

There are various types of preferred stock but fixed-rate is not one these types.

Question 27

By senior corporate securities, we mean that the holder of the senior security has priority over the ________.

A) secured debt owners in the case of bankruptcy of a corporation.
B) all other senior debt owners in the case of restructuring of a corporation.
C) equity owners in the case of voting rights.
D) equity owners in the case of bankruptcy of a corporation.

Question 28

In assessing management quality, Moody's tries to understand the business strategies and policies formulated by investors.

Question 29

When a company is liquidated, creditors receive distributions based on the absolute priority rule to the extent assets are available.

Question 30

________ means that all the assets of the corporation will be distributed to holders of claims on the corporation, and no corporate entity will survive.

A) Recapitalization
B) Distribution
C) Reorganization
D) Liquidation

Question 31

Having achieved an understanding of a corporation's business risk and corporate governance risk, the rating agencies move on to assessing financial risk, which involves traditional ratio analysis and other factors affecting the firm's financing.

Question 32

The Bankruptcy Reform Act of 1978 is the law governing bankruptcy in the United States.

Question 33

In assessing the credit risk of a corporate issuer, the rating agencies never look at the protections afforded to debt holders that are provided by covenants limiting management's discretion.

Question 34

Because the tax code exempts 70% of qualified dividends from federal income taxation if the recipient is a qualified corporation, the major buyers of preferred stock are corporations seeking tax-advantaged investments; these investors are willing to accept a lower dividend rate.

Question 35

Payments made to preferred stockholders are treated as a distribution of earnings and therefore are not tax deductible to the issuing corporation.

Question 36

Preferred stock has no important similarities with debt.

Question 37

Corporate governance issues involve (1) the ownership structure of the corporation, (2) the practices followed by management, and (3) policies for financial disclosure.

Question 38

Common stock is a class of stock in which the dividend rate is typically a fixed percentage of par or face value.

Question 39

Chapter 11 of the act deals with the reorganization of a company, and Chapter 7 deals with the dividend policy of a company.

Question 40

Which of the below statements is TRUE?

A) In a reorganization, the distribution made to claimholders will converge to that required by the absolute priority principle.
B) In a reorganization, a committee representing the various claimholders is appointed with the purpose of formulating a plan of reorganization.
C) When a company is take over in a merger, creditors receive distributions based on the absolute priority rule to the extent assets are available.
D) None of these

Question 41

Can failure to make preferred stock dividend payments force a firm into bankruptcy? Explain.

Question 42

The warrants on Eurobonds are varied: some are equity warrants, others are debt warrants, and still others may be currency warrants. Describe these three types of warrants on Eurobonds.

Question 43

The Eurobond sector of the global bond market includes bonds with a number of distinguishing features. Name three of these features.

Question 44

The law governing bankruptcy in the United States is the Bankruptcy Reform Act of 1978. One purpose of the act is to set forth the rules for a corporation to be liquidated or reorganized. Distinguish between a liquidation and a reorganization.

Question 45

The major issuers of adjustable-rate preferred stock (ARPS) have been bank holding companies. There are two reasons bank holding companies have become major issuers of ARPS. Describe these two reasons.

Question 46

Electronic bond trading makes up about 30% of corporate bond trading. Name three major advantages of electronic trading over traditional corporate bond trading in the over-the-counter market.

Question 47

There are five types of electronic corporate bond trading systems. Describe two of these five types.

Question 48

There are three types of deferred coupon structures: (1) deferred-interest bonds, (2) step-up bonds, and (3) payment-in-kind bonds. Describe two of these three types.

Question 49

In essence, the high-yield bond market shifts the risk from commercial banks to the investing public in general. There are four advantages to such a shift. Describe two of these advantages.

Question 50

In reorganizations, the absolute priority rule generally holds, but in liquidations under Chapter 11, it is often violated.