Learning objectives: Describe features of bond trading and explain the behavior of bond yield. Describe a bond indenture and explain the role of the corporate trustee in a bond indenture. Define high-yield bonds and describe types of high-yield bond issuers and some of the payment features unique to high-yield bonds. Differentiate between credit default risk and credit spread risk. Describe event risk and explain what may cause it to manifest in corporate bonds.
Questions:
23.1.1. Acme Industrial Inc. is considering a corporate bond issuance. Acme's CFO first wants to decide between a private placement and a public issuance. In contrast to the public issuance, each of the following is true as an advantage of the private placement over the public issuance EXCEPT which is false?
a. Private placement has lower interest rate
b. Private placement has lower issuance cost
c. Private placement has fewer registration requirements
d. Private placement avoids the involvement of rating agencies
23.1.2. A U.S. corporate bond that matures on April 1st, 2026, pays a semi-annual coupon of 9.0% per year. The coupon payment dates are Jan 1st and July 1st. Settlement is on April 7th, 2024. The year 2024 is a leap year. The bond's yield happens to be about 7.00%. If the cash (aka, dirty) price is $1,064.50, then which is nearest to the quoted (aka, clean) price? (Inspired by GARP EOC PQ 17.13)
a. $960.14
b. $974.50
c. $1,040.50
d. $1,088.50
23.1.3. Which of the following is TRUE about a bond indenture?
a. Bonds issued by risker creditworthy firms generally contain few covenants
b. Indentures may include negative (aka, restrictive), positive, and/or financial covenants
c. If a bond is a debenture, then the bond is unlikely to also have an indenture which is redundant
d. The corporate bond trustee's primary duty is to ensure the bond's credit rating is an accurate representation of the issuer's credit quality
Answers here:
Questions:
23.1.1. Acme Industrial Inc. is considering a corporate bond issuance. Acme's CFO first wants to decide between a private placement and a public issuance. In contrast to the public issuance, each of the following is true as an advantage of the private placement over the public issuance EXCEPT which is false?
a. Private placement has lower interest rate
b. Private placement has lower issuance cost
c. Private placement has fewer registration requirements
d. Private placement avoids the involvement of rating agencies
23.1.2. A U.S. corporate bond that matures on April 1st, 2026, pays a semi-annual coupon of 9.0% per year. The coupon payment dates are Jan 1st and July 1st. Settlement is on April 7th, 2024. The year 2024 is a leap year. The bond's yield happens to be about 7.00%. If the cash (aka, dirty) price is $1,064.50, then which is nearest to the quoted (aka, clean) price? (Inspired by GARP EOC PQ 17.13)
a. $960.14
b. $974.50
c. $1,040.50
d. $1,088.50
23.1.3. Which of the following is TRUE about a bond indenture?
a. Bonds issued by risker creditworthy firms generally contain few covenants
b. Indentures may include negative (aka, restrictive), positive, and/or financial covenants
c. If a bond is a debenture, then the bond is unlikely to also have an indenture which is redundant
d. The corporate bond trustee's primary duty is to ensure the bond's credit rating is an accurate representation of the issuer's credit quality
Answers here:
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