Question #1 of 65Question ID: 1268910
XYZ Corporation is guaranteeing a debt issue for the IHG Company. Regarding these bonds, which of the following is true?
A)
Explanation
These are guaranteed bonds where the value of the guarantee is only as good as the financial strength (good faith and credit) of the company making the guaranteejQuery112407737173761372067_1614393139675in this case, XYZ Corporation. Because these bonds are backed by the good faith and credit of XYZ and not by any tangible asset, they are unsecured debt instruments. Always remember that even though the word "guaranteed" is used to describe such issues, the bonds are unsecured debt.
Question #2 of 65Question ID: 1279901
The first investors to get paid in corporate liquidations are holders of
C)
Explanation
Secured investors are the first to get paid in corporate liquidations.
Question #3 of 65Question ID: 1299523
A corporate bankruptcy liquidation took place. Of the following??general creditors, secured bondholders, subordinated debenture holders, accrued taxes??who was paid first and who was paid last?
A)Secured bondholders first, general creditors last
B)General creditors first, secured bondholders last
C)Secured bondholders first, subordinated bondholders last
D)Secured bondholders first, accrued taxes last
C)
Explanation
The liquidation priority is as follows: secured debt, unsecured debt and general creditors, then subordinated debt, and then equity holders with preferred shareholders first, followed by common shareholders. Therefore, of those that are listed here, secured bondholders would be paid first, and subordinated bondholders last. General creditors and taxes are paid at the same level.
Question #4 of 65Question ID: 1268917
A company reorganizing with the intent to emerge from a bankruptcy is likely to issue which of the following type of bonds to accomplish that goal?
Income bonds, also known as adjustment bonds, are used when a company is reorganizing. These bonds allow the issuer to only pay interest if the corporation has enough income to meet the interest payment obligations. This allows the corporation some flexibility while attempting to reorganize and emerge from bankruptcy.
Question #5 of 65Question ID: 1268893
If a company files for bankruptcy, which of the following investors would be most likely to be paid first?
A)
Explanation
Mortgage bonds are senior securities. Those who hold mortgage bonds expect to receive any assets from the dissolution of a bankrupt company before the holders of junior securities such as debentures and equity securities.
Question #6 of 65Question ID: 1279889
For the following investors, which of the following is correctly ranked from lowest to highest in liquidation?
A)
Explanation
The normal priority from first to last is secured debt, debentures, subordinate debentures, preferred stock, common stock.
Question #7 of 65Question ID: 1279895
Which of the following is the most junior security?
D)
Explanation
All of these are debt securities except preferred stock. All debt securities are senior to equity securities.
Question #8 of 65Question ID: 1268909
A guaranteed bond is
A)a secured debt instrument.
B)debt backed by another company, such as a subsidiary company.
C)debt backed by another company, such as a parent company.
D)backed by physical assets of either a parent company or a subsidiary company.
C)
Explanation
Guaranteed bonds are backed by a company other than the issuing corporation, such as a parent company. The value of the guarantee is only as good as the strength of the company making that guarantee (good faith and credit) because no physical assets back the bonds. Hence, these are unsecured debt instruments.
Question #9 of 65Question ID: 1268905
A corporation has issued debt securities backed by the shares of another corporation that it owns. These debt securities are known as
A corporation can deposit securities it owns into a trust to be used as collateral to back its debt issues. When this is done, the securities issued are known as collateral trust bonds.
Question #10 of 65Question ID: 1299526
A court has ordered a corporation to liquidate all assets under a federal bankruptcy proceeding. Which of the following is true?
A)Common stockholders are paid before preferred stockholders.
B)Preferred stockholders are paid before debtholders.
C)Debtholders are paid before stockholders.
D)There is no priority for the payment of wages to employees.
C)
Explanation
When a corporation is liquidated, employee wages and accrued taxes are paid first. These are followed by all debt instruments, which are to be followed by equity holders (stockholders). One of the preferences for preferred stockholders is that, in a liquidation, any preferred stock classes are paid before common stock. Secured creditors are paid first, followed by unsecured creditors (debentures) and general creditors (which includes taxes and wages), and then subordinated debentures. Equities follow debt with preferred shareholders paid before common shareholders.
Question #11 of 65Question ID: 1279887
If a bond is trading at a discount, which of the following rates is correctly ranked from low to high?
D)
Explanation
The order from low to high is coupon rate, current yield, yield to maturity, yield to call.
Question #12 of 65Question ID: 1268922
When an investor purchases a corporate bond, the investor is
C)
Explanation
While stock represents ownership, a bond represents a loan. When investors purchase bonds, they are lending money to the borrowing entity and thus become creditors of the entity.
Question #13 of 65Question ID: 1268895
A bond backed by a corporation's full faith and credit is
secured.
unsecured.
backed by a specific asset.
not backed by any assets.
A)I and III
B)II and III
C)II and IV
D)I and IV
C)
Explanation
When a bond is backed by a corporation's full faith and credit, it is backed only by the reputation, credit record, and financial stability of the corporation. Not being backed by any of the corporation's assets, this bond is unsecured.
Question #14 of 65Question ID: 1268926
Once a corporate liquidation proceeding in court is underway, common shareholders know that
C)
Explanation
There are no guarantees in a bankruptcy proceeding that payment will be paid to anyone. Common shareholders, paid last of all claimants, if anything is left to be paid, should be acutely aware of this.
Question #15 of 65Question ID: 1268919
In the event that a liquidation needs to occur, subordinated debtholders
C)
Explanation
In the event that a liquidation needs to occur, though they are still senior to all equity holders, subordinated debtholders agree to be paid back last of (subordinate or junior to) all debtholders.
Question #16 of 65Question ID: 1279904
A guaranteed bond is usually guaranteed by which of the following entities?
A)The broker-dealer who sold it
B)The U.S. Guarantee Association
C)The U.S. government
D)A parent company
D)
Explanation
A guaranteed bond is back by a third party, normally a parent company backing the debt of a subsidiary company.
Question #17 of 65Question ID: 1268902
A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are
Debt securities issued by corporations backed by the assets the corporation owns and uses in its daily business are known as equipment trust certificates.
Question #18 of 65Question ID: 1279892
Which of the following is an unsecured corporate debt security?
D)
Explanation
Debentures are unsecured. Mortgage bonds are backed by property. Equipment trust certificates are backed by equipment. Collateral trust certificates are backed by securities.
Question #19 of 65Question ID: 1268896
A secured debt security can be backed by a corporation's
Secured debt securities are backed by real assets. An unsecured debt security is one backed only by the issuer's full faith and credit, which includes characteristics such as credit rating, financial stability, and business reputation.
Question #20 of 65Question ID: 1268897
Regarding corporate bond issues, which of the following statements best describes secured debt and unsecured debt?
A)
Explanation
Corporations can issue both secured and unsecured debt securities. Secured debt issues are backed by real assets, while those that are unsecured are simply backed by the issuer's full faith and credit.
Question #21 of 65Question ID: 1279903
When the interest rates in the marketplace moves up or down, the price of all bonds move
C)
Explanation
Interest rates and bond prices move in opposite directions. This is known as an inverse relationship.
Question #22 of 65Question ID: 1268928
Holders of subordinated debt instruments know that in the case of a corporate liquidation, they
B)
Explanation
In the event of a corporate bankruptcy, subordinated debtholders, while having no guarantees of being paid, would come last of all bondholders in the liquidation priority??subordinate.
Question #23 of 65Question ID: 1268911
Which of the following is a characteristic shared by both corporate debentures and income bonds?
D)
Explanation
All bonds must pay principal when due. Income bonds, however, are not required to pay interest when due unless the earnings of the issuer are deemed to be sufficient and the board of directors (BOD) declares that interest payments be made.
Question #24 of 65Question ID: 1268930
Income from an investment in debt securities is known as
D)
Explanation
Income from debt securities is known as interest. Income from common stock is known as dividends. Sale of a security for a price different from that originally paid is known as a capital gain or loss. The total return on an investment is the sum of income received and capital gain or loss upon sale.
Question #25 of 65Question ID: 1268918
An issuer has a subordinated debt issue outstanding. Which of the following is true?
A)
Explanation
Subordinated debt (usually debentures) have a junior claim to all other debt issues but, like all debt, is senior to the claims of all equity holders, both preferred and common.
Question #26 of 65Question ID: 1268913
Which of the following bonds trade flat (without interest) unless interest payments are declared by the board of directors (BOD)?
C)
Explanation
Bonds that trade flat (without interest), unless the payments are declared by the BOD, are income bonds (also known as adjustment bonds).
Question #27 of 65Question ID: 1268931
A company's board of directors (BOD) approves a dividend payment. When this occurs it is recognized as the
When a company's board of directors (BOD) approves a dividend payment it is recognized as the date the dividend was declared; declaration date.
Question #28 of 65Question ID: 1268891
Which of the following securities carries the greatest amount of risk in conjunction with a corporate liquidation?
D)
Explanation
Common stockholders are always the last to be paid in the event of a corporate liquidation and, therefore, have the most risk.
Question #29 of 65Question ID: 1279905
Which of the following preferred stocks' price would remain most stable in an environment of changing interest rates?
A)
Explanation
Adjustable rate preferred dividend resets when interest rates change so the price remains stable.
Question #30 of 65Question ID: 1279893
Subordinate debentures are senior to which of the following fixed income securities?
D)
Explanation
All debt securities are senior to equity securities.
Question #31 of 65Question ID: 1299520
Regarding a corporate bankruptcy and the liquidation priority, which of the following is accurate?
C)
Explanation
In the event of a corporate liquidation, the order of claims priority would be as follows: secured debt, unsecured debt (debentures) and general creditors (which includes taxes and wages), subordinated debt (subordinated debentures), preferred shares, and, last of all, common shares.
Question #32 of 65Question ID: 1268885
The two classifications of chapters for corporate bankruptcies are
liquidations.
reorganizations.
bankruptcy.
failures.
A)
Explanation
Corporate bankruptcies can be either liquidations, where assets are sold off and proceeds are distributed based on the priority of the claim, or reorganizations, where the company continues to operate under a plan to repay creditors.
Question #33 of 65Question ID: 1279899
Rank the following investors from highest to lowest priority in liquidation.
A)
Explanation
The normal priority from first to last is secured debt, debentures, subordinate debentures, preferred stock, and common stock.
Question #34 of 65Question ID: 1279891
T-bonds are delivered in
D)
Explanation
All U.S. government issues are delivered in book entry.
Question #35 of 65Question ID: 1268903
Which of the following corporate bonds is backed by the securities of other corporations or those of a subsidiary?
C)
Explanation
Collateral trust bonds are backed by a portfolio of other securities; mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment. Debentures are backed only by the company's promise to pay (good faith and credit).
Question #36 of 65Question ID: 1268914
If investors have income listed as their investment objective, they would not hold which of the following securities in their portfolio?
A)
Explanation
Also known as adjustment bonds, income bonds pay interest only if the issuer has enough earnings to do so. They are often issued by companies coming out of bankruptcy. As a result, the interest payments providing the income to meet the objective are uncertain.
Question #37 of 65Question ID: 1268927
Secured corporate debt includes
B)
Explanation
Examples of secured corporate debt includes outstanding bonds and mortgage paper. Debt owed to suppliers would be unsecured. Government debt owed is taxes, and preferred and common stock is equity.
Question #38 of 65Question ID: 1268884
A company has issued bonds (debt securities) to investors. For these investors, these securities represent
A)ownership in the existing company.
B)a loan to the issuing company.
C)liability for the issuing company's debt.
D)equity in the issuing company.
B)
Explanation
Purchasers of bonds have essentially given the issuer a loan for which they will receive repayment plus interest.
Question #39 of 65Question ID: 1268889
Regarding bankruptcy proceedings,
D)
Explanation
Bankruptcy is a general term for court procedures available to both individuals and businesses. During the proceedings, filers are protected by the court from creditors. Protection is granted independent of any actions to liquidate or file a plan for reorganization.
Question #40 of 65Question ID: 1268907
Which one of the following best describes a debenture?
C)
Explanation
A debenture is unsecured corporate debt, not backed by any physical assets but only the issuer's good faith and credit.
Question #41 of 65Question ID: 1268904
For collateral trust bonds, all of the following are true except
A)
Explanation
For a collateral trust certificate, the issuer deposits securities of other corporations that it owns, or securities of fully or partially owned subsidiaries into a trust. The securities held in the trust are the collateral backing the certificates, and thus with this backing, the certificates are considered secured debt instruments.
Question #42 of 65Question ID: 1268916
An income bond is also known as
B)
Explanation
Income bonds or adjustment bonds are used when a company is reorganizing. The bonds only pay interest if the corporation has enough income to meet the obligations on the debt issue and are therefore unsecured.
Question #43 of 65Question ID: 1279888
If a bond is trading at a premium, which of the following rates is correctly ranked from high to low?
C)
Explanation
The order from high to low is coupon rate, current yield, yield to maturity, yield to call.
Question #44 of 65Question ID: 1299521
In what order would claimants receive payment in the event of a corporate bankruptcy?
Holders of secured debt
Holders of subordinated debt instruments
General creditors
Preferred stockholders
B)
Explanation
For corporate bankruptcies, the liquidation priority is as follows: secured debtholders, unsecured debtholders (including general creditors), holders of subordinated debt instruments, preferred stockholders, and common stockholders.
Question #45 of 65Question ID: 1268915
Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle?
B)
Explanation
Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. Therefore, the interest payments are not predictable, and they are not suitable for customers seeking income.
Question #46 of 65Question ID: 1268898
An investor holding a corporate-issued mortgage bond is holding a debt security that is
D)
Explanation
An investor holding a corporate-issued mortgage bond is holding the mortgage paper as the debt security. These mortgage bonds are backed by real estate, like all mortgage paper, and are therefore considered secured debt instruments.
Question #47 of 65Question ID: 1268908
A written promise made by a corporation to pay the principal at its due date and interest on a regular basis on one of its debt issues but backed by no physical assets or titles to assets could only be
A debenture is a debt obligation of a corporation backed only by its word and general creditworthiness. Debentures are written promises of the corporation to pay the principal at its due date and interest on a regular basis.
Question #48 of 65Question ID: 1306936
Corporate shareholder structure regarding liability is different from that of a partnership. In recognizing that, which of the following is true?
D)
Explanation
During a bankruptcy dissolution process, a corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy. Corporate shareholders have limited liability, risking only what was invested. By contrast, a partner or a sole proprietor risks not only any amount invested but also personal assets should the business not be able to pay off its obligations.
Question #49 of 65Question ID: 1268888
Regarding filing for corporate bankruptcy, which of the following is true?
B)
Explanation
The primary difference between a reorganization and a liquidation is that in a reorganization, the corporation can keep property and continue doing business. Liquidation means that all property will be taken and sold to repay all debts.
Question #50 of 65Question ID: 1279898
Rank the following investors from lowest to highest priority in liquidation.
A)
Explanation
The normal priority from first to last is secured debt, debentures, subordinate debentures, preferred stock, common stock.
Question #51 of 65Question ID: 1268899
When a corporation issues a mortgage bond, the issue's total value
B)
Explanation
Mortgage bond issues represent the amount the issuer is borrowing that is backed by its real estate assets. Just as with a home mortgage, the amount borrowed shouldn't exceed the value of the property. Hence, the issue's total value should be less than that of the real estate by which it is backed. Backed by real property, these are secured debt instruments.
Question #52 of 65Question ID: 1279886
If a bond is trading at a discount, which of the following rates is correctly ranked from high to low?
C)
Explanation
The order from high to low is yield to call, yield to maturity, current yield, nominal yield.
Question #53 of 65Question ID: 1268886
A company an individual has invested in by purchasing 1,000 shares of common stock has unfortunately gone bankrupt. This investor
A)may lose all that was invested and can be found to be liable for any corporate debts that cannot be satisfied during the dissolution process.
B)may lose all that was invested but is not liable for any corporate debts that cannot be satisfied during the dissolution process.
C)is guaranteed to receive back all that was invested but may have to liquidate personal assets to satisfy any debts of the corporation.
D)is guaranteed to receive back all that was invested and is not liable for any corporate debts that cannot be satisfied during the dissolution process.
B)
Explanation
In the event of bankruptcy, common shareholders are paid back last of all in the dissolution process and priority. They are not guaranteed anything and can lose all of their investment. However, they have limited liability status, meaning that while they can lose their entire investment, they cannot be held liable for any of the corporation's remaining debts.
Question #54 of 65Question ID: 1268929
Interest on a 7% corporate bond would be paid to the investor as
A)
Explanation
Interest on corporate bonds is paid twice per year, or semiannually. The interest rate reported, however, is an annual rate. Thus a 7% bond would pay 7% of par ($1,000), or $70, per year as two semiannual checks for $35 each.
Question #55 of 65Question ID: 1313231
Rank the following in order of payment at the time of a corporate liquidation, from first to last.
When a corporation is liquidated, secured debt is paid first, then debentures and general creditors, followed by subordinated debt, preferred stock, and common stock last.
Question #56 of 65Question ID: 1268906
Which of the following is an unsecured debt instrument?
A)
Explanation
Corporate debentures are unsecured bonds backed by the good faith and credit of the issuing corporation; they are not secured by any underlying collateral.
Question #57 of 65Question ID: 1299522
Of the debt and equity holders listed here, in what order would claimants receive payment in the event that a corporate bankruptcy liquidation needed to occur?
Holders of secured debt
Holders of subordinated debentures
General creditors
Preferred stockholders
A)
Explanation
In the event of a corporate bankruptcy liquidation, the order of payment is as follows: secured debtholders, unsecured debtholders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.
Question #58 of 65Question ID: 1279900
The risk of being the last to get paid in a corporate liquidation is characteristic of which of the following?
C)
Explanation
Common stock is always last to get paid.
Question #59 of 65Question ID: 1279902
A bond that is structured so that a portion of the principal is scheduled to mature at intervals over several years is
A)a series bond.
B)a serial bond.
C)a term bond.
D)a balloon bond.
B)
Explanation
With a serial bond, portions of the issue mature over a period of years until the entire issue is paid.
Question #60 of 65Question ID: 1268901
A bondholder has invested in a certificate backed by equipment that the issuer owns and utilizes in its daily operations. This issuer is most likely
A)a transportation company.
B)a utility.
C)a political subdivision (municipality).
D)the federal government.
A)
Explanation
This is the essence of an equipment trust certificate. These are corporate bonds commonly issued by transportation companies, such as railroads and airlines. These bonds are backed by equipment (e.g., aircraft) the issuer uses in its day-to-day business.
Question #61 of 65Question ID: 1268912
Bondholders should expect that interest payments would always be forthcoming for all of the following except
A)
Explanation
Income bonds pay interest only if earnings are sufficient and the payments to be made are declared by the board of directors (BOD). This is not true of any of the other fixed-income securities listed (debentures, subordinated debentures, or convertible bonds).
Question #62 of 65Question ID: 1279894
Which of the following projects would most likely be funded with a revenue bond?
A)
Explanation
Revenue bonds are issued to finance self-supporting projects that generate enough revenue to pay the bond holders and run the facility. A stadium should be able to collect enough revenue to do that. The other three are not revenue-producing facilities.
Question #63 of 65Question ID: 1299524
List the order of payment from first to last in the event of a corporate liquidation.
Secured debt
Preferred shareholders
Unsecured debt
Common shareholders
B)
Explanation
In the event of a corporate liquidation, the order of claims priority would be as follows: all debt instruments (secured first, then unsecured), preferred shareholders, and last of all claims, common shareholders. Taxes, wages, and general creditors are paid at the same level as senior unsecured debt (debentures).
Question #64 of 65Question ID: 1268900
When an issuer has equipment trust certificates outstanding,
title to the assets backing the certificates are held in trust.
the equipment is held in trust.
the assets can be repossessed and sold by the trustee.
the certificates are unsecured because they represent the debt owed on the assets.
C)
Explanation
When equipment trust certificates have been issued, the titles to the assets (not the actual equipment) backing the certificates are held in trust. If the issuer fails to make the payments on the equipment, it can be repossessed and sold to pay off the debt held by the certificate holders. In other words, it is the equipment acting as the collateral that secures these loans.
Question #65 of 65Question ID: 1268894
Which of the following is an example of an unsecured debt security?
Debenture
Preferred stock
Mortgage bond
Income bond
C)
Explanation
A debenture and income bonds are examples of unsecured debt instruments. Preferred stock is an equity security and a mortgage bond is secured (collateralized) by real estate.
