P1u2.1

  1. 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.
  2. 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.
  3. 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.
  4. 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?

    A)Mortgage bonds
    B)Subordinated debt
    C)Adjustment bonds
    D)Debentures
    • C)
    • Explanation

    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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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)mortgage bonds.
    B)equipment trust certificates.
    C)debentures.
    D)collateral trust bonds.
    • D)
    • Explanation

    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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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

    A)mortgage bonds.
    B)debentures.
    C)equipment trust certificates.
    D)collateral trust bonds.
    • C)
    • Explanation

    Debt securities issued by corporations backed by the assets the corporation owns and uses in its daily business are known as equipment trust certificates.
  18. 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.
  19. Question #19 of 65Question ID: 1268896
    A secured debt security can be backed by a corporation's

    A)manufacturing facilities.
    B)financial stability.
    C)credit rating.
    D)business reputation.
    • A)
    • Explanation

    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.
  20. 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.
  21. 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.
  22. 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.
  23. 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.
  24. 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.
  25. 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.
  26. 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).
  27. 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

    A)ex-dividend date.
    B)record date.
    C)dividend disbursement date.
    D)declaration date.
    • D)
    • Explanation

    When a company's board of directors (BOD) approves a dividend payment it is recognized as the date the dividend was declared; declaration date.
  28. 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.
  29. 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.
  30. 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.
  31. 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.
  32. 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.
  33. 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.
  34. Question #34 of 65Question ID: 1279891
    T-bonds are delivered in




    • D)
    • Explanation

    All U.S. government issues are delivered in book entry.
  35. 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).
  36. 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.
  37. 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.
  38. 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.
  39. 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.
  40. 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.
  41. 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.
  42. 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.
  43. 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.
  44. 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.
  45. 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.
  46. 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.
  47. 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)an equipment trust certificate.
    B)a mortgage bond.
    C)a debenture.
    D)a collateral trust bond.
    • C)
    • Explanation

    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.
  48. 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.
  49. 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.
  50. 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.
  51. 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.
  52. 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.
  53. 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.
  54. 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.
  55. Question #55 of 65Question ID: 1313231
    Rank the following in order of payment at the time of a corporate liquidation, from first to last.

    Secured debtholders
    Preferred stock
    Subordinated debentures
    Debentures



    • C)
    • Explanation

    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.
  56. 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.
  57. 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.
  58. 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.
  59. 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.
  60. 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.
  61. 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).
  62. 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.
  63. 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).
  64. 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.
  65. 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.
Author
NancyShi
ID
354699
Card Set
P1u2.1
Description
SIE Part 1 Unit 2
Updated