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corporate finance

Questions and Answers of Corporate Finance

Why is an option-adjusted spread more suitable for a bond with an embedded option than a yield spread?
Suppose a client observes the following two benchmark spreads for two bonds: Bond issue U rated A: 150 basis points Bond issue V rated BBB: 135 basis points Your client is confused because he thought
In the May 29, 1992, Weekly Market Update published by Goldman, Sachs & Co., the following information was reported in an exhibit for high-grade, tax-exempt securities as of the close of business
Answer the below questions.(a) What is an embedded option in a bond?(b) Give three examples of an embedded option that might be included in a bond issue.(c) Does an embedded option increase or
Answer the below questions. (a) What is a yield curve?(b) Why is the Treasury yield curve the one that is most closely watched by market participants?
What is a spot rate?
Explain why it is inappropriate to use one yield to discount all the cash flows of a financial asset.
What are the differences among a Treasury bill, Treasury note, and Treasury bond?
In a Treasury auction, how is the price that a noncompetitive bidder must pay determined in a single-price auction format?
Suppose that a Treasury coupon security is purchased on April 8 and that the last coupon payment was on February 15. Assume that the year in which this security is purchased is not a leap year.Answer
Answer the below questions.(a) What is meant by coupon stripping in the Treasury market?(b) What is created as a result of coupon stripping in the Treasury market?
Why is a stripped Treasury security identified by whether it is created from the coupon or the principal?
What is the federal income tax treatment of accrued interest income on stripped Treasury securities?
What is a government-sponsored enterprise?
Explain why you agree or disagree with the following statement: “The debt of government-owned corporations is guaranteed by the full faith and credit of the U.S. government, but that is not the
In the fall of 2010, the author of this book received an offering sheet for very short-term Treasury bills from a broker. The offering price for a few of the issues exceeded the maturity value of the
The following questions are about Treasury Inflation Protected Securities (TIPS).(a) What is meant by the “real rate”?(b) What is meant by the “inflation-adjusted principal”?(c) Suppose that
What is the when-issued market?
Why do government dealers use government brokers?
Suppose that the price of a Treasury bill with 90 days to maturity and a $1 million face value is $980,000. What is the yield on a bank discount basis?
The bid and ask yields for a Treasury bill were quoted by a dealer as 5.91% and 5.89%, respectively. Shouldn’t the bid yield be less than the ask yield, because the bid yield indicates how much the
Assuming a $100,000 par value, calculate the dollar price for the following Treasury coupon securities given the quoted price.(a) The quoted price for a $100,000 par value Treasury coupon security
Answer the below questions for a treasury auction.(a) For a Treasury auction what is meant by a noncompetitive bidder?(b)For a Treasury auction what is meant by the high yield?
In a Treasury auction, how is the price that a competitive bidder must pay determined in a single-price auction format?
What is the significance of a secured position if the absolute priority rule is typically not followed in a reorganization?
Answer the below questions.(a) What is meant by a make-whole call provision?(b) What is the make-whole premium?(c) How does a make-whole call provision differ from a traditional call provision?(d)
Answer the below questions.(a)What is a sinking fund requirement in a bond issue?(b) “A sinking fund provision in a bond issue benefits the investor.” Do you agree with this statement?
What is the difference between a fallen angel and an original-issue high-yield bond?
“A floating-rate note and an extendable reset bond both have coupon rates readjusted periodically. Therefore, they are basically the same instrument.” Do you agree with this statement?
What is a payment-in-kind bond?
Answer the below questions.(a) Why has there been a decline in corporate bond liquidity?(b) Why is e-trading of corporate bonds that rely less on dealer inventory important?
Answer the below questions.(a) In what ways does an MTN differ from a corporate bond?(b) What derivative instrument is commonly used in creating a structured MTN?
Answer the below questions.(a) Do you agree or disagree with the following statement? “Most MTN issues are rated non-investment grade at the time of offering.”(b) Do you agree or disagree with
Answer the below questions pertaining to the private-placement corporate debt market.(a) Do you agree or disagree with the following statement? “Since Rule 144A became effective, all privately
The supplemental prospectus of an actual offering by Royal Bank of Canada states the following:“Reference Asset:SGI Smart Market Neutral Commodity Index (USD – Excess Return) (BloombergTicker:
Answer the below questions.(a) What is the difference between liquidation and a reorganization?(b) What is the difference between a Chapter 7 and Chapter 11 bankruptcy filing?
Answer the below questions.(a) Why is commercial paper an alternative to short-term bank borrowing for a corporation?(b) What is the difference between directly placed paper and dealer-placed
Answer the below questions.(a) Bank loans are classified as investment-grade and leveraged bank loans. Explain the difference between these two types of loans.(b) Which of the two types of bank loans
Answer the below questions.(a) What is a syndicated bank loan?(b) What is the reference rate typically used for a syndicated bank loan?(c) What is the difference between an amortized bank loan and a
Explain the two ways in which a bank can sell its position in a syndicated loan.
In a collateralized loan obligation, howis protection afforded to the most senior bond class?
Why is a default rate not a good sole indicator of the potential performance of a portfolio of high-yield corporate bond?
What is the difference between a credit rating and recovery rating?
What is a rating transition matrix?
What is the difference between event risk and headline risk?
What is a debtor in possession?
What is the principle of absolute priority?
Comment of the following statement: “A senior secured creditor has little risk of realizing a loss if the issuer goes into bankruptcy.”
What is meant by an issue or issuer being placed on a credit watch?
Comment on the following statement: “An investor who purchases the mortgage bonds of a corporation knows that should the corporation become bankrupt, mortgage bondholders will be paid in full
Answer the below questions.(a) What is the difference between refunding protection and call protection?(b) Which protection provides the investor with greater protection that the bonds will be
Answer the below questions.(a) What is a bullet bond?(b) Can a bullet bond be redeemed prior to the stated maturity date?
Answer the below questions.(a) Explain why you agree or disagree with the following statement: “All municipal bonds are exempt from federal income taxes.”(b) Explain why you agree or disagree
Answer the below questions.(a) What are the three different types of letter-of-credit in a municipal bond, and how do they differ?(b) Which of letter-of-credit bond provides the greatest protection
The following statement appeared in a publication by the Idaho State Treasurer’s Office: “Each year since 1982 the Idaho State Treasurer has issued a State of Idaho Tax Anticipation Note
What are the revenues supporting an asset-backed security issued by a municipality?
The four largest tobacco companies in the United States reached a settlement with 46 state attorneys general to pay a total of $206 billion over the following 25 years. Answer the below questions.(a)
Answer the below questions.(a) Explain how an inverse-floating-rate municipal bond can be created.(b) Who determines the leverage of an inverse floater?(c) What is the duration of an inverse floater?
Historically, what have been the causes of municipal bankruptcies?
Credit default swaps, a derivative instrument described in Chapter 30, allow investors to buy and sell protection against the default of a municipal issuer. Why do you think it is difficult to find
Answer the below questions.(a) Why doesn’t a Chapter 13 bankruptcy filing by a municipality allow for its liquidation?(b) What is the role of the bankruptcy court in a Chapter 13 bankruptcy case?
In a revenue bond, what is a catastrophe call provision?
What is the tax risk associated with investing in a municipal bond?
If Congress changes the tax law so as to increase marginal tax rates, what will happen to the price of municipal bonds?
Answer the below questions.(a) What is the equivalent taxable yield for an investor facing a 40% marginal tax rate, and who can purchase a tax-exempt municipal bond with a yield of 7.2?(b) What are
What can you say about the typical relationship between the yield on short-term and long-term municipal bonds?
How does the steepness of the Treasury yield curve compare with that of the municipal yield curve?
Explain why the market for taxable municipal bonds competes for investors with the corporate bond market.
What is the yield ratio and why is it typically less than 1?
Answer the below questions.(a) What is a Build America Bond?(b) What is the current status of the federal government program authorizing the issuance of such bonds?
What is the difference between a tax-backed bond and a revenue bond?
Which type of municipal bond would an investor analyze using an approach similar to that for analyzing a corporate bond?
In a revenue bond, which fund has priority when funds are disbursed from the reserve fund, the operation and maintenance fund or the debt service reserve fund?
“An insured municipal bond is safer than an uninsured municipal bond.” Indicate whether you agree or disagree with this statement.
Who are the parties to a letter-of-credit–backed municipal bond, and what are their responsibilities?
In a revenue bond, which fund has priority when funds are disbursed from the reserve fund, the operation and maintenance fund or the debt service reserve fund? Discuss.
Answer the below questions.(a) What is a prerefunded bond?(b) Why does a properly structured prerefunded municipal bond have no credit risk?
Describe the trading blocs that are used in classifying the world’s bonds markets.
This excerpt, which discusses dual currency bonds, is taken from the International Capital Market, published in 1989 by the European Investment Bank:“The generic name of dual-currency bonds hides
Answer the below questions. (a) Why do rating agencies assign a different rating to the debt of a sovereign entity based on whether the debt is denominated in a local currency or a foreign
What are the different methods for the issuance of government securities?
Answer the below questions.(a) What are covered bonds?(b) How do covered bonds differ from residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed
In the analysis of emerging market sovereign bonds, what is meant by structural factors?
In the analysis of emerging market sovereign bonds, why is geopolitical significance important?
What can one consider alleged corruption in a presidential election in an emerging market country or the change in finance minister in an emerging market country headline risk? (Headline risk was
On January 9, Reuters announced a US$2.6 billion bond offering by the Australia and New Zealand Banking Group. The following is reproduced from the announcement:Issue:US$2.6 bln 144a reg S 2,
On January 9, Reuters announced a US$3.075 billion bond offering by the Commonwealth Bank of Australia. The following is reproduced from the announcement: Issue: US$3.075 bln of 144a reg S bonds
What is meant by infrastructure debt?
What risk is faced by a U.S. life insurance company that buys British government bonds?
“The strongest argument for investing in nondollar bonds is that there are diversification benefits.” Explain why you agree or disagree with this statement.
What arguments are offered for investing in nondollar bonds?
What is the difference between LIBID and LIMEAN?
What is the foreign bond market of a country?
What is the debate regarding covenants in corporate bonds in the Eurobond market?
Explain the step-up and step-down structure used in the Eurobond market.
Suppose that the yield to maturity on a Eurodollar bond is 7.8%.What is the bond-equivalent yield?
What type of property is security for a residential mortgage loan?
What is a conventional loan?
(a) What is meant by conforming limits?(b) What is a jumbo loan?
Answer the below questions. (a) When a prepayment is made that is less than the full amount to completely pay off the loan, what happens to future monthly mortgage payments for a fixed-rate mortgage

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