Analyzing Subsidiary Bonds Quiz

Choose a study mode

Play Quiz

Study Flashcards

Spaced Repetition

Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What key factor must a subsidiary demonstrate to support its bond?

A favorable market reputation
Historical performance of the parent company
A strong parent company guarantee
Its own ability to meet bond obligations (correct)

When evaluating guaranteed bonds, which financial statement is primarily utilized?

Subsidiary's balance sheet
Parent company's cash flow statement
Parent company's equity report
Consolidated income statement (correct)

What is a significant challenge when evaluating unguaranteed subsidiary bonds?

Immediate market fluctuations affecting value
Availability of subsidiary management
Lack of parent company involvement
Difficulty in obtaining separate financial statements (correct)

Which of the following misconceptions might investors have when purchasing subsidiary bonds?

<p>The parent's past performance guarantees the subsidiary's success (A)</p> Signup and view all the answers

What does a thorough analysis of subsidiary bonds require beyond just parent company performance?

<p>Direct responsibility of the parent to cover the subsidiary bond (A)</p> Signup and view all the answers

Flashcards

Subsidiary Bond

When a company issues bonds, it promises to repay the debt with interest. A subsidiary bond is a bond issued by a company that is owned by a larger parent company.

Parent Company Guarantee

A guarantee from a parent company assures bondholders that they will be repaid, even if the subsidiary defaults. However, investors should not rely solely on the parent company's strength when evaluating a subsidiary bond.

Evaluating Subsidiary Performance

To assess the risk of a subsidiary bond, it's crucial to analyze the performance of the subsidiary itself – not just the parent company. This means examining the subsidiary's ability to generate enough income to cover its debt obligations.

Financial Statements for Subsidiary Bonds

In case of guaranteed bonds, the parent company's financial statements can be used to assess the subsidiary's ability to cover the debt. However, for unguaranteed bonds, separate financial statements of the subsidiary are essential to evaluate its financial health and ability to repay the bond.

Signup and view all the flashcards

Obtaining Subsidiary Financial Statements

Investors should not assume that subsidiary financial statements will be easily accessible. In some cases, obtaining these statements can be difficult, making it crucial to thoroughly investigate the subsidiary's financial health before investing.

Signup and view all the flashcards