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Bond Performance in Corporate Structures

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Bond Performance in Corporate Structures

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Questions and Answers

How does the performance of a subsidiary company's bonds relate to its parent company's obligations?

Subsidiary company bonds are generally well-protected as the parent company is expected to cover its obligations; however, if the parent is not responsible for those bonds, this assumption may be misleading.

What does the earnings coverage calculation for bonds of subsidiaries typically include?

Earnings coverage calculations for subsidiary bonds include operations of both the parent company and its guaranteed subsidiaries.

In the context of bond guarantees, what does the term 'interest coverage' refer to?

Interest coverage refers to the ability of a company to meet its interest obligations, often represented as a ratio of earnings to interest expenses.

What potential risks exist for bondholders if a subsidiary company is unprofitable?

<p>If a subsidiary company is unprofitable, there is a risk that the parent company may not fulfill its obligations to bondholders and could abandon the subsidiary's debt.</p> Signup and view all the answers

Using the Indiana Harbor Belt Railway example, what does an interest coverage of 2.98 times indicate?

<p>An interest coverage of 2.98 times indicates that the company's earnings are nearly three times greater than its interest expenses, suggesting a strong ability to meet its obligations.</p> Signup and view all the answers

Flashcards

Interest Coverage

A measure of a company's ability to cover its interest expenses with its earnings. It is calculated by dividing earnings by the interest charges.

Guaranteed Subsidiary Bond

A subsidiary whose bonds are guaranteed by a parent company. The parent company is responsible for paying the interest and principal of the subsidiary's bonds.

Consolidated Income Account

A company's consolidated income statement that includes the financial results of both the parent company and its subsidiaries.

Interest Coverage for Guaranteed Subsidiaries

The calculation of interest coverage should include the earnings of the parent company and its subsidiaries, even if the subsidiary's bonds are guaranteed by the parent.

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Parent Company Abandonment

In certain cases, even though a subsidiary's bonds are guaranteed, the parent company might choose to abandon the subsidiary if it is unprofitable, leaving the bondholders to bear the loss. This may happen if the subsidiary's financial issues are severe and threaten the parent company's overall stability.