Fixed-Income Securities Quiz

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Questions and Answers

What is the coupon rate of the BRWA Corporation Five-Year Notes?

3.2% (correct)

3.0%

2.5%

4.0%

What is the maturity date of the BRWA Corporation Notes?

One year from the settlement date

End of fiscal year

Three years from the settlement date

Five years from the settlement date (correct)

How often are interest payments made on the BRWA Corporation Notes?

Quarterly

Annually

Semiannually (correct)

Semimonthly

What describes the seniority of the BRWA Corporation Notes?

They are unsecured and unsubordinated (B) Signup and view all the answers

What is the principal amount of the BRWA Corporation Notes?

US$ 300 million (A) Signup and view all the answers

What is the initial settlement date for the BRWA Corporation Notes?

T + 3 Business Days (B) Signup and view all the answers

What type of cash flows does the BRWA Corporation Bond offer to investors?

Periodic fixed or variable cash flows (A) Signup and view all the answers

On which business days are the BRWA Corporation Notes expected to pay out?

New York business days (B) Signup and view all the answers

What does the Indenture primarily prohibit with respect to sales?

Selling and leasing back any plant for more than [X] years (B) Signup and view all the answers

What must be avoided after a merger or consolidation according to the Indenture?

Violating limitations on liens or sales and leasebacks (C) Signup and view all the answers

How do covenants protect senior bondholders?

By preventing dilution of their claims (D) Signup and view all the answers

Which type of issuer faces additional covenants to protect bondholders?

Issuers of lower credit quality (A) Signup and view all the answers

What is the role of negative covenants in the context of bond issuance?

To limit the issuer's business decisions (C) Signup and view all the answers

What is the main purpose of an indenture in fixed-income securities?

To define the specific features and terms of the bond. (B) Signup and view all the answers

Which of the following statements about covenants in an indenture is accurate?

Covenants may require or prohibit certain actions by the issuer. (B) Signup and view all the answers

How is the annual coupon amount for a fixed-rate bond calculated?

By multiplying the coupon rate by the par value of the bond. (B) Signup and view all the answers

What describes a zero-coupon bond?

It involves a lump-sum payment that includes both principal and interest at maturity. (D) Signup and view all the answers

What is a characteristic of a floating-rate note?

Its interest payments fluctuate based on market interest rates. (B) Signup and view all the answers

What does the par value of a bond represent?

The amount the bondholder will receive upon maturity. (C) Signup and view all the answers

Which option represents the correct matching of a fixed-coupon bond?

Uniform payments occurring periodically throughout its life. (C) Signup and view all the answers

What happens during periods shorter than a year for a fixed-rate bond's coupon payments?

The annual coupon amount is divided into smaller periodic payments. (B) Signup and view all the answers

What is the total cash received by investors at maturity from BRWA Corporation?

USD304.8 million (C) Signup and view all the answers

What is the annual interest expense incurred by BRWA Corporation for the bond?

USD9.6 million (B) Signup and view all the answers

How much is the semiannual interest payment made by BRWA Corporation?

USD4.8 million (A) Signup and view all the answers

If the BRWA bond is priced at USD101, what is the current yield?

3.168% (D) Signup and view all the answers

What is the bond’s par value at the time of issuance?

USD300 million (A) Signup and view all the answers

Over the five-year term, how many total coupon payments does an investor receive?

10 (B) Signup and view all the answers

What is a simple measure of yield for a bond's cash flows and price?

Current yield (CY) (A) Signup and view all the answers

Which of the following is NOT a component of the cash flows received by BRWA investors?

Dividend payment (D) Signup and view all the answers

What does the current yield of a bond represent?

The bond's annual coupon divided by the bond’s price expressed as a percentage (B) Signup and view all the answers

What happens to the current yield if a bond's price falls?

It rises (D) Signup and view all the answers

In a downward-sloping yield curve, the yields-to-maturity on longer-term bonds are typically:

Lower than those on shorter-term bonds (D) Signup and view all the answers

What is the primary purpose of a bond indenture?

To outline the obligations of the issuer and rights of bondholders (D) Signup and view all the answers

What do sources of bond repayment indicate about a bond's risk?

Higher sources of repayment decrease the bond's risk (D) Signup and view all the answers

Why are sovereign bonds often considered to have the highest credit quality?

Governments can tax and print currency (A) Signup and view all the answers

Affirmative covenants in bond agreements generally require the issuer to:

Maintain certain financial ratios or conditions (A) Signup and view all the answers

The relative risk of bonds is often benchmarked against which type of bonds?

Sovereign bonds in developed markets (A) Signup and view all the answers

What must the Issuer maintain to meet the Debt Restriction Test?

Interest Coverage Ratio greater than 2.50× (A), Net Interest Bearing Debt to EBITDA not greater than 5.00× (C) Signup and view all the answers

What is a consequence of violating covenants according to the content?

Increased bond interest rates (D) Signup and view all the answers

Which of the following actions is restricted unless the Incurrence Test is met?

Paying dividends (C) Signup and view all the answers

What is the threshold for Net Interest Bearing Debt to EBITDA under the Incurrence Test?

Not greater than 4.50× (D) Signup and view all the answers

What effect can highly restrictive covenants have on an issuer?

Force unnecessary defaults (D) Signup and view all the answers

Which of the following does NOT fall under negative covenants?

Paying dividends (D) Signup and view all the answers

What ratio must be greater than 2.50× for an issuer to comply with Debt Restriction Test?

Interest Coverage Ratio (C) Signup and view all the answers

What is a potential recourse for bondholders in case of covenant violations?

Alter financial terms for the bonds (B) Signup and view all the answers

Study Notes

Fixed-Income Securities and Indentures

An indenture is a legal contract outlining the features and terms of a fixed-income security.
It includes covenants, legally binding terms, that either require the issuer to act or prevent them from acting.
These covenants are agreed upon at the time of issuance.

Calculating Coupon Amounts

The annual coupon amount of a fixed-rate bond is determined by multiplying the coupon rate by the par value.
For periods shorter than a year, the annual coupon is divided into smaller, equally-sized periodic payments.

Bond Types and Descriptions

Fixed-coupon bond: Involves uniform payments at regular intervals (monthly, quarterly, semi-annually, annually)
Floating-rate note: Interest payments reset periodically based on market factors.
Zero-coupon bond: The difference between issuance price and par value at maturity represents accumulated interest.

Bond Features (BRWA Example)

Issuer: Bright Wheels Automotive Corporation
Settlement Date: [T + 3 Business Days]
Maturity Date: Five years from settlement date
Principal Amount: US$300 million
Interest: 3.2% fixed coupon, paid semiannually
Interest Payment: Commencing six months from settlement date, final payment at maturity.
Seniority: Unsecured and unsubordinated, ranking equally with other unsecured obligations.
Business Days: New York

Bond Cash Flows (BRWA Example)

Investors receive periodic interest payments and the par value at maturity.
The total received is greater than the par value, reflecting accumulated interest.

Annual and Semiannual Interest Expense Calculation (BRWA Example)

Annual expense = Par value × Coupon rate
Example using BRWA: $300,000,000 × 3.2% = $9,600,000
Semiannual expense = Annual expense / 2
Example using BRWA: $9,600,000 / 2 = $4,800,000

Current Yield Calculation

Current Yield (CY) = Annual coupon / Bond price expressed as a percentage
Example: If a 5-year BRWA bond trades at $101 per $100 face value, CY = 3.2%/1.01 = 3.168 %
Current yield increases if bond price decreases.

Yield Curve (Downward Sloping)

A downward-sloping yield curve indicates that longer-term bond yields are lower than shorter-term bond yields.

Bond Indentures: Covenants and Repayment Sources

Bond indentures are legal contracts that specify details like repayment sources, issuer obligations, and bondholder rights.
Repayment sources differ, e.g., sovereign bonds (high credit quality, minimal default risk).

Secured vs Unsecured Corporate Bonds (Repayment Sources)

The text does not provide a direct discussion of difference in repayment sources for securing and unsecured corporate bonds beyond the general idea expressed in the paragraph regarding repayment sources. The discussion was about different covenants and types of bonds, not about this specific question.

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Description

Test your knowledge on fixed-income securities and indentures with this quiz. Learn about various bond types, calculating coupon amounts, and important features of bonds. Perfect for finance students and professionals looking to refresh their understanding.