SIE (Training Consultants v3.5, 2025): Ch. 2 Debt Securities, Sec. 3 - Fundamentals of Corporate Bonds

Corporate Bond

Debt instrument issued by a corporation; bondholders are creditors, not owners.

Corporate Bond Interest

Paid semi-annually; fully taxable at federal, state, and local levels.

Corporate Bond Market

Most are traded OTC in dealer/principal transactions.

Corporate Bond Quotation

Quoted in points and eighths of points as a % of par; 1 point = $10.

Dollar Value of Bond Formula

Quoted Price × $10 = Dollar Value.

Leveraged Buy-Out (LBO)

Takeover of a company using borrowed funds, often secured by company assets.

Spin-Off

Corporate divestiture where a subsidiary becomes an independent company.

Holding Company

Corporation that owns enough voting shares of another company to influence policy and management.

Trust Indenture Act of 1939

Requires corporate bonds/debentures be issued under an indenture with a trustee to protect bondholders.

Bond Indenture

Legal document specifying rights and duties of issuer, underwriter, and investor.

Trustee Role

Represents and protects bondholders in case of conflict of interest or default.

Trust Indenture Act Exemptions

Federal government issues, municipal issues, private placements, and unit investment trusts (UITs).

What is a corporate bond?

A debt instrument issued by a corporation where bondholders are creditors.

Are corporate bondholders equity owners?

No, they are creditors.

How often do corporate bonds pay interest?

Semi-annually.

Are corporate bond interest payments taxable?

Yes, fully taxable at federal, state, and local levels.

Where are most corporate bonds traded?

Over-the-counter (OTC) market in dealer/principal transactions.

How are corporate bonds quoted?

In points and eighths of points as a percentage of par.

What is the formula to calculate the dollar value of a corporate bond?

Quoted Price × $10.

What is the dollar value of a bond quoted at 96½?

$965.00.

What is a leveraged buy-out (LBO)?

Takeover of a company using borrowed funds secured by assets.

What is a spin-off?

A subsidiary becomes an independent company.

What is a holding company?

A corporation that controls another by owning enough voting shares.

What is the Trust Indenture Act of 1939?

Federal act requiring corporate bonds/debentures to be issued under an indenture with a trustee.

What is the purpose of a trustee under the Trust Indenture Act?

To represent and protect bondholders.

Which securities are exempt from the Trust Indenture Act of 1939?

Federal government, municipal, private placements, and UITs.