You can distinguish the various types of bonds by their terms of contract, pledg

Question

You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the type of bond based on each description given in the table that follows: Description Type of Bond These bonds are traded in the bond markets based on investors' belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields. These bonds have a claim on assets only after senior debt has been paid in full These bonds are collateralized securities with first claims in the event of bankruptcy Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true? O During an economic recession and in a pessimistic environment, the yield spread between U.S. govemment bonds and corporate bonds could be higher than during good economic times. O During a period of economic growth and in an optimistic environment, the yield spread between U.s govemment bonds and corporate bonds could be higher than during an economic recession and a pessimistic environment. In 2008, the United States began to witness one of the worst recessions since the 1930s. The collapse of the housing bubble in 2006 led to a massive decline in real estate prices, affecting consumers and institutions, espily banking and financial entities. Severe liquidity shortfalls in the United States as well as other global markets led to a serious credit crisis. During the credit crisis of 2008-2009, several banks and other businesses went through a reorganization process or were forced to liquidate. Consider the following example: In December 2008, Hawaiian Telcom took action to strengthen its balance sheet by reducing debt. Although the company continued to operate, its creditors could not collect their debts or loan payments that were due prior to the legal action that the company took. However, on November 30, 2009, the company had $75 million in cash on hand This is an example of: Liquidation Reorganization

Explanation / Answer

Debentures are the bonds are traded in bond markets based on investor's belief that issuer will not default on repayment and they do not have collateral and usually offers higher yield

Subordinate debentures are the bonds having claim on assets only after the senior debt has been paid in full in event of liquidation

Mortagage bonds are backed by collatereals with first claim in event of bankrupcy

During economic recession and pessimistic environment,the yield spread between US goverment bond and corporate bond could be higher during good economic time

Reason : When there is economic recession there are more chances that the firm will default, hence YTM increases as YTM increases the price of bond decreases, Thus yield increases.

Liquidation means end of business however in reorganisation business continues to survive, Thus the above example is of reorganisation

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