Attempts 16 7 Hore on types of bonds You can distinguish the

Attempts: 1.6 7. Hore on types of bonds You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the Keep the Highest: 1.6/2 AAa type of bond based on each description given in the table that follows: Description These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates These bonds are not backed by any physical collateral. TheyD are backed by the reputation and creditworthiness of the issuing company These bonds are collateralized securities with first claims in the event of bankruptcy. Type of Bond Senior mortgage bonds Debentures Subordinated debentures Junior mortgage bonds Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true? O An indenture is a legal document that details the rights of bondholders. If the indenture includes a sinking O An indenture is a legal document that details the rights of bondholders. If the indenture includes a sinking funds provision, the bond will have less default risk funds provision, the bond will have more default risk. to witness one of the worst recessions since the 1930s. The collapse of the housing end insttutions, especally banking In 2008, the United States began bubble in 2006 led to a massive dedine in real estate prices, affecting consumers and financial entities, Severe liquidity shortrals credit crisis. During the credit crisis of 2008-2009, several banks and other businesses went through a in the United States as well as other global markets led to a serious

Solution

Part 1

Subordinated debentures - Ranks the lowest in terms of priority with regards to claim on assets, is the riskiest of all. Higher the risk, higher would be the return offered on the bond.

Debentures - These bonds are those which are not backed by any collateral. Issued by both corporations as well as governemnts, debentures are backed only by the general creditworthiness and reputation of the issuer.

Senior Mortgage Bonds - \'Senior\' means they rank high in terms of claims on assets and \'Mortgage\' implies they are backed by collateral.

Part 2 - True Statement is First

By definition, sinking fund is a fund accumulated periodically by the issuer of bond, which is used to repay funds borrowed through bond issued. This implies accumulation of funds to repay the loan, and hence reduction in default risk.

So, sinking fund reduced default risk.

Part 3 - Reorganization

Liquidation would have been the case if General Motors sold all its assets and shut shop to pay back loan or borrowed funds as well as those having claim on its assets.

However, in this case they steered clear of bankruptcy, as they emerged from bankruptcy protection. Hence, the answer is reorganization.