Corporate Debt & Money Market Instruments
Key definitions, collateral types, maturities, and liquidation priority for corporate and money market debt on the SIE.
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Questions Covered in This Set
10 cards to master
Debenture
An unsecured corporate bond backed only by the issuer's full faith and credit; ranks behind secured debt but ahead of subordinated debt and equity.
Mortgage bond — what backs it, and closed-end vs. open-end indenture?
Backed by real property (land, buildings), common for utilities. Closed-end forbids issuing more bonds against the same property; open-end allows it, which weakens existing holders.
Equipment trust certificate (ETC) vs. collateral trust certificate
ETC is backed by rolling stock (railcars, aircraft, trucks); collateral trust certificate is backed by securities deposited with a trustee.
Income (adjustment) bonds
Pay interest only if the board declares earnings are sufficient; issued by companies emerging from reorganization, trade flat, and are the riskiest bond tested.
A $1,000 par bond is convertible at $40. What is the conversion ratio and parity price if the stock is $46?
Ratio = 1,000 ÷ 40 = 25 shares. Parity = $46 × 25 = $1,150, so a bond at $1,100 is below parity (arbitrage opportunity).
Zero-coupon bond features
Issued at a deep discount with no periodic interest and one payment at maturity; maximum interest-rate sensitivity and phantom income taxed annually on taxable zeros.
Liquidation priority ladder
Unpaid wages and taxes → secured creditors → general/unsecured creditors (debentures, trade creditors) → subordinated debt → preferred stock → common stock.
Commercial paper
Unsecured corporate promissory note sold at a discount, maturing in 270 days or less to stay exempt from registration; large denominations (often $100,000+).
Negotiable (jumbo) CD
Bank time deposit with a $100,000 minimum (often $1 million+), interest-bearing and tradable in a secondary market; FDIC covers only $250,000.
Bankers' acceptance (BA)
A time draft drawn on and accepted (guaranteed) by a bank to finance international trade; maturities up to 270 days.
