AT&T TKT II 190 QUESTIONS WITH 100%
CORRECT ANSWERS.
What does it mean and why was AT&T trading at a substantial premium compared to its
peers?
stock is very expensive (high relative to similar companies), but the bonds are very cheap
(selling for less than face value).
How would you trade this situation (what do you think is most likely to happen and how
would you position yourself to profit from your prediction given the market prices of the
different securities in the case)? You can trade AT&T Canada stock, AT&T Canada
bonds, AT&T US stock, and AT&T US bonds (any number/combination of these). Don't
worry about hedging the currency risk...
Why do Stock and bond prices should generally reflect the same health of a company?
high stock price
We think the future is bright."
low bond price means:
We're scared they might default (miss payments)."
Stocks = future optimism
Bonds = short-term solvency
hy might stock and bond prices disagree like this
What is a floor price agreement?
A floor price is the lowest price that someone (in this case, AT&T Corp.) promises to pay for
your stock in the future.
Think of it like this:
You own a video game that's not selling well. But I promise you: "No matter how unpopular the
game gets, I'll buy it from you for at least $37.50. And if the game becomes popular again, I'll
,pay even more."
So:
You can't lose too badly (your downside is protected).
But you can still win big if the price goes higher than $37.50.
That's why investors loved AT&T Canada stock — because they had:
A guaranteed minimum price in the future (the floor), and
Unlimited upside if the company did well.
Why might the stock and bond prices not match?
stocks had a saftey net and bonds didn't.
2. ⚖️ Stocks and bonds are treated differently when things go bad
If the company goes bankrupt:
Bondholders get paid first, but only what they're owed.
Stockholders get whatever is left (if anything).
Usually, that makes bonds feel safer.
BUT — in this case, the stock had a deal protecting it, so it felt safer than usual.
Which price tells the truth — the stock or the bond?
The stock price looks happy because there's a promise to buy it later for a good price. But
that doesn't mean the company is doing well. The bonds are dropping because people are
scared the company might run out of money or not pay them back. Since bonds only care
about getting paid back and not growing, they're probably telling the real story. So I'd
trust the bond price more — it shows that the company might be in trouble."
✅ Stock = hopeful because of a promise.❌ Bonds = nervous because they don't have
protection.🎯 The bond price is probably more honest.
what is par/face value?
the amount the company originally promised to repay you when the bond matures.
Let's break it down:
Imagine AT&T Canada sold a bond for $1,000.
That $1,000 is the par value — what they promise to pay you back at the end (plus interest along
,the way).
So when you buy a bond at par, you give the company $1,000, they give you interest every year,
and then they pay back your $1,000 in the future.
What does "trading at a discount to par" mean?
Let's say that same bond is now selling in the market for $700 instead of $1,000.
👉 That means it's trading at a $300 discount to par.
Why would that happen?
Investors are worried. They think:
"What if AT&T Canada runs out of cash and doesn't pay me back the full $1,000?"
So they say:
"I'll only buy this bond if I get it for cheap — like $700 — to make up for that risk."
📉 Bond price drops → yield (expected return) goes upBecause now you could make more if
they do pay you the full $1,000 later.
Is it good or bad that the stock was trading at a premium and the bonds at a discount?
Stock trading at a premium sounds good — it means investors are confident.👉 But here, that
confidence comes from the floor price safety net, not from company performance.
❌ Bonds trading at a discount is usually bad — it means people are nervous the company won't
pay back what it owes.
So are bonds trading at a discount because the company still needs money but can't
promise as high of a return, so they drop the price?"
Not quite — companies don't "drop the price" of the bond themselves. That happens in the
secondary market — after the bond is issued.
So let's separate two things:
When the company first sells the bond:
They pick a face value (par), like $1,000.
They pick an interest rate, like 7%.
You pay $1,000, and they promise to pay you $70 per year + return your $1,000 later.
After that — in the market:
, If people trust the company, that bond might still trade at $1,000.
But if people don't trust the company to pay back the $1,000, they won't buy it at full price.
So investors might only pay $700 for that same bond.
But they'll still get the same interest and hope for the same $1,000 back.
That means:✅ If the company pays in full, that buyer earns a sweet return.❌ But if the
company defaults, that buyer could lose big.
How do bond investors get scared in the first place?
Bond investors are like detectives — they don't just watch stock prices.They dig into financial
statements, earnings reports, debt levels, and news. So even if the stock price is propped up by a
floor deal, bondholders are looking at something else:
"Can this company really keep making payments? Do they have enough cash? Are revenues
slowing? Is debt piling up?"
So where did the fear come from — even with the stock price floor?
Let's walk through exactly what was spooking bondholders in the AT&T Canada case:
1. The company's fundamentals were getting worse.
Revenues and EBITDA started falling in 2000-2001.
They were burning cash and missing performance expectations.
Their Q2 results in 2000 were a big miss. That's like saying: "Hey, we're not doing as well as we
told investors we would."
Bondholders saw this and went:
"Uh oh. Even if the stock price is protected by a promise, this company might not have enough
cash to pay off their debt."
First: Aren't bondholders supposed to get paid before stockholders? why did AT&T say
they would help shareholders but not bondholders? Isn't that illegal?
yes. It would be illegal if AT&T Canada were in bankruptcy and AT&T skipped bondholders to
give money to shareholders.
But here's the catch:
AT&T Corp. (the U.S. parent company) isn't legally required to support AT&T Canada's debt at
all.
CORRECT ANSWERS.
What does it mean and why was AT&T trading at a substantial premium compared to its
peers?
stock is very expensive (high relative to similar companies), but the bonds are very cheap
(selling for less than face value).
How would you trade this situation (what do you think is most likely to happen and how
would you position yourself to profit from your prediction given the market prices of the
different securities in the case)? You can trade AT&T Canada stock, AT&T Canada
bonds, AT&T US stock, and AT&T US bonds (any number/combination of these). Don't
worry about hedging the currency risk...
Why do Stock and bond prices should generally reflect the same health of a company?
high stock price
We think the future is bright."
low bond price means:
We're scared they might default (miss payments)."
Stocks = future optimism
Bonds = short-term solvency
hy might stock and bond prices disagree like this
What is a floor price agreement?
A floor price is the lowest price that someone (in this case, AT&T Corp.) promises to pay for
your stock in the future.
Think of it like this:
You own a video game that's not selling well. But I promise you: "No matter how unpopular the
game gets, I'll buy it from you for at least $37.50. And if the game becomes popular again, I'll
,pay even more."
So:
You can't lose too badly (your downside is protected).
But you can still win big if the price goes higher than $37.50.
That's why investors loved AT&T Canada stock — because they had:
A guaranteed minimum price in the future (the floor), and
Unlimited upside if the company did well.
Why might the stock and bond prices not match?
stocks had a saftey net and bonds didn't.
2. ⚖️ Stocks and bonds are treated differently when things go bad
If the company goes bankrupt:
Bondholders get paid first, but only what they're owed.
Stockholders get whatever is left (if anything).
Usually, that makes bonds feel safer.
BUT — in this case, the stock had a deal protecting it, so it felt safer than usual.
Which price tells the truth — the stock or the bond?
The stock price looks happy because there's a promise to buy it later for a good price. But
that doesn't mean the company is doing well. The bonds are dropping because people are
scared the company might run out of money or not pay them back. Since bonds only care
about getting paid back and not growing, they're probably telling the real story. So I'd
trust the bond price more — it shows that the company might be in trouble."
✅ Stock = hopeful because of a promise.❌ Bonds = nervous because they don't have
protection.🎯 The bond price is probably more honest.
what is par/face value?
the amount the company originally promised to repay you when the bond matures.
Let's break it down:
Imagine AT&T Canada sold a bond for $1,000.
That $1,000 is the par value — what they promise to pay you back at the end (plus interest along
,the way).
So when you buy a bond at par, you give the company $1,000, they give you interest every year,
and then they pay back your $1,000 in the future.
What does "trading at a discount to par" mean?
Let's say that same bond is now selling in the market for $700 instead of $1,000.
👉 That means it's trading at a $300 discount to par.
Why would that happen?
Investors are worried. They think:
"What if AT&T Canada runs out of cash and doesn't pay me back the full $1,000?"
So they say:
"I'll only buy this bond if I get it for cheap — like $700 — to make up for that risk."
📉 Bond price drops → yield (expected return) goes upBecause now you could make more if
they do pay you the full $1,000 later.
Is it good or bad that the stock was trading at a premium and the bonds at a discount?
Stock trading at a premium sounds good — it means investors are confident.👉 But here, that
confidence comes from the floor price safety net, not from company performance.
❌ Bonds trading at a discount is usually bad — it means people are nervous the company won't
pay back what it owes.
So are bonds trading at a discount because the company still needs money but can't
promise as high of a return, so they drop the price?"
Not quite — companies don't "drop the price" of the bond themselves. That happens in the
secondary market — after the bond is issued.
So let's separate two things:
When the company first sells the bond:
They pick a face value (par), like $1,000.
They pick an interest rate, like 7%.
You pay $1,000, and they promise to pay you $70 per year + return your $1,000 later.
After that — in the market:
, If people trust the company, that bond might still trade at $1,000.
But if people don't trust the company to pay back the $1,000, they won't buy it at full price.
So investors might only pay $700 for that same bond.
But they'll still get the same interest and hope for the same $1,000 back.
That means:✅ If the company pays in full, that buyer earns a sweet return.❌ But if the
company defaults, that buyer could lose big.
How do bond investors get scared in the first place?
Bond investors are like detectives — they don't just watch stock prices.They dig into financial
statements, earnings reports, debt levels, and news. So even if the stock price is propped up by a
floor deal, bondholders are looking at something else:
"Can this company really keep making payments? Do they have enough cash? Are revenues
slowing? Is debt piling up?"
So where did the fear come from — even with the stock price floor?
Let's walk through exactly what was spooking bondholders in the AT&T Canada case:
1. The company's fundamentals were getting worse.
Revenues and EBITDA started falling in 2000-2001.
They were burning cash and missing performance expectations.
Their Q2 results in 2000 were a big miss. That's like saying: "Hey, we're not doing as well as we
told investors we would."
Bondholders saw this and went:
"Uh oh. Even if the stock price is protected by a promise, this company might not have enough
cash to pay off their debt."
First: Aren't bondholders supposed to get paid before stockholders? why did AT&T say
they would help shareholders but not bondholders? Isn't that illegal?
yes. It would be illegal if AT&T Canada were in bankruptcy and AT&T skipped bondholders to
give money to shareholders.
But here's the catch:
AT&T Corp. (the U.S. parent company) isn't legally required to support AT&T Canada's debt at
all.
