Session5-Notes2010

Session5-Notes2010 - Session 5 RWJ, Chapter 20 In Chapter...

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Session 5 RWJ, Chapter 20 In Chapter 20 of the RWJ text, we discuss some important aspects of long-term debt financing: The written agreement describing the details of the long-term debt contract is called an indenture . Some of the main provisions are security, repayment, protective covenants, and call provisions. There are many ways that shareholders can take advantage of bondholders. Protective covenants are designed to protect bondholders from management decisions that favor stockholders at bondholders' expense. Unsecured bonds are called debentures or notes . They are general claims on the company's value. Most public industrial bonds are unsecured. In contrast, utility bonds are usually secured. Mortgage bonds are secured by tangible property, and collateral trust bonds are secured by financial securities such as stocks and bonds. If the company defaults on secured bonds, the trustee can repossess the assets. This makes secured bonds more valuable. Long-term bonds usually provide for repayment of principal before maturity
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