ch_07 - Chapter 7 Bond Markets Questions 1. What is a bond...

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Chapter 7 Bond Markets Questions 1. What is a bond indenture? ANSWER: The bond indenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. It is designed to address all matters related to the bond issue, such as collateral, and call provisions. 2. What is the function of a trustee, as related to bond issues? ANSWER: A trustee represents the bondholders in all matters concerning the bond issue, including the monitoring of the issuing firm's activities to assure compliance with the terms of the indenture. 3. Explain the use of a sinking-fund provision. How can it reduce the investor’s risk? ANSWER: A sinking fund provision is a requirement that the firm retire a certain amount of the bond issue each year. This reduces the payments necessary at maturity and therefore can reduce the risk of investors. 4. What are protective covenants? ANSWER: Protective covenants are restrictions placed on the firm issuing bonds, in order to protect the bondholders. For example, they may limit the dividends or corporate officer salaries, or limit the amount of debt the firm can issue. 5. Explain the call provision of bonds. How can it affect the price of a bond? ANSWER: A call provision allows the issuing firm to purchase its bonds back prior to maturity at a specific price (the call price). Investors require a higher yield to compensate for this provision, other things being equal. 6.
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This note was uploaded on 04/12/2011 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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ch_07 - Chapter 7 Bond Markets Questions 1. What is a bond...

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