CH10 - Chapter 10 Default Risk 10-1 Bond Indenture Every...

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10-1 Chapter 10 Default Risk
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10-2 Every bond issue has a contract called the bond indenture among three parties – the bondholders, the issuer, and the trustee. The trustee is appointed to protect the interests of the bondholders and must be independent of the issuing firm. Bond Indenture
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10-3 Corporate bond issues have protective covenants. These are restrictions on the issuer to prevent the issuer from taking advantage of the bondholders. Typical protective covenants include restrictions on Issuance of additional debt. Dividends. Mergers. Disposition of assets. Protective Covenants
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10-4 Default is a violation of any part of the bond indenture agreement. Some defaults involved nonpayment of interest or principal. Other defaults involve violation of some protective covenant in the bond indenture. Default
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10-5 The trustee acts on behalf of the bondholders in the event of default. If there is a nonpayment of cash, 100 percent agreement of the bondholders is required for the trustee to take action. For other defaults, complete agreement of the bondholders is not necessary for the trustee to act.
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10-6 Default Renegotiate Bankruptcy Reorganize Liquidate
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10-7 Fishermen acting individually $100,000 now Fishermen acting in concert $25,000 annually Common Pool Problem . 000 , 250 $ 10 . 0
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