lecture 20 - Business Finance Lecture 20 Review of the...

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108 Business Finance Lecture 20 Review of the Previous Lecture | Bond price Theorems | Finding Yield to Maturity | Debt vs Equity Topics under Discussion | Bond Indenture z Terms of a bonds z Security z Seniority z Repayment z Call provision z Protective covenants | Bond Ratings The Bond Indenture | The bond indenture is a contract between the bond issuer and the bondholders. Usually, a trustee (perhaps a bank) is hired by the issuer to protect the bondholders’ interests. | The trust company must z Make sure the terms of indenture are obeyed z Manage the sinking fund z Represent the bondholders in default | The indenture includes z The basic terms of the bond issue z The total amount of bonds issued z A description of the security z The repayment arrangements z The call provisions z Details of the protective covenants Terms of a Bond | Corporate bonds usually have a face value of $1000, called principal value and is stated on the bond certificate. | The par value (initial accounting value) of a bond is almost always same as the face value, and terms are used interchangeably. | The corporate bonds are usually in registered form | The company keeps a register recording the ownership of each bond and any changes thereof. | The company will pay the interest and principal by cheque mailed directly to the address of the owner of record. | The bond may be registered and have attached coupons . To obtain the interest payment, the owner must separate a coupon from the bond certificate and send it to company registrar
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109 | Alternatively, the bond could be in bearer form, in which case, the certificate is the evidence of ownership and the company will pay the bearer. Ownership is not recorded, and the holder of the bond certificate detaches coupons and sends to company to receive payments. z
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lecture 20 - Business Finance Lecture 20 Review of the...

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