Most bonds are issued with maturities of 10 to 30

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Unformatted text preview: es to repay it in the future under clearly defined terms. Most bonds are issued with maturities of 10 to 30 years and with a par value, or face value, of $1,000. The coupon interest rate on a bond represents the percentage of the bond’s par value that will be paid annually, typically in two equal semiannual payments, as interest. The bondholders, who are the lenders, are promised the semiannual interest payments and, at maturity, repayment of the principal amount. Legal Aspects of Corporate Bonds Certain legal arrangements are required to protect purchasers of bonds. Bondholders are protected primarily through the indenture and the trustee. Bond Indenture bond indenture A legal document that specifies both the rights of the bondholders and the duties of the issuing corporation. A bond indenture is a legal document that specifies both the rights of the bondholders and the duties of the issuing corporation. Included in the indenture are descriptions of the amount and timing of all interest and principal payments, various standard and restrictive provisions, and, frequently, sinking-fund requirements and security interest provisions. 274 PART 2 Important Financial Concepts standard debt provisions Provisions in a bond indenture specifying certain recordkeeping and general business practices that the bond issuer must follow; normally, they do not place a burden on a financially sound business. restrictive covenants Provisions in a bond indenture that place operating and financial constraints on the borrower. Standard Provisions The standard debt provisions in the bond indenture specify certain record-keeping and general business practices that the bond issuer must follow. Standard debt provisions do not normally place a burden on a financially sound business. The borrower commonly must (1) maintain satisfactory accounting records in accordance with generally accepted accounting principles (GAAP); (2) periodically supply audited financial statements; (3) pay taxes and other liabilities when due; and...
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This document was uploaded on 01/19/2014.

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