FIN325 Ch. 6 (Bonus Questions)

Protective Covenants

A part of the indenture limiting certain actions that might be taken during the term of the loan, usually to protect the lender's interest

Call Provision

Agreement giving the issuer the option to repurchase a bond at a specific price prior to maturity

Sinking Fund

An account managed by the bonds trustee for early bond redemption

Convertible Bonds

Bonds that can be converted into common stock at the bondholder's option

Negative Covenant

It prohibits actions that the company might take; 1. the firm must limit the amount of dividend it pays according to some formula 2. the firm cannot pledge any assets to other lenders 3. the firm cannot merge with another firm 4. the firm cannot sell or lease any major assets without approval by the lender 5. the firm cannot issue additional long-term debt

Positive Covenant

It specifies an action that the company agrees to take or a condition the company must abide by; 1. the company must maintain its working capital at or above some specified minimum level 2. the company must periodically furnish audited financial statements to the lender 3. the firm must maintain any collateral or security in good condition

Call Premium

The amount by which the call price exceeds the par value of the bond

Why is the bond rating important to the issuing company? To creditors/investors?

The bond rating is an important process because the rating alerts investors to the quality and stability of the bond. That is, the rating greatly influences interest rates, investment appetite, and bond pricing

Put Bond / Puttable bond

The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal

Indenture

The written agreement between the corporation and the lender detailing the terms of the debt issue

Debenture

Unsecured debt, usually with a maturity of 10 years or more

"Fallen Angels" Bonds

a bond that has been reduced to junk status because its issuer has fallen into financial trouble

"Deed of trust"

indenture

Spread/ bid-ask spread

the difference between bid and asked price

Bid Price

the price a dealer is willing to pay for a security

Asked Price

the price a dealer is willing to take for a security

Bond's dirty/ full/ invoice price

the price of a bond including accrued interest, the price the buyer actually pays

Bond's Clean Price

the price of a bond net of accrued interest, this is the price that is typically quoted