Chapter 6 - P2 Flashcards
What is a Trust Deed?
legal document which gives the details of a bond issue. It allows the bondholders to seize a specified physical asset or sell them to recover investment
What is an index linked note?
Loasn is compensated in the form of a return based on future factors such as the change in level of an equity index
What are the most common denominations of bonds
$1000 and $10 000, sometimes larger issues for investing institutions
What is conversion privilege?
The right to exchange a bond for common shares on specifically determined terms.
What is the protection against dilution clause for convertible bonds?
If the company’s common shares are split, the conversion privilege is adjusted accordingly.
What is forced conversion and who benefits?
It is when the company is able top force the bondholders to convert into common shares. Usually stipulates that once the price of common stock rises above a specified level, the company can call the bonds at a stipulated price which is much lower than the level at which the convertible debt would be trading at because of rise in common stock.
It is an advantage to the issuing company, as they free up room for more financing and don’t need to pay interest
Sinking fund VS purchase fund
Sinking: money is set aside out of earnings to provide the repayment of all or a portion of debt issued by maturity. Sometimes they will have a mandatory call feature for sinking fund purposes where the issuer will attempt to buy the debt in the secondary market and if they cannot buy enough they will call the debt.
purchase: fund is set up to retire a specified amount of bonds through purchases in the market. purchases must be below or at a specified price. (may retire smaller amount than sinking fund)
What are covenants
AKA protective provisions. Safeguards in teh bond contract to guard against any weakening in the security holder’s position.
What are the following protective covenants:
- security
- negative pledge.
- limitation on sale and leaseback transactions
- sale of assets or merge
- dividend test
- debt test
- additional bond provisions
- Sinking or purchase fund and call provisions
- security: includes details of assets that support the debt
- negative pledge: Borrower will not pledge any assets if the pledge results in less security for debt holder
- limitation on sale and leaseback transactions: Firm cannot sell or lease back assets that provide security for debt
- sale of assets or merge: In the event that all assets are sold or company is merged, the debt is either forced to be retired or assumed by newly merged company
- dividend test: Establishes rules for payment of dividends
- debt test: establishes max debt-to-assets ratio
- additional bond provisions: States which financial tests and circumstances allow the firm to issue additional debt
- Sinking or purchase fund and call provisions: outlines sinking fund or purhcae fund and the specified dates and price at which the firm can call the debt
How often are T-bills sold at auction by ministry of finance?
every 2 weeks.
What is the most common way for municipalities to raise capital?
Through instalment debenture (aka serial bond) which has part of the bond mature each year
What is a bondissued in canadian dollars in a European market called?
Eurobond (EuroCanadian)
