chapter 6 part 6

Question 1

what is a Sinking fund?

Answer 1

It is a obligation of a bond for the issuer to repay part of a bond on a fixed schedule before the maturity date. Normally set aside from yearly profits

Question 2

what is a purchase fund?

Answer 2

it is an agreement for the issuer to buy a certain amount of securities if the bonds fall below a specified price

Question 3

What are the 8 protective provisions for cooperate bonds?

Answer 3

1. Security - in cases of mortgages, asset backed or secured debt. details on assets that support the debt.
2. Negative pledge - says the issuer will not pledge any assets if puts the debt holder at risk.
3. limitations on sale and leaseback transactions - put restrictions on the issuer selling and leasing assets securing a loan.
4. Sales of assets or merger - protects the debt holder in case of sale of assets or merging of companies. either forcing the closure of debt or assumption by new company
5. Dividend test - insures that dividend payments will not drain the equity of the company
6. Debt test - limits the amount of debt a company can take to protect the debt holder
7. Additional bond provisions - states which financial tests required for company to take on more debt
8. Sinking and purchase fund and call provisions - lays out Specific dates and prices

Question 4

are government of canada bonds callable?

Answer 4

No they are non-callable

Question 5

what denominations are treasury bills sold in?

Answer 5

1,000 up to a million. Treasury bills are especially popular when their yields exceed canadian premium bonds and other retail instruments. On tax returns Treasury bills are considered income not capital gains.

Treasury bills do not have interest.
Usuall terms are 3 months, 6 months and 1 year

Question 6

What is a real return bond?

Answer 6

A government of canada issued bond that has a fixed rate of interest which is calculated on inflation. Yearly inflation is added to the face value of the bond. At maturity the bond value is multiplied by total inflation of the term of the bond.

Question 7

What are provincial and municipal debt securities?

Answer 7

They are debentures. the quality of the bonds is only second to government of canada bonds.

Question 8

What two factors determine bond quality?

Answer 8

1. credit quality

2. Market conditions

Question 9

What 4 factors determine whether interest and principle will be paid on time of a provincial bond?

Answer 9

1. The amount of provincial debt
2. the level of federal payments
3. the stability of the province
4. The industry and resources of the province

Question 10

What debt instrument do municipalities issue?

Answer 10

instalment debentures, long term unsecured non-callable debt