Chapter 7 Flashcards
Indenture
Written agreement between the corporation (borrower) and its creditors (lender)
interest Rate risk
The longer the time to maturity
&
The lower the coupon rate
The greater the interest rate risk
Registered form
Bearer form
Recorded ownership of bond
Bond issued without the record of owner’s name
Debenture
Unsecured debt, usually with the maturity of 10 years or more
Sinking fund
Account managed by the bond trustee for early bond redemption
Call provision
Agreement giving the corporation the option to repurchase the bond at a specific price before maturity
Call premium
Amount by which the call price exceeds the par value of the bond
Deferred call
Call provision prohibiting the company from redeeming the bond before certain date
Call protected
Bond during periods in which cannot be redeemed by the issuer
Canada plus call
No set call premium at bond issue. If the bond is called the call premium must compensate investors for the difference between the interest on the original bond and that on new replacement
No benefit to company of calling the bond
Protective covenants
Part of indenture the limits certain actions of the firm during the term of the loan (to reduce agency costs faced by bondholder)
Negative: limits certain actions
Positive: specifies an action the firm must take
Retractable bond
Bond that may be sold back to the issuer prespecified price before maturity
Determinants of bond yields
1) the real interest rate
2) The inflation premium
3) The interest rate risk premium
Default risk, tax status, lack of liquidity
