Final exam - corporate debt

Question 1

Debt

Answer 1

Fixed claim to interest and principal

Question 2

Bond

Answer 2

overall term OR
used specifically to long-term securities (maturity of more than a year) secured by property of debtor

Question 3

debenture

Answer 3

long-term unsecured (i.e. issued against general credit of the corporation) debt obligations

Question 4

notes

Answer 4

generally short-term promises to pay money that are usually secured by specific sources of future revenues

Question 5

indentures

Answer 5

documents that embody the terms of bonds and debentures – basically a contract.

Question 6

covenant

Answer 6

contractual obligations of the borrower or issue as specified in indenture

Question 7

Role of corporate trustee

Answer 7

Chosen by issuer, usually part of bank
enforce covenants on behalf of debtholders
can be involved in modifying covenants through supplemental indentures

Question 8

What happens when called?

Answer 8

1. Issue can call, and remaining principal repaid with no more interest
2. Borrower will want to call if interest rates have declined (get new lenders that will have to give less interest payments to) and lenders will want to call when interest rates are going up because can get more by loaning to someone else