FIN 310 Chapter 7 Exam 2 Exam
Questions and Answers (Most Recent
Version, Complete Study
What is a bond indenture? - CORRECT ANSWERS A legal document specifying the rights and
obligations of both the issuing firm and the bondholders. It is designed to address all matters related to
the bond issue, such as collateral, and call provisions.
What is the function of a trustee, with respect to the bond indenture? - CORRECT ANSWERS A
trustee represents the bondholders in all matters concerning the bond issue, including the monitoring of
the issuing firm's activities to assure compliance with the terms of the indenture.
Explain the use of a sinking-fund provision. How can it reduce the investor's risk? - CORRECT ANSWERS
A sinking-fund provision is a requirement that the firm retire a certain amount of the bond issue each
year. This reduces the payments necessary at maturity and therefore can reduce the risk of investors.
What are protective covenants? - CORRECT ANSWERS Restrictions placed on the firm issuing
bonds, in order to protect the bondholders. For example, they may limit the dividends or corporate
officer salaries, or limit the amount of debt the firm can issue.
Why are protective covenants needed? - CORRECT ANSWERS Reduce the risk of bonds.
Explain the use of call provisions on bonds. How can a call provision affect the price of a bond? -
CORRECT ANSWERS A call provision allows the issuing firm to purchase its bonds back prior to
maturity at a specific price (the call price). Investors require a higher yield to compensate for this
provision, other things being equal.
Explain the use of bond collateral - CORRECT ANSWERS Bond collateral may be established by
the bond issuer as a means of backing the bond. If the issuer defaults on the bonds, the investors would
have a claim on the collateral.
Questions and Answers (Most Recent
Version, Complete Study
What is a bond indenture? - CORRECT ANSWERS A legal document specifying the rights and
obligations of both the issuing firm and the bondholders. It is designed to address all matters related to
the bond issue, such as collateral, and call provisions.
What is the function of a trustee, with respect to the bond indenture? - CORRECT ANSWERS A
trustee represents the bondholders in all matters concerning the bond issue, including the monitoring of
the issuing firm's activities to assure compliance with the terms of the indenture.
Explain the use of a sinking-fund provision. How can it reduce the investor's risk? - CORRECT ANSWERS
A sinking-fund provision is a requirement that the firm retire a certain amount of the bond issue each
year. This reduces the payments necessary at maturity and therefore can reduce the risk of investors.
What are protective covenants? - CORRECT ANSWERS Restrictions placed on the firm issuing
bonds, in order to protect the bondholders. For example, they may limit the dividends or corporate
officer salaries, or limit the amount of debt the firm can issue.
Why are protective covenants needed? - CORRECT ANSWERS Reduce the risk of bonds.
Explain the use of call provisions on bonds. How can a call provision affect the price of a bond? -
CORRECT ANSWERS A call provision allows the issuing firm to purchase its bonds back prior to
maturity at a specific price (the call price). Investors require a higher yield to compensate for this
provision, other things being equal.
Explain the use of bond collateral - CORRECT ANSWERS Bond collateral may be established by
the bond issuer as a means of backing the bond. If the issuer defaults on the bonds, the investors would
have a claim on the collateral.
