Textbook Notes (368,315)
Canada (161,809)
Finance (37)
MGFC10H3 (13)
Derek Chau (13)
Chapter 21

Chapter 21 Notes

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Derek Chau

Chapter 21 LongTerm Debt Notes212 The Public Issue of Bondspublic issuesale of securities to the publicindenture deed of trustwritten agreement between the corporate debt issuer the borrower and the lender trust company setting forth maturity date interest rate and other termsthe trust company must 1 be sure the terms of the indenture are obeyed 2 manage the sinking fund and 3 represent the bondholders if the company defaults on its paymentsthe indenture includes1 the basic terms of the bonds 2 a description of property used as security 3 the seniority of the bonds 4 details of the protective covenants 5 the sinking fund arrangements and 6 the call provisionProtective Covenantsprotective covenantparts of the indenture or loan agreement that limits certain actions a company takes during the term of the loan to protect the lenders interest there are two types positive and negative covenantsnegative covenantpart of the indenture or loan agreement that limits or prohibits actions that the company may takepositive covenantpart of the indenture or loan agreement that specifies an action that the company must abide byThe Sinking Fundsinking fundan account managed by the bond trustee for the purpose of repaying the bondsthere are many different kinds of sinking fund arrangementsomost sinking funds start between 5 and 10 years after the initial issuanceosome sinking funds establish equal payments over the life of the bondomost highquality bond issues establish payments to the sinking fund that are not sufficient to redeem the entire issue as a consequence there is the possibility of a large balloon payment at maturitysinking funds have two opposing effects on bondholders1Sinking funds provide extra protection to bondholders A firm experiencing financial difficulties would have trouble making sinking fund payments Thus sinking fund payments provide an early warning system to bondholders2Sinking funds give the firm an attractive option If bond prices fall below the face value the firm will satisfy the sinking fund by buying bonds at the lower market prices If bond prices rise above the face value the firm will buy the bonds back at the lower face valueThe Call Provisiona call provision lets the company repurchase or call the entire bond issue at a predetermined price over a specified periodcall premiumthe price of a call option on common stockdeferred calla provision that prohibits the company from
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