MGFC10H3 Chapter 21: Chapter 21 Notes
Document Summary
A firm experiencing financial difficulties would have trouble making sinking fund payments. Thus, sinking fund payments provide an early warning system to bondholders: sinking 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. The written agreement describing the details of the long-term debt contract is called an indenture. Some of the main provisions are security, repayment, protective covenants, and call provisions. There are many ways in which shareholders can take advantage of bondholders. Protective covenants are designed to protect bondholders from management decisions that favour shareholders at bondholders" expense: unsecured bonds are called debentures or notes. They are general claims on the company"s value. Mortgage bonds are secured by tangible property, and collateral trust bonds are secured by financial securities such as stocks and bonds. If the company defaults on security bonds, the trustee can repossess the asset.
