Chapter 6 Finance Exam 2

corporate bond

corporation has borrowed money and promises to pay it back

par value/ face value/ principal

amount of money borrower must repay at maturity and value where periodic interest payments are based off of

coupon rate

percentage paid annualy/semiannualy of bonds par value

bond indenture

legal document specifying rights of bond holders and duties of the issuing corporation

1. maintain accounting records

2. periodically supply audited financial statements

3. pay taxes and liabilities

4. maintain facilities in good working order

standard debt provisions

specify record keeping and business practices bond issuers must follow

restrictive covenants

place operating and financial constraints on borrower in the bond indenture

subordination

creditors agree to wait until all claims of senior debt are satified

sinking fund requirement

retirement of bond before maturity

collateral

asset of the borrower that can be claimed if they fault on a bond

secured bond

has collateral

unsecured bond

has no collateral

trustee

paid individual that acts as a 3rd party in bond indenture and can take action if terms are violated

factors impacting cost/coupon rate

bond maturity (more mature=more sensitive price)

offering size

issuers risk: higher issuer default risk=higher interest rate

cost of money

after a bond price is issued…

bond price will fluctuate by market supply and demand forces