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ACC2681

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ACC2681
Pg 324. Question # 8
A legal and binding contract between a bond issuer and the bondholders. The indenture specifies all the important features of a bond, such as its maturity date, timing of interest payments, method of interest calculation, callable/convertible features if applicable and so on. The indenture also contains all the terms and conditions applicable to the bond issue. Other critical information included in the indenture are the financial covenants that govern the issuer and the formulas for calculating whether the issuer is within the covenants.

Question # 15

Sinking Fund Bonds are issued to holders with the provision that the issuer will make periodic payments to a custodial account that will be used to repay holders when the bonds come due. It is prudent for bond issuers to accumulate earnings over the life of these bonds to avoid paying off the bonds from current cash when they mature.

A sinking fund enhances the tax benefits of financial leverage. First, interest expense and depreciation are tax deductible. The issuer can use the tax savings to fund part of the annual sinking fund payment. Second, the sinking fund could earn compounded interest, helping to reduce the cost of borrowing. Finally, the interest expense decreases proportionately to the amount of bonds outstanding. If the sinking fund accumulates and compounds, the earnings grow geometrically. At some point the issuer will benefit from a positive after-tax cash flow.

Pg 325 Question # 1
A B =$849.53
B B = $849.53
Question # 2
A.
B
C.
D.
E.
Question # 4
CPT PV = $656.82

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