Investments Exam Study Guide
Exam Two: Chapters 10, 6, 12, and 7
Contract Between Bondholder & Issuer
In addition to specifying a payment schedule, the bond *indenture, which is the document defining the contract between the bond issuer and the bondholder, also specifies a set of restrictions that protects the rights of the bondholders
Such restrictions include provisions relating to collateral, sinking funds, dividend policy, and further borrowing. The issuing firm agrees to these so called protective covenants in order to market its bonds to investors concerned about the safety of the bond issue.
The coupon rate, maturity date, and par value of the bond are part of the bond indenture.
Sinking fund: a bond indenture that calls for the issuer to periodically repurchase some proportion of the outstanding bonds prior to maturity
Differs from the call provision because: the firm can only repurchase a certain amount of the bond issue at the sinking fund call price and the sinking fund call price is above par value
Subordinate clauses: restrictions on additional borrowing that stipulate that senior bondholders will be paid first in the event of bankruptcy
Collateral: A specific asset pledged against possible default on a bond
*Debenture: a bond not backed by specific collateral
Credit risk of unsecured bonds depends on the general earning power of the firm
*Subordinated Debenture Bond: a class of unsecured bond that, in the event of liquidation, is prioritized lower than other classes of debt.
It is an unsecured loan, with no collateral. This class of debt carries higher risk, but also pays higher interest than other classes. It is a type of junior debt.
2nd tier
Calculate HPR
HPR is a key measurement of investor’s is the success rate at which their funds have grown during the investment period rate of return over a given investment period.
Depends on the increase (or decrease) in the price of the share over the investment period as well as on any dividend income the share has
Contract Between Bondholder & Issuer
In addition to specifying a payment schedule, the bond *indenture, which is the document defining the contract between the bond issuer and the bondholder, also specifies a set of restrictions that protects the rights of the bondholders
Such restrictions include provisions relating to collateral, sinking funds, dividend policy, and further borrowing. The issuing firm agrees to these so called protective covenants in order to market its bonds to investors concerned about the safety of the bond issue.
The coupon rate, maturity date, and par value of the bond are part of the bond indenture.
Sinking fund: a bond indenture that calls for the issuer to periodically repurchase some proportion of the outstanding bonds prior to maturity
Differs from the call provision because: the firm can only repurchase a certain amount of the bond issue at the sinking fund call price and the sinking fund call price is above par value
Subordinate clauses: restrictions on additional borrowing that stipulate that senior bondholders will be paid first in the event of bankruptcy
Collateral: A specific asset pledged against possible default on a bond
*Debenture: a bond not backed by specific collateral
Credit risk of unsecured bonds depends on the general earning power of the firm
*Subordinated Debenture Bond: a class of unsecured bond that, in the event of liquidation, is prioritized lower than other classes of debt.
It is an unsecured loan, with no collateral. This class of debt carries higher risk, but also pays higher interest than other classes. It is a type of junior debt.
2nd tier
Calculate HPR
HPR is a key measurement of investor’s is the success rate at which their funds have grown during the investment period rate of return over a given investment period.
Depends on the increase (or decrease) in the price of the share over the investment period as well as on any dividend income the share has