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P1.T3. 504. Bond indenture and interest payments

Nicole Seaman

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Learning objectives: Describe a bond indenture and explain the role of the corporate trustee in a bond indenture. Explain a bond’s maturity date and how it impacts bond retirements.

Questions:

504.1. Which of the following elements is the LEAST likely to be explicitly specified in the bond indenture?

a. Negative covenants
b. Principal value of bond (aka, par value)
c. Yield to maturity (aka, yield)
d. Legal identity of bond issuer


504.2. Four years ago, Acme Corporation issued a bond with a fixed-rate coupon and an original maturity of seven years; that is, the tenor (term to maturity) is three years. In the meantime, market interest rates have declined and the issuer wants to extinguish (retire) the bond's principal which is obviously before the stated maturity date. Among the following methods, which is the following is the MOST likely to make it possible for the issuer to retire the date before the maturity date?

a. Execute an appealing tender offer to the bond holders
b. Exercise of a put provision that was included in the indenture
c. Exercise of a call provision that was inadvertently omitted from the indenture at issuance
d. None of the above: unless there is a call provision in the indenture, the issuer has no legal way to extinguish debt prior to the stated maturity date


504.3. On Jan 1st, 2010, Acme Corporation (a U.S. corporation) issued a zero-coupon bond with an original maturity of ten (10) years on Jan 1st, 2020. The original yield to maturity (YTM, yield) was 6.0% with semi-annual compounding. In 2015, Amce filed for bankruptcy with a bankruptcy filing date of September 1st, 2015 (which becomes the settlement date). The bankruptcy court determines that the original yield is a valid market yield assumption for purposes of unpaid interest. Which of the following is represents the bondholder's claim at settlement?

a. $55.37 (day count is not relevant)
b. $77.40 based on 30/360 day count
c. $83.81 based on act/act day count
d. $100.00 (day count is not relevant)

Answers here:
 
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