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What is the primary function of a trustee in a bond issuance?
What is the primary function of a trustee in a bond issuance?
- To act as a financial advisor to the bondholders
- To act as a middleman between the issuer and the bondholders
- To ensure that the stipulations in the bond indenture are diligently followed (correct)
- To manage the daily operations of the issuing company
What type of bond has a fixed rate specified in the face of the certificate?
What type of bond has a fixed rate specified in the face of the certificate?
- Secured bond
- Unsecured bond
- Conventional bond (correct)
- Floating-rate bond
What is the purpose of a bond indenture?
What is the purpose of a bond indenture?
- To outline the terms and conditions of the bond issuance (correct)
- To provide a guarantee for the bondholders
- To specify the nominal rate of the bond
- To determine the credit rating of the issuer
What is a sinking fund provision in a bond indenture?
What is a sinking fund provision in a bond indenture?
What is the difference between a conventional bond and a floating-rate bond?
What is the difference between a conventional bond and a floating-rate bond?
What is the purpose of a bond rating?
What is the purpose of a bond rating?
What is a conversion provision in a bond indenture?
What is a conversion provision in a bond indenture?
What type of bond is backed by a specific asset or collateral?
What type of bond is backed by a specific asset or collateral?
What is the purpose of a call provision in a bond indenture?
What is the purpose of a call provision in a bond indenture?
What type of bond is registered in the name of the bondholder?
What type of bond is registered in the name of the bondholder?
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Study Notes
Types of Bonds
- Convertible bonds allow bondholders to trade bonds for appreciated stock or receive interest payments and face value at maturity
- Callable bonds can be redeemed by the issuer prior to maturity date if interest rates decrease
- Guaranteed bonds have a guarantor who accepts the obligation to pay interest and principal in case of default
- Junk bonds are high-risk, high-yield bonds issued by companies with weak financial conditions
- Floating-rate bonds have interest payments that change with fluctuations in interest rates
Characteristics of Bonds
- Bonds are used primarily by corporations and government agencies
- Bondholders have priority of claim on firm's assets and dividends over preferred and common stockholders in case of insolvency
- Securities and Exchange Commission (SEC) approval is required for bond issuance
- Bonds can have different denominations, with a usual minimum of P1,000
Bond Indenture
- A bond indenture is a detailed document containing essential information about the bond issue
- It outlines the rights and duties of the borrower and other parties to the contract
- A trustee, usually a bank, represents the bondholders and ensures that stipulations in the bond indenture are followed
Bond Certificate
- A bond certificate represents a portion of the total loan
- It contains the nominal rate or principal/face amount of the bond issuance
Other
- Duration measures the risk of a bond, with shorter durations posing less risk
- Bills are fixed-income securities with a maturity date of three years or less
- Notes are small-issue bonds sold to a limited number of investors
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