Question

2. Characteristics of bonds

To be effective issuing and investing in bonds, knowledge of their terminology, characteristics, and features is essential.

For example:

•	A bond’s____________ refers to its face value and the amount of money that the issuing entity borrows and promises to repay on the maturity date.
•	A bond issuer is said to be in ______ if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue’s restrictive covenants.
•	The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called ____.
•	A bond’s_________ gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions.

Suppose you read an article about the Golden Gate Bridge and Highway District bonds. It includes the following information:

Bridge Bonds Series A Dated 7-15-2005 4.375% Due 7-15-2055 @100.00

What is the maturity date of this bond?

7-15-2055

7-15-2005

If the coupon interest rate remains constant from the time of issue until the bond matures, then the bond is called a_____ bond.

Which feature of a bond contract allows the issuer to redeem a bond issue immediately in its entirety at an amount greater than par value prior to maturity?

Convertible provision

Put provision

Call provision

Deferred call provision

Which term is used to describe a call provision in which the issuer is prevented from calling a portion or the entire issue for several years during the early years of the bond issue?

Sinking fund provision

Deferred call provision

Declining call provision

Answer 1

Question 1:

•	A bond’s par value refers to its face value and the amount of money that the issuing entity borrows and promises to repay on the maturity date.
•	A bond issuer is said to be in default if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue’s restrictive covenants.
•	The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called indenture.
•	A bond’s call provision gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions.

Question 2:

Maturity date is 7-15-2055. 7-15-2015 is the issue date.

Question 3:

If the coupon interest rate remains constant from the time of issue until the bond matures, then the bond is called a fixed-rate bond.

Question 4:

Call Provision

Question 5:

Deferred Call Provision