Question

1. How do the following terms relate to bonds?
   1. Indenture
   2. Registered form
   3. Sinking fund
   4. Call provision
   5. Protective covenant
   6. Zero coupon
   7. Bid-ask spread

Answer 1

a) Indenture: It refers to the contract associated with a bond. It includes the description of bond features like interest rate, payment dates, covenants, etc., restrictions and actions if failed to pay timely payments.

b) Registered form: It refers to a debt instrument where the bond holder's information like name, address, etc., is kept on record by the issuing party to ensure that timely coupon payments are made to the right person.

c) Sinking fund: It refers to the restricted asset which requires putting money aside by a corporation to pay off a debt or bond.

d) Call provision: It refers to the provision that gives the issuer the right to call an issue prior to the maturity date.

e) Protective Covenant: It refers to certain limits ascertained on actions of company that it takes over the period of loan to protect the interests of lender.

f) Zero coupon: A zero coupon bond refers to a bond where there is no periodic interest payments and sold at a discount from face value at the time of maturity.

g) Bid-ask spread: Bid price refers to the price at which the dealer is willing to buy the bond and ask price refers to the price at which dealer wants to sell the bond. The difference between these two prices is called Bid-ask spread