Bond Indenture
ANSWER
Contract that specifies all the rights and obligations of the issuer and owners of a fixed in-
come security.
Negative Covenants
ANSWER
Prohibitions on the borrower.
Affirmative Covenants
ANSWER
Actions that the borrower promises to perform.
Maturity or Term to Maturity
ANSWER
Length of time until loan contract or agreement expires. Remaining life of bond.
Par Value
ANSWER
Amount borrower promises to pay on or before maturity date.
Coupon Rate
ANSWER
1
,Rate when multiplied by Par Value gives amount of annual interest payment.
Zero-Coupon Bonds
ANSWER
Bonds that do not pay interest; Instead sold at a deep discount from par values. Market con-
vention states semi-annual compounding used when pricing zeros.
Non-Amortizing Bond (Bullet Bond or Bullet Maturity)
ANSWER
Characteristic of most T-Bonds and Corporate bonds. Pay only interest until maturity, at
which time full face value is paid back.
Bullet Bonds
ANSWER
Pay entire principal in one lump sum at maturity.
Serial Bonds
ANSWER
Pay off principal thru series of pmts over time.
Amortizing Securities
ANSWER
Make periodic principal and interest pmts (i.e., MBS & ABS).
Sinking Fund Provisions
ANSWER
Provide for the retirement of a bond thru a series of predefined principal pmts over the life
of the issue.
2
,Sinking-Fund Provisions
ANSWER
Cash Payment - issuer deposits cash with trustee who retires applicable proportion of bonds
at par using lottery selection.
Delivery of Securities - issuer purchases the bonds with equal total par value in the market
and delivers them to trustee who will retire them.
Investor options
ANSWER
Conversion features, put provisions, and floors.
Issuer options
ANSWER
Call provisions, prepayment options, sinking fund provisions, and caps.
Callable Bond Provisions
ANSWER
Issuer has right (not obligation) to retire all or part of bond prior to maturity. There may be
several call dates, and customarily when a bond is called on the first permissible call date,
the call price is above par value. The call price will normally decline over time according to
the schedule.
Doubling Option
ANSWER
Like a Call Option.
Put Provision
ANSWER
3
, Grants right to sell (put) the bond to the issuer at a specified price prior to maturity.
When would it be beneficial for a bondholder to exercise a put option?
ANSWER
If interest rates have risen and/or the creditworthiness of the issuer has deteriorated so that
the market price of the bond has fallen below par.
Non-Callable Bond
ANSWER
Absolute protection against call prior to maturity.
Refunding Provisions
ANSWER
Nonrefundable bonds prohibit premature retirement of issue using proceeds of a lower cpn
bd. Bds that carry these provisions can be freely callable, but not refundable.
Non-Refundable Bond
ANSWER
Prohibit call of an issue using proceeds from a lower coupon bond issue.
Conversion Option
ANSWER
Grants bondholder right to convert bond into a fixed number of common shares. Options
adds value to bond.
Exchange Option
ANSWER
Similar to conversion option, but allows conversion into a security other than common stock.
4
ANSWER
Contract that specifies all the rights and obligations of the issuer and owners of a fixed in-
come security.
Negative Covenants
ANSWER
Prohibitions on the borrower.
Affirmative Covenants
ANSWER
Actions that the borrower promises to perform.
Maturity or Term to Maturity
ANSWER
Length of time until loan contract or agreement expires. Remaining life of bond.
Par Value
ANSWER
Amount borrower promises to pay on or before maturity date.
Coupon Rate
ANSWER
1
,Rate when multiplied by Par Value gives amount of annual interest payment.
Zero-Coupon Bonds
ANSWER
Bonds that do not pay interest; Instead sold at a deep discount from par values. Market con-
vention states semi-annual compounding used when pricing zeros.
Non-Amortizing Bond (Bullet Bond or Bullet Maturity)
ANSWER
Characteristic of most T-Bonds and Corporate bonds. Pay only interest until maturity, at
which time full face value is paid back.
Bullet Bonds
ANSWER
Pay entire principal in one lump sum at maturity.
Serial Bonds
ANSWER
Pay off principal thru series of pmts over time.
Amortizing Securities
ANSWER
Make periodic principal and interest pmts (i.e., MBS & ABS).
Sinking Fund Provisions
ANSWER
Provide for the retirement of a bond thru a series of predefined principal pmts over the life
of the issue.
2
,Sinking-Fund Provisions
ANSWER
Cash Payment - issuer deposits cash with trustee who retires applicable proportion of bonds
at par using lottery selection.
Delivery of Securities - issuer purchases the bonds with equal total par value in the market
and delivers them to trustee who will retire them.
Investor options
ANSWER
Conversion features, put provisions, and floors.
Issuer options
ANSWER
Call provisions, prepayment options, sinking fund provisions, and caps.
Callable Bond Provisions
ANSWER
Issuer has right (not obligation) to retire all or part of bond prior to maturity. There may be
several call dates, and customarily when a bond is called on the first permissible call date,
the call price is above par value. The call price will normally decline over time according to
the schedule.
Doubling Option
ANSWER
Like a Call Option.
Put Provision
ANSWER
3
, Grants right to sell (put) the bond to the issuer at a specified price prior to maturity.
When would it be beneficial for a bondholder to exercise a put option?
ANSWER
If interest rates have risen and/or the creditworthiness of the issuer has deteriorated so that
the market price of the bond has fallen below par.
Non-Callable Bond
ANSWER
Absolute protection against call prior to maturity.
Refunding Provisions
ANSWER
Nonrefundable bonds prohibit premature retirement of issue using proceeds of a lower cpn
bd. Bds that carry these provisions can be freely callable, but not refundable.
Non-Refundable Bond
ANSWER
Prohibit call of an issue using proceeds from a lower coupon bond issue.
Conversion Option
ANSWER
Grants bondholder right to convert bond into a fixed number of common shares. Options
adds value to bond.
Exchange Option
ANSWER
Similar to conversion option, but allows conversion into a security other than common stock.
4
