7.13.2005

Q&A: What are some of the things generally included in a bond indenture?

  • The basic terms of the bond.
  • Details of the protective covenants.
  • Sinking fund arrangements.
  • Call provisions.

Bonus Points

  • A bond indenture is a written agreement between the issuer and holders regarding promises (of the issuer) and rights (of the bondholders).
  • In a bond indenture, there are two types of covenants
    • Affirmative covenants: set forth certain actions that the borrowers must take, such as paying interest and principal on a timely basis, submitting periodic reports to a trustee for evaluation of the issuer's compliance with the indenture, Maintaining a satisfactory working capital ratio (aka financial convenant).
    • Negative covenants: certain limitations and restrictions on the borrower's activities, such as the borrower's ability to incur additional debt unless certain tests are met, sale of assets.
  • Negative covenants place direct restrictions on management actions and thus play a more significant role than affirmative covenants in loan agreements.
  • When the debtor has violated one or more covenants in a loan agreements but continues to make all payments on a timely basis, it's known as "technical default".

Category: C++ Quant > Debt

No comments:

Post a Comment