Reading 61: Features of Debt Securities-LOS a 习题精选 2011, following, positive, describe, purposes

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Session 15: Fixed Income: Basic Concepts
Reading 61: Features of Debt Securities

LOS a: Explain the purposes of a bond's indenture and describe affirmative and negative covenants.

 

 

Which of the following is an example of a positive covenant? The company:

A) must maintain a times interest earned ratio of at least two times.

B) must not use the same collateral to back more than one debt obligation.

C) may not sell fixed assets that have been pledged as collateral for the bonds.

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Positive covenants specify what the company must do, negative covenants specify what they must not do. Both of the alternatives are examples of negative covenants.

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Which of the following contains the overall rights of the bondholders?

A) Covenant.

B) Indenture.

C) Rights offering.

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Covenants are part of the indenture. A rights offering describes an equity offering—not fixed income.

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Which of the following bond covenants is considered negative?

A) No additional debt.

B) Payment of taxes.

C) Maintenance of collateral.

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Negative covenants set forth limitations and restrictions, whereas positive (affirmative) covenants set forth activities that the borrower promises to do.

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Which of the following is NOT a negative bond covenant?

A) Credit rating must be investment grade.

B) Restriction on asset sales.

C) Current ratio of at least 2.25.

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Current ratio covenants are positive (borrower promises to perform) versus the others listed (prohibitions on the borrower).