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TIPS offer investors inflation protection byby the inflation rate each year. increasing only the coupon rate increasing only the par value increasing the promised yield to maturity increasing both the par value and the coupon payment Question 7 (1 point) Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? Convertible feature Subordination clause Sinking fund Callable feature

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Answer #1

TIPS offer investors inflation protection by increasing both the par value and the coupon payment by the inflation rate each year. Explanation: Treasury Inflation Protected Securities (TIPS) are the bonds issued and backed by the Unites States Governments. These TIPS bonds are created with the aim to provide investor protection from the inflation because the par value of a TIPS bond is adjusted, it increases with inflation and decreases with deflation, as measured by Consumer Price Index (CPI) but the coupon rate remain fixed Example: Suppose an investor holds a $100 par value TIPS with the a coupon rate of 1%, if there is no inflation as per CPI the investor would received coupon payment of $1. If inflation rises by 2%, the adjusted principle will be $102 but coupon rate will still be 1%, however coupon payment will be calculated on the adjusted principle of $102 as a result coupon payment will increase to $1.02. At maturity the adjusted principle or original price whichever is greater is paid to investor

Answer to no 7 is Sinking fund

Explanation: Bond Indenture is a legal document providing the details on the rights of the issuer and the rights of the investor. Bond Indenture also provide details on the terms and conditions of the bonds like the Rate of interest, the timings of the interest payment, exact Maturity date and all other minute details and specific features.

Convertible feature:This feature allows for the exchange of bond for common stock.

Subordinate Clause: This clause is used to protect the creditors/investors in the bond by giving them priority in claims over other agreements that come after the current agreement.

Sinking fund: Bond indenture may contain a Sinking fund provision requiring the Issuer to put money aside on regular basis to repay the bond when it matures.

Callable Feature: Callable feature allows the issuer to redeem the bond at any time before maturity. Normally, issuer uses this privilege right when market interest rates are below the interest rate of the bond. thus, issuer pay-off the bond and issue another bonds at lower market rates.

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