Question

1. Two statements on bond indenture and covenants were made:

Statement 1: "In the bond indenture, the trustee represents the interests of bondholders."

Statement 2: "A bond issuer that is required to submit periodic reports to the trustee is an example of a negative covenant."

A. Both statements are correct.

B. Exactly one statement is correct.

C. None of the statements are correct.

2. The coupon rate on a floater is:

Coupon Rate = 5-year Treasury Yield - 100 Basis Points

The floater has a cap at 4%. Two statements about the coupon structure were made.

Statement 1: "When the 5-year treasury yield is 4% on coupon reset date, the coupon rate will be 4%."

Statement 2" The maximum coupon rate is 4% and that occurs when the 5-year treasury yield is at or above 5% on coupon reset date."

A. Both statements are correct.

B. Exactly one statement is correct.

C. None of the statements are correct.

3. A 10-year IBM bond can be converted into 20 shares of IBM common stock. This bond contains an embedded option which is:

A. Beneficial to the bond issuer.

B. Beneficial to the bond holder.

C. Effectively a put option owned by the bond issuer.

Answer 1

Question 1

Option B

Statement 1: Correct

The trustees are setup to act in the best interests of the investors even though it is paid for by the issuer. It ensures that the issuer is following the terms listed in the bond contract.

Statement 2: Incorrect

The negative covenants limit the issuer from doing certain activities. Any active that they are obligated to do is a positive covenant.