Question

Suppose a potential bondholder requires an indenture agreement to include a limit on dividend distributions by the bond's issuer and also a restriction on the sale of the issuer's assets. In this case, the bondholder is most likely concerned about:

Multiple Choice

• shareholders transferring firm assets to themselves.

• shareholders claiming all of the residual profits of the firm.

• increasing interest rates.

• shareholder claims being diluted.

• shareholders earning a higher return on their investment in the firm than the bondholders earn on their debt.

Answer 1

Ans- Option A. shareholders transferring firm assets to themselves.

Bondholders restrict the shareholders to transfer firm's asset to themselves as it hampers there interest. Bondholder's want the firm to have that sufficient amount of assets in the firm that they had at the time of bond issue. Shareholders transferring firm assets to themselves can increase risk for the bondholders.