Listed below are some provisions that are often contained in bond indentures: 1. Fixed assets may be used as security.
2) The bond may be subordinated to other classes of debt.
3) The bond may be made convertible.
4) The bond may have a sinking fund.
5) The bond may have a call provision.
6) The bond may have restrictive covenants in its indenture.
Which of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors would otherwise require on a newly issued bond?
A) 1, 2, 3, 4, 5, 6
B) 1, 2, 3, 4, 6
C) 1, 3, 4, 5, 6
D) 1, 3, 4, 6
E) 1, 4, 6

Question

Quizplus · Accepted Answer

Provisions that tend to reduce the yield to maturity investors would otherwise require on a newly issued bond are those that provide additional security or certainty for the bondholder. These include using fixed assets as security (1), having a sinking fund (4), and including restrictive covenants in the indenture (6). The conversion option (3) may also be seen as a positive feature for some investors as it provides the potential for equity participation. The subordination provision (2) and the call provision (5) both increase risk for the bondholder and therefore tend to increase the yield to maturity required by investors. Therefore, the correct answer is D, containing only provisions that tend to reduce the yield to maturity for investors.

Listed Below Are Some Provisions That Are Often Contained in Bond