Downing, Inc., issues bonds to purchase new machinery for its factories. These bonds are secured by the machinery purchased with the proceeds of the bond issue. These are ____ bonds.
A) debenture
B) mortgage
C) convertible
D) indenture
E) sinking fund

Question

Quizplus · Accepted Answer

Mortgage bonds are secured by a mortgage or lien on specific assets, such as machinery or real estate, purchased with the bond proceeds. This ensures that the bondholders have a claim on the assets if the company defaults on the bond payments. On the other hand, debenture bonds are unsecured and rely solely on the creditworthiness of the issuing company. Convertible bonds give the bondholders the option to convert the bond into common stock. An indenture is a legal document that outlines the terms of the bond issue, while a sinking fund is a provision that requires the issuer to set aside funds to retire the bonds.