Listed below are some provisions that are often contained in bond indentures.Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond?
1)Fixed assets are used as security for a bond.
2)A given bond is subordinated to other classes of debt.
3)The bond can be converted into the firm's common stock.
4)The bond has a sinking fund.
5)The bond has a call provision.
6)The indenture contains covenants that prevent the use of additional debt.

Question

Quizplus · Accepted Answer

Provisions 1, 3, 4, and 6 tend to reduce the risk associated with the bond, making it less risky for investors, and thus reducing the yield to maturity required by investors. The use of fixed assets as security, the ability to convert the bond into common stock, the existence of a sinking fund, and the presence of covenants limiting the use of additional debt all serve to protect the interests of bondholders, thereby reducing their risk. Provision 5, the call provision, is viewed as a disadvantage for investors because it gives the issuer the ability to redeem the bond before maturity, potentially leaving investors with lower-yielding investments. Provision 2, subordination, increases the risk to bondholders, as it makes the bond less likely to be paid in full in the event of bankruptcy or default.

Listed Below Are Some Provisions That Are Often Contained in Bond