Chapter 16

Discussion Questions

1. In the early 1970s the average Canadian industrial corporation had its interest covered almost six times. By 1991, the ratio had slipped below 1, but by 2000 had rebounded to 3 times, slipping again more recently.

2. The bond agreement specifies such basic items as the par value, the coupon rate, and the maturity date.

3. The bond agreement covers a limited number of items, whereas the bond indenture is a supplement that often contains over 100 pages of complicated legal wording and specifies every minute detail concerning the bond issue. The bond indenture covers such topics as pledged collateral, methods of repayment, restrictions on the corporation, and procedures for initiating claims against the corporation.

4. The greater the security provisions afforded to a given class of bondholders, the lower the coupon rate.

5. The priority of claims can be determined from Figure 16-2: • senior secured debt, • junior secured debt, • senior debenture, • subordinated debenture, • preferred stock, • common stock.

6. Bond conversion.

7. The purpose of serial and sinking fund payments is to provide an orderly procedure for the retirement of a debt obligation. To the extent bonds are paid off over their life, there is less risk to the security holder.

8. A call provision may be exercised when interest rates on new securities are considerably lower than those on previously issued debt. The purpose of a deferred call is to insure that the bondholder will not have to surrender the security due to a call for at least the first five or ten years.

9. Bond prices on outstanding issues and interest rates move in opposite directions. If interest rates go up, bond prices will go down and vice versa. Long-term bonds are particularly