Question

Which two of the following five statements are correct?

Select two alternatives:

1. Convertible debt usually carries a higher interest rate than other comparable noncovertible debt.

2. Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds.

3. Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt.

4. A call feature allows the issuer of the bond the right (but not the obligation) to retire all outstanding bonds on (or after) a specific date (the call date), for the call price.

5. When bond yields have increased, by exercising the call on the callable bond and then immediately refinancing, the issuer can lower its borrowing costs.

Answer 1

Correct Statements Are 2 and 4

Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds.

Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt.

4. A call feature allows the issuer of the bond the right (but not the obligation) to retire all outstanding bonds on (or after) a specific date (the call date), for the call price.

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