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Bond Valuation Features and Indenture Paper

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BOND VALUATION I. BOND FEATURES § § As fixed-income securities, bonds are desirable to many investors because they offer a steady stream of interest income during the bond’s life, then return of principal. Some investors are interested in bonds because bond prices will change as interest rates change. • • • • • Bond -- evidence of debt issued by a corporation or a governmental body. A long-term debt instrument that promises to pay the lender a series of periodic interest payments in addition to returning the principal at maturity. A bond represents a loan made by investors to the issuer. In return for his/her money, the investor receives a legal claim on future cash flows of the borrower. The issuer promises to make regular coupon payments every period until the bond matures, and pay the face/par/maturity value of the bond when it matures. Default -- since the above mentioned promises are contractual obligations, an issuer who fails to keep them is subject to legal action on behalf of the lenders (bondholders). II. BOND INDENTURE § The bond indenture is a three-party contract between the bond issuer, the bondholders, and the trustee. § The trustee is hired by the issuer to protect the bondholders’ interests.) § The indenture includes: o The basic terms of the bond issue o The total amount of bonds issued o A description of the security o The repayment arrangements o The call provisions -- A provision that permits an issuer of bonds (and ...
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