Bond Indenture Covenants The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance (the regular date is 20 years hence). a) “The debtor company shall maintain a working capital ratio of 2:1 at all times, and, in any fiscal year following a failure to maintain said ratio, the company shall restrict compensation of officers to a total of $500,000. Officers for this purpose shall include chairman of the board of directors, president, all vice presidents, secretary and treasurer.” b) “The debtor company shall keep all property which is security for this debt insured against loss by fire to the extent of 100 percent of its actual value. Policies of insurance comprising this protection shall be filed with the trustee.” c) “The debtor company shall pay all taxes legally assessed against the property which is security for this debt within the time provided by law for payment without penalty and shall deposit receipted tax bills of equally acceptable evidence of payment of same with the trustee.” d) “A sinking fund shall be deposited with the trustee by semiannual payments of $300,000, from which the trustee shall, in his discretion, purchase bonds of this issue.” Required: 1. For each of (a) through (d), write two audit procedures that you would use to ascertain whether the covenant has been breached.
Bond Indenture Covenants
The following covenants are extracted from the indenture of a bond issue. The indenture
provides that failure to comply with its terms in any respect automatically advances the due date
of the loan to the date of noncompliance (the regular date is 20 years hence).
a) “The debtor company shall maintain a
fiscal year following a failure to maintain said ratio, the company shall restrict compensation
of officers to a total of $500,000. Officers for this purpose shall include chairman of the
board of directors, president, all vice presidents, secretary and treasurer.”
b) “The debtor company shall keep all property which is security for this debt insured against
loss by fire to the extent of 100 percent of its actual value. Policies of insurance comprising
this protection shall be filed with the trustee.”
c) “The debtor company shall pay all taxes legally assessed against the property which is
security for this debt within the time provided by law for payment without penalty and shall
deposit receipted tax bills of equally acceptable evidence of payment of same with the
trustee.”
d) “A sinking fund shall be deposited with the trustee by semiannual payments of $300,000,
from which the trustee shall, in his discretion, purchase bonds of this issue.”
Required:
1. For each of (a) through (d), write two
whether the covenant has been breached.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
