Chapter 6, Problem 1QTD

a)

Summary Introduction

To discuss: The word indenture related with long term debt.

Explanation of Solution

Indenture is an agreement among issuing company and lenders in the obligation of debt stipulating the nature of issue of debt, the way in which principal should be settled, and limitations placed on the company by financiers.

b)

Summary Introduction

To discuss: The word trustee related with long term debt.

Explanation of Solution

Trustee can be considered as representatives of bondholders in public debt offering. The trustee is accountable for evaluating borrower’s obedience with the terms of indenture.

c)

Summary Introduction

To discuss: The word call feature related with long term debt.

Explanation of Solution

Call feature is a facility that allows the issuer of bonds to give up the responsibility before its maturity.

d)

Summary Introduction

To discuss: The word sinking fund related with long term debt.

Explanation of Solution

Sinking fund is a technique of delivering for the slow superannuation of a bond issue.  The sinking fund requisite must be encountered by investing a particular quantity of cash yearly in a sinking fund account.  Otherwise, the company can either buy a part of the debt every year in the open market or, when the debt is callable, utilize a lottery method to define which real bonds will be called and discharged every year.

e)

Summary Introduction

To discuss: The word conversion feature related with long term debt.

Explanation of Solution

Conversion character is a facility that permits the holder of the bond to convert the bond for stocks of the firm’s common stock at the choice of the holder.

f)

Summary Introduction

To discuss: The word coupon rate related with long term debt.

Explanation of Solution

Coupon rate is the yearly interest rate rewarded to the bondholders. It stated as a percentage of face value.