Asked by Jordyn Orrison on Jun 05, 2024
Verified
A put provision in a bond indenture allows:
A) A bond issuer to recall the bond after a specified period of time at a price that exceeds the face amount.
B) A bondholder to force the issuer to increase the coupon rate if inflation increases by more than a specified amount.
C) The bondholder to force the issuer to buy back the bond at a specified price prior to maturity.
D) The issuer to convert a coupon bond into a zero-coupon bond at their discretion.
E) The issuer to suspend interest payments for any year in which the interest expense exceeds the net income of the firm.
Put Provision
An option clause in a bond or preferred stock allowing the holder to sell back the security to the issuer at a predetermined price before maturity.
Bond Indenture
A legal contract between bond issuers and bondholders, specifying the terms of the bond, including its maturity date, coupon rate, and other conditions.
Maturity
The point in time when a financial instrument such as a bond or loan becomes due and payable.
- Identify the characteristics and purposes of various bond provisions such as put provisions, call provisions, and protective covenants.
Verified Answer
NB
Nicole BoldsJun 10, 2024
Final Answer :
C
Explanation :
A put provision in a bond indenture gives the bondholder the right to force the issuer to buy back the bond at a predetermined price before maturity. This can be beneficial for the bondholder in a declining interest rate environment or if the credit quality of the issuer deteriorates.
Learning Objectives
- Identify the characteristics and purposes of various bond provisions such as put provisions, call provisions, and protective covenants.