Why Do the Issuers of Bonds Not Seek to Minimize

question 36

Multiple Choice

Why do the issuers of bonds not seek to minimize the strength and number of covenants in a bond agreement?

• A) More covenants favor the equity holders that managers work for.
• B) More covenants can increase the flexibility of the company issuing bonds.
• C) More covenants lower the interest rate investors will require to buy the bond.
• D) Less covenants force the company to renegotiate the terms of the bond if they are broken.

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Definitions:

Market Price

The current price at which a service or asset can be bought or sold in the market.

CAPM

CAPM - Capital Asset Pricing Model, a formula used to determine the theoretical return on an investment by relating risk and the expected return, often used in the finance sector for pricing risky securities.

Risk Premium

The additional return that an investor expects to receive for taking on a higher level of risk compared to a risk-free investment.

WACC

Weighted Average Cost of Capital, a calculation that reflects the average rate that a company is expected to pay on its securities, taking into account debt and equity.