Multiple Choice
In the context of bonds, what is the term premium?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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The legal contract between the bondholders and the issuer is called the bond ______.
A
prospectus
B
coupon
C
debenture
D
indenture
Verified step by step guidance1
Understand the concept of a bond indenture: A bond indenture is a legal contract between the bond issuer and the bondholders. It outlines the terms and conditions of the bond, including the interest rate, maturity date, and any covenants or restrictions.
Differentiate between the given options: Prospectus refers to a document that provides details about an investment offering to the public. Coupon refers to the interest payment made to bondholders. Debenture is a type of unsecured bond. Indenture specifically refers to the legal contract governing the bond.
Recognize that the bond indenture is essential for protecting the rights of both the issuer and the bondholders, ensuring compliance with agreed-upon terms.
Review the importance of the bond indenture in financial accounting: It helps accountants and auditors verify compliance with financial covenants and ensures accurate reporting of liabilities.
Confirm the correct answer: Based on the definitions and context, the correct term for the legal contract between bondholders and the issuer is 'indenture.'
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