Bond Valuation – Debt Instruments

Practice Question

Intro to Finance
Bond Valuation
Debt Instruments
MCQs

Which of the following is false?

A) Indentures are debt instruments that are generally unsecured.
B) Callable bonds give the issuer the option to “call” or repurchase outstanding bonds at predetermined call prices at specified times.
C) Mortgage bonds are debt instruments that are secured by real assets.
D) Protective covenants can be positive or negative.
E) None of the above.

Answer +
Final Answer: A) Indentures are debt instruments that are generally unsecured.
Explanation +

Explanation: An indenture is a formal contract between a bond issuer and bondholders that outlines the terms of the bond. It is not itself a debt instrument and does not imply that the bond is unsecured.

Review of other choices:

  • B) Correct. Callable bonds allow issuers to repurchase bonds early at set terms.
  • C) Correct. Mortgage bonds are secured by physical collateral, such as real estate.
  • D) Correct. Protective covenants in indentures can restrict or require certain issuer actions (negative or positive).
  • E) Incorrect. Since A is false, not "none" are false.

Conclusion: The false statement is A. Indentures are not generally unsecured debt instruments; they are legal contracts, and the securities they govern may be secured or unsecured.