Canadian Securities Course (CSC) Level 1 Practice Exam

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Describe 5 protective provisions commonly found in bond contracts.

  1. Market trends, redemption options, issuer's credit rating, coupon rate, and face value

  2. Stock market performance, bond yield, financial statements, liquidity ratio, and mining bonds

  3. Conversion rates, par value, bondholder meetings, put options, and legal jurisdiction

  4. Security details, negative pledge, sale of assets, debt test, and dividend test

The correct answer is: Security details, negative pledge, sale of assets, debt test, and dividend test

The choice highlighting security details, negative pledge, sale of assets, debt test, and dividend test accurately represents protective provisions commonly found in bond contracts. Security details refer to the specifics of the collateralized assets that back the bond, providing bondholders with a claim on these assets in case of default. This can greatly reduce the risk associated with the bond, as bondholders have a tangible asset to claim. A negative pledge is a covenant that prevents the issuer from pledging certain assets to other creditors, thereby ensuring that the bondholders have a priority claim on those assets. This is crucial in safeguarding bondholder interests, particularly if the issuer faces financial difficulties. The sale of assets provision restricts the issuer's ability to sell off significant assets without bondholder approval. This protection ensures that the issuer maintains a healthy balance sheet that can support its debt obligations. The debt test requires the issuer to maintain certain financial ratios, thereby ensuring that their leverage remains within a manageable range. This is vital for maintaining the issuer's creditworthiness. Finally, the dividend test limits the issuer's ability to pay dividends on its equity while debt obligations are outstanding. This ensures that cash flow is preserved for meeting interest and principal payments to bondholders. These provisions are fundamental in establishing a

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