A company has an agreement with a bondholder that prevents it from selling several of its...

Question:

A company has an agreement with a bondholder that prevents it from selling several of its coal-fired power plants. However, recent regulatory changes have made these plants less profitable and the value of the firm is falling. Which of the following is this agreement called?

(a) Collateral trust

(b) Lien

(c) Indenture

Bond Indenture:

This question calls for a general understanding of a bond, which is a fixed income financial security. Essentially, a bond is a loan agreement, which reflects a legally-binding arrangement between a borrower of funds, known as an issuer, and a lender.

Answer and Explanation:

The answer is "(C) Indenture." An indenture is a legally-binding agreement between two parties. In the finance world, the word indenture is most commonly used in connection with bond agreements, real estate transactions, and bankruptcy proceedings. A bond indenture specifies the bond terms and outlines any restrictions placed on the issuer.


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