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FRM Part I · FRM Exam Part I · Corporate Bonds

A corporate bond indenture states that if the issuer fails to make a scheduled coupon payment, the trustee may declare the entire principal immediately due and payable. Which feature does this describe?

This is an acceleration clause. After a default event such as a missed coupon, the trustee can declare the whole principal due immediately, rather than waiting for maturity, which strengthens bondholders' position against the issuer.

  1. AAn acceleration clauseCorrect
  2. BA sinking fund provision
  3. CA make-whole call
  4. DA negative pledge covenant

Explanation

An acceleration clause lets the trustee or holders demand immediate repayment of the full principal after an event of default such as a missed coupon. A sinking fund requires scheduled retirement of principal, a make-whole call lets the issuer redeem early at a premium, and a negative pledge restricts new secured debt.

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