Bond

The exam rarely asks “what is a bond” — it tests whether you can map a described feature onto the right bond indenture element (the legal contract between issuer and holder). Read the vignette for the three legal pillars: covenants (affirmative = the issuer must do, e.g. insure assets or pay on time; negative = must not, e.g. exceed a leverage ratio or take on more debt), the source of repayment, and collateral/seniority. A favorite item asks who absorbs losses first — the answer hinges on the priority waterfall: secured before unsecured, senior before subordinated, with equity holders last.

The classic trap is conflating the bond (the instrument and its full contract) with its narrower features. A bond is not its coupon (the periodic cash payment) and not its maturity (the principal-repayment date); both are merely terms inside the indenture. Students also wrongly assume par value equals price — par is the fixed redemption amount, while market price is the present value of future cash flows and can trade at a premium or discount. Hook: an indenture is the bond’s rulebook; coupon and maturity are just two clauses in it.