Financial Accounting and Reporting-CPA Practice Exam

Which term is used to describe a promise by a corporation to pay bondholders a specific sum at maturity?

1. Loan contract

2. Bond indenture

3. Bond covenant

4. Bond agreement

The correct answer is: Bond indenture

The term that describes a promise by a corporation to pay bondholders a specific sum at maturity is the bond indenture. A bond indenture is a formal agreement between the bond issuer (the corporation) and the bondholders, detailing the terms of the bond, including the principal amount to be paid at maturity, the interest rate, and the payment schedule. This document serves as a contract that outlines the rights and responsibilities of both parties involved in the bond transaction. It ensures that the bondholders have a clear understanding of what to expect in terms of repayment and any other covenants or restrictions that the issuer must adhere to during the life of the bond. While other terms like loan contract, bond covenant, and bond agreement are related to financial agreements, they do not specifically capture the essence of the promise tied to the payment of the principal amount at maturity in the way that a bond indenture does. For example, a bond covenant refers to specific agreements or conditions that the issuer must follow as part of the indenture, rather than the promise itself. Understanding these distinctions clarifies the importance of the bond indenture in the context of bonds and corporate finance.