PPT Slide
Impact of various bond indenture provisions on risky debt valuation
1. Inter-temporal default (safety covenants)
If the firm value falls to specified level, the bondholders are entitled
to force the firm into bankruptcy and obtain the ownership of the assets.
Payments can be made to the junior debt holders only if the full
promised payment to the senior debt holders has been made.
P = par value of senior bond
Q = par value of junior bond