Question

If a company fails to live up to the terms of an indenture, what is the consequence?

1) The company may be required to pay a penalty
2) The company may be taken to court
3) The company may lose its assets
4) The company may be dissolved

Answer 1

When a company fails to meet the terms of an indenture, bondholders can take the firm to court, which can lead to penalties, bankruptcy, asset sales, or even dissolution of the company. However, there is no guarantee that bondholders will recover the full amount loaned.The company may be dissolved.

Step-by-step explanation:

If a company fails to live up to the terms of an indenture, such as not making the payments it owes to its bondholders, there are several potential consequences.

Typically, bondholders have the right to take legal action against the company. This might result in the company being required to pay a penalty, declaring bankruptcy, selling off assets to reimburse bondholders, or in extreme cases, the company might be dissolved if it cannot meet its obligations. In the process of bankruptcy, bondholders may recoup only a portion of their investment, depending on the company's remaining assets.