Question

A municipal revenue bond trust indenture includes an "additional bonds test" covenant. This prohibits the issuer from doing all the following EXCEPT:_________.

A. issuing parity bonds unless the facility's revenues are sufficient to pay for existing and proposed debt
B. issuing senior lien bonds unless the facility's revenues are sufficient to pay for existing and proposed debt
C. issuing junior lien bonds unless the facility's revenues are sufficient to pay for existing and proposed debt
D. issuing bonds with the same lien on pledged revenues unless the facility's revenues are sufficient to pay for existing and proposed debt

Answer 1

C. issuing junior lien bonds unless the facility's revenues are sufficient to pay for existing and proposed debt

Step-by-step explanation:

A municipal revenue bond trust indenture includes an "additional bonds test" covenant. This prohibits the issuer from doing all the following;

1. issuing parity bonds unless the facility's revenues are sufficient to pay for existing and proposed debt.

2. issuing senior lien bonds unless the facility's revenues are sufficient to pay for existing and proposed debt.

3. issuing bonds with the same lien on pledged revenues unless the facility's revenues are sufficient to pay for existing and proposed debt

On the other hand, it allows issuing junior lien bonds unless the facility's revenues are sufficient to pay for existing and proposed debt.

An additional bonds test ultimately implies that the issuer is prohibited or restricted from the issuance of new bonds against the revenues of any other firm having same parity lien against pledged revenues, except it has sufficient funds (revenues) to do so.

Generally, in bond transactions, prohibition are made for selling debt having a senior claim when compared to that of the old (existing) bondholders such as creditors or investors.