Association for Financial Professionals (AFP) Practice Exam

A default under a bond indenture occurs when the issuer fails to meet the obligations outlined in the agreement. Missing the due date for an interest payment is a clear violation of the indenture terms, which specify when payments need to be made to bondholders. This failure constitutes a default because the bond issuer has not fulfilled its contractual obligation to pay interest on the specified date, thereby impacting the bondholders' expected return on their investment.

While other options may present financial challenges or risks related to the bonds, they do not necessarily constitute a default under the bond indenture. For instance, bonds becoming unmarketable refers to liquidity issues rather than a failure to pay. Inadequately funding a sinking fund might indicate financial distress but doesn't immediately represent a default unless it explicitly violates the indenture's terms. Similarly, a loss or devaluation of collateral might be a concern but doesn't meet the definition of default unless it directly affects the payment obligations specified in the indenture.