kind of debt
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CHAPTER 25 The Many Different Kinds of Debt Answers to Practice Questi ons 1. If the bond is issued at f ace value an d investors demand a yield of 9. 5%, th en, immediately after the issue, the price w ill be $1,000. As time passes, the price will radually rise t o reflect accrued interest. !or e"ample, #ust bef ore the first semiannual& coupon payment, the price will be $1,0'(.50, and then, upon payment of the coupon $'(.50&, the price wil l drop to $1,000. )his pattern will be repeated throuhout the life of the bond as lon as investors continue to demand a return of 9.5%. *. Answers here will vary , dependin o n the company chosen. +ome ey areas that should be e"amined are- coupon rate, maturity, security, sinin fund provision, and call provision. . !loati n ra te bo nds provi de bondholder s wi th pr ot ection a ainst infl at ion and risin interest rates, but this protection is not complete. In practice, the e"tent of the protection depends on the fre/uency of the rate ad#ustments and the benchmar rate. ot only can the y ield curve shift, but y ield spreads can shift as well.& +imilarly, puttable bonds provide the bondholders with protection aainst an increase in default ris, but this protection is not absolute. If the company s problems suddenly become public nowlede, the value of the company may fall so /uicly that bondholders miht still suffer losses even if they put their bonds immediately. '. !irst mort ae bondho lders will recei ve t he $*00 million proceeds fr om the sale of the fi"ed assets. )he remainin $50 mil lion of mortae bonds t hen ran alonside the unsecured senior debentures. )he remainin $100 million in assets will be divided between the mortae bondholders and the senior debenture holders. )hus, the mortae bondholders are paid in full, the senior debenture holders receive $50 million and the subordinated debenture holders receive nothin. *'
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