公司理财第20章.docVIP

Chapter 20: Long-Term Debt CONCEPT QUESTIONS - CHAPTER 20 20.2 ( Do bearer bonds have any advantage? Why might Mr. I Like to Keep My Affairs Private prefer to hold bearer bonds? They have the advantage of secrecy. ( What advantages and what disadvantages do bondholders derive from provisions of sinking funds? They provide additional security as an early warning system if sinking fund payments are not made. But if interest rates are high, the company will buy the bonds from the market, and if rates are low, it will use the lottery, exercising an option that makes sinking fund bonds less attractive to bondholders. ( What is a call provision? What is the difference between the call price and the stated price? It is an option that allows the company after a certain number of years to repurchase the bonds at the call price. This option will only be exercised if interest rates drop. The difference between the call price and the stated price is the call premium. 20.3 ( What the advantages to a firm of having a call provision? If interest rates go down and the market bond prices are higher than the call price, the firm can exercise its call option and buy the bonds at less than the market price. ( What are the disadvantages to bondholders of having a call provision? If the firm decides to exercise its option, bondholders will have to sell their bonds to the firm at less than the market price. 20.4 ( List and describe the different bond rating classes. Investment grade |AAA/Aaa to BBB/Baa: extremely strong to adequate capacity to pay interest and principal. Speculative BB/Ba to CC/Ca: slightly to extremely speculative capacity to pay interest and principle. C: Debt not currently paying interest D: Debt in default. ( Why dont bond prices change when bond ratings change? The bond ratings are based on publicly available information and therefore may not provide information that the market did not have before the change. ( Are the costs of bond issues relat