Question

Company X would like to issue bonds to finance the purchase of a new factory, but they are having financial difficulties, negatively impacting the credit rating of their existing bonds. Which of the following options could they realistically have to issue new bonds at a favorable interest rate?

Group of answer choices

Issue bonds without promising any collateral, but market the fact that the new factory is projected to substantially increase profitability

Default on the existing bonds

Let the new bonds be senior to the old bonds

Pledge the new factory as collateral for the new bonds

Answer 1

Option 1 is not realistic. Marketing the new factory's profitability without any collateral is unlikely to lower the interest rate on the new bonds as investors seek actual profits and not projected profits

Option 2 is not realistic. Defaulting on the existing bonds will lower the Company's credit rating further and increase the interest rate to be offered on the new bonds

Option 3 is not realistic. Letting the new bonds be senior to the old bonds will lower the credit rating of the old bonds further, and is not likely to impact favorably the interest rate to be offered on the new bonds.

Option 4 is realistic.  Pledging the new factory as collateral for the new bonds will lower the risk for bond investors, and impact favorably the interest rate to be offered on the new bonds.