Question

1. Why do callable bonds usually pay a higher coupon rate than noncallable bonds? A. To compensate investors for their extra tax liability B. Because callable bonds have greater default risk than noncallable C. To compensate investors who might suffer a loss as a result of their bonds being called D. To comply with SEC regulations E. None of the above 2. You own a convertible bond issued by MJ9 Corporation that can be exchanged for 60 shares of the company's common stock for each $1,000 par value. The bond's current market value is close to the $1,000 par value. MJO's common stock is currently trading at $14.23 on the NASDAQ. Is it in your best interest to convert the bond to common stock today? A. Yes, you would be gaining $2.44 per share B. Yes, but your tax liability would be higher C. You are indifferent between converting and not converting D. No. It would be cheaper to buy the stock directly on the NASDAQ. E. None of the above 3. You are the CFO of a corporation. You need to raise $ 100 million by issuing debt securities with a maturity of 20 years. You note that both Treasury bond and Corporate bond interest rates are currently at historic lows. Which is your best course of action? A. Issue 20-year fixed rate bonds B. Issue 20-year floating rate notes based on the Treasury bond rate plus a premium C. Issue 1-year notes and roll over the debt each year D. Issue 4-year notes and roll over the debt every four years E. None of the above 4. If a company goes into liquidation, in which order will the claims on the company be paid? A. Common stock, subordinated debt, senior debt, preferred stock B. Preferred stock, senior debt, common stock, subordinated debt C. Preferred stock, common stock, subordinated debt, senior debt D. Senior debt, subordinated debt, preferred stock, common stock E. None of the above

questions 1-4 please

Answer 1

Answers:

(1) Option (C)

As the Callable bonds will be called in case of Market Interest Rates fall lower than Coupon Rate paid to Bond hoders, as it would be beneficial for the company to buyback the bonds at higher Coupon rate already issued and Issue bonds with lower coupon Rates. Due to which Investors will suffer loss, Hence Callable bonds will have higher Interest rate to compensate for the Option given.

(2) Option (D)

Current Market Value of Bond = $ 1,000

No. of Shares Recievable if Conversion Option is exercised = 60 Shares

Market Price of Share = $ 14.23 per Share.

Value of 60 Shares if purchased from NASDAQ = 60 Sahres * $ 14.23 = $ 853.8

Hence it is not advisable in the better interest to convert as the shares can be purchased for a cheaper price in NASDAQ.

(3) Option(A)

As the Interest Rates are at historic lows, it is better to issue 20 year fixed rate Bonds. Because issuing floating rate poses risk of Increase in interest rate. The same happens on issuance of roll over bonds as the interest rate may subsequently increase and it may result in higher interest payouts.

(4) Option (D)

Common Stock holders are the ultimate owners of the entity, they should take ther claims from the residual assets after payment of all the debts and Preference Stock holders.

Preference stock holders by their name suggests they will have preference over common stock holders in the claim of residual assets at the time of liquidation.

Senior Dedt is the priority debt and their claims should be addressed first inthe event of kiquidation followed by the claims of subordinate debt.